[R-G] Price drop has yet to cut Canadian oil output

[Anthony Fenton]

Price drop has yet to cut Canadian oil output
Fri Nov 21, 2008 5:59pm EST
http://www.reuters.com/article/marketsNews/idUSN2128783220081121?sp=true
By Jeffrey Jones

CALGARY, Alberta, Nov 21 (Reuters) - Canadian energy companies have  
yet to start shutting down large volumes of oil production due to low  
prices, but the market meltdown has started to fuel some nervousness  
about the prospect.

So far, a 66 percent drop in crude prices since July, coupled with the  
credit crunch and still-high construction costs, has prompted numerous  
oil sands developers to defer and rethink their plans for new projects  
and expansions.

But at $50 a barrel, the taps on existing Canadian production of  
conventional light and heavy oil and oil sands-derived crude -- a key  
energy source for the United States -- have not been seen to be closing.

"You've got to think that it's starting to get a little bit closer to  
the bone," FirstEnergy Capital Corp analyst William Lacey said.

"They're still making money, albeit it's a lot less than what they  
were."

Canada pumps about 2.8 million barrels of oil a day, and about 1.8  
million of that is exported to refineries in the United States, many  
in the Midwest.

Energy companies shut off production when operating and other costs  
exceed their ability to earn a return. That's also when job losses  
begin.

Shutting in is a much easier prospect for conventional wells than with  
complex oil sands mining and upgrading, or steam-assisted gravity  
drainage (SAGD), where steam is pumped into the ground to allow the  
heavy crude to be pumped to the surface.

"I'm sure that's being thought about, but frankly I don't think we're  
at that point yet," said Steve Fekete, an oil-market analyst with  
energy consultants Purvin & Gertz.

"And our assumption is that the SAGD guys are going to go forward, the  
projects that are existing, and on the conventional side. They're  
still covering their costs and so on."

Some analysts have said new integrated oil sands projects that mine  
the tar-like oil in open pits and upgrade it into refinery-ready light  
crude require oil prices above $100 a barrel to earn an acceptable  
return due to high costs.

The energy-market drop has forced such companies as Petro-Canada  
(PCA.TO: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell Plc  
(RDSa.L: Quote, Profile, Research, Stock Buzz) and Canadian Natural  
Resources Ltd (CNQ.TO: Quote, Profile, Research, Stock Buzz) to slow  
down the development of their multibillion-dollar projects.

Such deferrals have fueled expectations that the Canadian Association  
of Petroleum Producers, the industry's main lobby group, will have to  
cut its oil sands output forecast for a second time in two years.

Last June, CAPP reduced its outlook to 2.8 million barrels a day by  
2015, down from the previous forecast of 3.4 million.

But in terms of existing operations, Syncrude Canada Ltd, the biggest  
oil sands project, has never cut output due to low prices, said Siren  
Fisekci, spokeswoman for Canadian Oil Sands Trust (COS_u.TO: Quote,  
Profile, Research, Stock Buzz), Syncrude's largest interest owner.

The operation produces about 350,000 barrels a day from its sprawling  
site in northeastern Alberta.

Fisekci pointed out its production costs this year have been about C 
$35 a barrel and its sustaining capital is about C$10 a barrel.  
Meanwhile, crude in Canadian dollar terms is worth about C$64.50 a  
barrel, leaving a reasonable cushion.

"Secondly, if we were in a sustained period of lower oil prices, you  
would look to reducing costs in the areas you could and how much  
flexibility you had to do that. I don't think that's been fully  
determined at this point," she said.

($1=$1.27 Canadian) (Reporting by Jeffrey Jones; editing by Rob Wilson)

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