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A shut-in well site about 60 kilometres east of field office during a tour of Gear Energy's well sites near Lloydminster, Saskatchewan. (Dan Riedlhuber/REUTERS)
A shut-in well site about 60 kilometres east of field office during a tour of Gear Energy's well sites near Lloydminster, Saskatchewan. (Dan Riedlhuber/REUTERS)

Oil patch curtails production to cope with plunging prices Add to ...

Gear Energy Ltd. chief executive officer Ingram Gillmore started 2016 with modest plans.

Spending for the year had been chopped to $31-million, down roughly 70 per cent from its original 2015 budget, assuming a U.S. oil price of $51.50 (U.S.).

The Calgary-based company planned to eke out production gains of 6 per cent by drilling 36 wells from an inventory of lower-cost heavy oil properties in the Lloydminster area on the Alberta-Saskatchewan border.

Instead, the rigs are sitting idle and the spending plans are on hold. Now, Mr. Gillmore is assessing whether to curtail thousands of barrels a day of production as U.S. crude prices buckle to about $30 a barrel. So far, the company has halted 500 b/d as profit evaporates.

“We essentially put our drilling plans on hold and, ultimately, it’s batten down the hatches, survival mode for us,” Mr. Gillmore said in an interview.

Across Western Canada, oil companies are performing the energy-industry equivalent of triage to cope with a relentless slide in prices that shows few signs of easing.

For now, analysts say oil sands behemoths have the financial heft to keep pumping, even at a sharp loss. But some companies are taking the more drastic step of turning off the taps – a sign that months of cutbacks are beginning to dent output.

Last week, oil sands producer Connacher Oil and Gas Ltd. said it planned to begin maintenance at its steam-driven Great Divide project earlier than planned, citing weak commodity prices. It said the move would lower output by about 3,000 b/d.

Canadian Natural Resources Ltd., whose operations span Western Canada, curtailed nearly 5,600 b/d of so-called conventional heavy oil output last year. Baytex Energy Corp. has suspended about 2,400 oil-equivalent b/d at its Canadian operations.

To be sure, the moves represent a fraction of the Canadian industry’s overall output, with many of the reductions affecting heavy oil operations. However, analysts say more companies could dial back production as U.S. and global crude prices teeter at around $30 a barrel.

In the oil sands, producers may time maintenance shutdowns to avoid the worst of the market pain, effectively curtailing production without saying so, said Mark Oberstoetter, analyst at energy consultancy Wood Mackenzie.

“Eventually, you’ll see the less well-capitalized companies start to take the longer-term, riskier decisions of looking into shut-ins,” he said.

For smaller companies such as Gear, the equation is especially grim.

Gear pumped about 5,400 oil-equivalent barrels a day of primarily heavy oil in the third quarter.

Some of its least-efficient wells cost about $30 (Canadian) a barrel to operate, including expenses for transportation, fuel and labour. It pays another $6 in provincial royalties, plus fixed costs of $1.50, all to produce a barrel of extra-thick crude that today is fetching less than $20.

On Tuesday, U.S. benchmark West Texas Intermediate oil touched $29 (U.S.) a barrel for the first time since 2003 before closing at $30.44 a barrel. Western Canada Select oil sands crude traded at roughly $15 under that, broker Net Energy Inc. said.

Gear’s super-thick oil is subject to a further discount of about $5 (Canadian). “So, not good,” Mr. Gillmore said.

Rather than pump crude at widening losses, the company has used gains from financial hedges to pay down debt, he said. Still, lenders in October chopped its borrowing limit to $60-million from $90-million to reflect a darkening commodity price outlook.

“This oil price is not sustainable for the majority of Canadian production,” Mr. Gillmore said.

“If I’m shutting in production, it’s because I think I’m slowing the bleed of cash flow. Ultimately, I’m sitting here waiting for prices to recover or for costs to dramatically drop.”

Editor's note: A previous version of this story said Canadian Natural Resources Ltd. had halted 10,000 barrels per day of production last year. In fact, the company has halted 5,600 barrels per day as of the third quarter.

 

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