China’s CNOOC Ltd. has taken a step its competitors are loath to follow: shutting down an oil sands operation.
Nexen Energy ULC, CNOOC’s Canadian subsidiary, last week suspended operations at its steam-driven Long Lake project after a fatal explosion left one worker dead and another seriously injured. The company said it had shut down its upgrading unit and reduced its steam plant to “minimum” rates.
The move took roughly 50,000 barrels a day of production out of the market indefinitely, making Nexen a rare example of an oil sands producer that has curtailed output amid the free fall in commodity prices.
Nexen chief executive officer Fang Zhi apologized for the incident, which remains the subject of a provincial occupational health and safety probe, as well as an internal corporate investigation.
Nexen said the emergency measure was enacted to help stabilize the site.
However, the company must now decide whether to restart the troubled operation at all, following the collapse in oil prices that has rendered even much more efficient bitumen projects uneconomic.
Representatives at Nexen did not respond to a request for comment on Tuesday.
“It’s got to be a question going through their minds,” said Martin King, an analyst at FirstEnergy Capital Corp. in Calgary. “I think they’re going to drive forward that project at some point, but ultimately, they have to figure out what the economics are going to be.”
With oil prices roughly 70-per-cent lower than in mid-2014, many oil sands producers are wrestling with a similar predicament.
This week, Connacher Oil and Gas Ltd. said it would cut production at its steam-driven Great Divide project to as little as 3,000 barrels a day starting in February. That’s down from nearly 14,000 barrels a day in the fourth quarter last year, a drop it blamed on “exceptionally low commodity prices.”
For now, analysts say larger companies with deeper pockets are unlikely to hit the pause button on producing oil sands projects, even as weak prices turn profit to loss.
West Texas intermediate oil would need to drop below $20 (U.S.) a barrel before producers took that step, according to analysts at investment dealer Peters & Co. Ltd.
In part, that’s because doing so risks damaging underground reservoirs of bitumen. Companies such as Imperial Oil Ltd. and Suncor Energy Inc. also require a steady supply of crude for processing in their refineries, making shutdowns unlikely.
The alternative is burning through dwindling cash reserves and waiting for commodity prices to recover. At current price levels, no oil sands projects are capable of generating sufficient cash flow to cover costs, including expenses tied to maintaining existing production, according to TD Securities Inc.
That’s despite break-even costs for mining and steam-driven projects that have fallen by 21 per cent and 18 per cent, respectively, from levels a year ago, according to the bank.
The emergency shutdown at Nexen’s Long Lake project is the latest in a series of setbacks for the company, and for China’s state-run energy giants in Canada. A pipeline rupture at the site last summer led to one of the largest spills ever in Canada, forcing output to be temporarily curtailed. Nexen was purchased by CNOOC for $15-billion (Canadian) in 2012.
Rival China Petroleum & Chemical Corp. (Sinopec), which paid $2.2-billion to acquire Calgary oil producer Daylight Energy Ltd. in 2011, has shed workers and is grappling with sharply lower profit at its operations, Brian Tuffs, chief executive officer of the firm’s Canadian division, said on Tuesday. He declined to specify the number of job reductions.
The company has scaled back drilling to a few strategic locations and is studying whether to suspend output at some operations, he told reporters in Calgary, without providing specifics.
Sinopec also owns a 9-per-cent stake in the Syncrude Canada Ltd. oil sands mine, where production is languishing at a decade low.
Like others in the sector, the companies are struggling to adapt to sharply lower commodity prices after years of lavish spending. In Canada, “the costs cannot be cut quickly,” said Chen Weidong, a former chief researcher at CNOOC, who now advises the company.
With files from reporter Kelly Cryderman in Calgary
The Long Lake project
A steam-assisted gravity drainage operation, Long Lake was the centrepiece of CNOOC Ltd.’s $15.1-billion acquisition of Nexen Energy. It is rated to produce 72,000 barrels of bitumen a day, but production in recent years has fallen well short of that target, owing to various operational issues.
Oil sands deposits are accessed by wells that inject steam into the deposit and melt the bitumen, which flows to a lower well and is then pumped to the surface. The bitumen is upgraded to produce synthetic crude.
Among the incidents at Long Lake, a pipeline rupture in July, 2015, allowed 31,500 barrels of bitumen to leak across a 16,000-square-metre area southeast of Fort McMurray.
- CNOOC Ltd$145.700.00(0.00%)
- Crude Oil Front Month Futures$42.88+0.14(+0.33%)
- Suncor Energy Inc$38.110.00(0.00%)
- Suncor Energy Inc$28.820.00(0.00%)
- Imperial Oil Ltd$38.360.00(0.00%)
- Imperial Oil Ltd$28.990.00(0.00%)
- Sinopec Shanghai Petrochemical Co Ltd$51.980.00(0.00%)
- Updated June 21 1:00 PM EDT. Delayed by at least 15 minutes.