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A pumpjack sucks oil out of the ground in a serene setting near Longview, Alberta (JEFF MCINTOSH/GLOBE AND MAIL)
A pumpjack sucks oil out of the ground in a serene setting near Longview, Alberta (JEFF MCINTOSH/GLOBE AND MAIL)

Longview’s troubles a tale of pipeline woes Add to ...

It would be a stretch to call Longview Oil Corp. a bellwether company among Canada’s energy players, but the company made a noteworthy move late Tuesday that reflects a key issue the entire sector is facing.

Longview chopped its spending plans by $27-million or 37 per cent. Its 2012 budget now rings in at $46-million, down from its original estimate of $73-million. The trim, detailed in a statement, will come as a surprise to investors who dropped in on Longview’s annual meeting May 23, when the company said capital expenditures could range between $70-million and $75-million.

Oil companies operating in Canada have been reluctant to admit pipeline constraints will affect their production and budgets, arguing they will find alternative ways to ship oil, citing railways as an example. Longview’s explanation for its budget cuts, however, demonstrates how severely energy companies are being pinched by infrastructure problems.

“These actions are being taken in response to the current weakness in global oil markets and the increase in differentials between posted Canadian oil prices and the [West Texas Intermediate] futures price caused by a lack of pipeline take away capacity for Canadian crude oil,” Longview said in its statement. “The reduction in capital expenditures is consistent with Longview’s strategy of maintaining financial discipline and a strong balance sheet in response to weaker than anticipated commodity prices.”

Oil was trading around $83.81 (U.S.) per barrel Wednesday morning. The North American benchmark last traded above $100 per barrel on May 3, and is down about 20 per cent since the beginning of the year. Much of Canada’s oil trades at a discount to WTI because of a supply glut in Cushing, Oklahoma, North America’s major oil hub. There is not enough pipeline space to get oil to other markets, such as refineries in eastern Canada and the United States, or the lucrative Gulf Coast.

Longview now expects to produce an average of 6,400 barrels of oil equivalent per day in 2012, and end the year producing the same. By way of comparison, the company churned out 6,738 barrels of oil equivalent per day in the first quarter of 2012. At its May meeting, Longview said it would produce between 6,600 and 6,800 barrels of oil equivalent per day in 2012, while planning to end the year producing between 6,800 and 7,000 barrels of oil equivalent per day.

The company, with operations in Saskatchewan and Alberta, also jacked up its operating costs expectations Tuesday. It expects operating costs to total $17.50 per barrel of oil equivalent in 2012, up from its May estimate of between $16 and $17.

Longview made its revisions assuming oil will be worth an average of $90.98 per barrel in 2012, with Canadian crude hit by a differential of $10.33.

Pipeline companies are trying to alleviate shipping constraints by beefing up their networks in the United States; building connector lines; reversing the flow of a line in Canada; and considering pumping oil rather than natural gas on another line in Canada. However, all of these measures will take time.

Further, these steps are piecemeal compared to the industry’s two most desired, and controversial, projects: Enbridge Inc.’s proposed Northern Gateway, a new line to Canada’s west coast; and TransCanada Corp.’s proposed Keystone XL project. Both lack regulatory approval.

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