Oil sands giant Cenovus Energy Inc. CVE-T, riding strong oil prices and U.S. demand for crude, sharply boosted production targets and accelerated major expansion plans, aiming to spend about $3.5-billion a year to increase its oil sands output six-fold over the next decade.
Cenovus expects to reach 500,000 barrels of oil per day by 2021. The company currently produces about 67,000 barrels per day at its oil sands operations and 71,500 barrels a day of conventional oil.
The new production target adds about 50,000 barrels a day of oil sands production, up from the previous forecast. And it nearly doubles the company’s conventional oil output versus current levels. The forecast does not account for any new production tied to its plan to find a joint venture partner to help fund and build projects on its undeveloped oil sands leases. The company has received numerous unsolicited inquiries from potential partners, but it is still pulling data together, said Cenovus chief executive officer Brian Ferguson as he outlined the company’s new plans Monday.
Cenovus’s production outlook comes as Canada’s oil sands industry enjoys a sustained resurgence with oil prices hovering around $100 (U.S.) a barrel, and U.S. refiners in key areas seeking new sources of crude.
The company’s ambitious production plan is a result of advances in technology, along with moves that are helping to fast-track certain projects.
The company has been able to decrease the amount of steam it uses to extract bitumen because of improvements in well spacing methods, allowing it to get oil out of the ground quicker than anticipated. Cenovus also received a number of regulatory approvals for its expansion phases faster than expected, clearing the way for growth. And the company spent the past year assessing its operations, and is now comfortable that it can pull oil out of the ground faster and more efficiently, said Rhona DelFrari, a spokeswoman for Cenovus.
The increased production outlook shows the company now has enough confidence to put out more aggressive targets since it has more experience and success in the notoriously tricky and expensive oil sands business, said Phil Skolnick, an analyst at Canaccord Genuity.
“It shows the quality of their asset base and their understanding of SAGD,” or steam-assisted gravity drainage projects, he said. “It shows how good operators they are.”
The danger, however, Mr. Skolnick warned, is that Cenovus and other producers plow ahead with growth and oversupply the market.
Cenovus officials say Canadian crude is needed in U.S. markets.
Cenovus’s strategy underlines the importance of the hotly debated Keystone XL proposed pipeline in the United States. Expansion plans envisioned by Cenovus and its industry competitors depend on TransCanada Corp. building the Keystone XL line to supply refiners in the Gulf Coast with needed crude supply. Without the extended Keystone system, growth plans in the oil sands will be shelved because there will be no way to shuttle all the extra crude out of Canada.
“We do see the need for added takeaway capacity starting [around] 2015, 2016,” Mr. Ferguson said, noting Cenovus has signed on to ship its crude via Keystone XL. TransCanada’s $7-billion project, which needs approval from the U.S. Department of State, is being challenged by environmental groups as well as a handful of legislators.
While Mr. Ferguson said Keystone XL is needed in order to make room for growth, his company did not consider Enbridge Inc.’s proposed Northern Gateway pipeline to Kitimat, B.C., when mapping out its new plans.
“We’re not in any way dependant upon that,” he said, declining to say whether Cenovus is among those who paid $10-million for discount shipping tolls and the right to buy equity in the controversial pipeline.
Cenovus extracts bitumen from the oil sands by pumping steam into the ground, which belts the thick crude and allows it to flow to the surface. Foster Creek and Christina Lake are its two main oil sands projects, both sporting new timelines and production guidelines.
“The advancement of [expansion] phases at Foster Creek and Christina Lake are a result of our demonstrated ability to execute project expansion on time and on budget,” Mr. Ferguson said on a conference call. Indeed, current startup and construction work at Christina Lake, for example, is already ahead of schedule.
Further, Mr. Ferguson said Cenovus low steam-to-oil ratio was also a factor in recalculating Foster Creek’s potential. Companies with low steam-to-oil ratios need less water and natural gas, allowing them to keep costs down.
George Toriola, an analyst at UBS Securities Inc., said the company was “staying the course.”
“We believe the company is able to fully fund its growth plans, but expect the company to use third-party capital to accelerate value, or reduce its leverage,” he said in a research note.
