SAGD

Merger activity this year has been frequent in Canada’s oil and gas sector as companies strive for scale and efficiencies in an increasingly competitive landscape. The latest M&A salvo arrived in late August when MEG Energy agreed to a takeover offer from Cenovus Energy to create the largest bitumen producer in Alberta’s oil sands. With billions of barrels of reserves up for development, it is a chance for Cenovus to further consolidate and expand its existing lead in bitumen output from the oil sands. However, what might seem a straightforward corporate merger has been buffeted by a rival bid from Strathcona Resources in its attempt to create scale and ensure its own long-term competitiveness. In today’s RBN blog, we’ll examine the details of the two offers and what is at stake for all involved. 

Three months after a series of devastating wildfires wreaked havoc in Alberta’s oil sands region, production is essentially back to normal. Temporary shutdowns at several production sites initially reduced the oil sands’ output by more than 1 MMbbl/d –– or about one-third the area’s pre-fire production level –– which trimmed inventories and goosed world oil prices. But the short-term closures appear to have had little effect on the Canadian and U.S. refineries that process oil sands-sourced crude. Now, oil sands producers (stung more than many by the collapse in oil prices) are focused again on reducing production costs in an effort to stay profitable in a low-oil-price era. Today, we summarize the current, post-wildfires state of oil sands production and consider the region’s future in the new, tight-oil/Shale Revolution world.

If you think that yesterday’s 13 year-low CME/NYMEX crude settlement price ($26.21/Bbl – February 11, 2016) is bad news for struggling U.S. producers then try putting yourself in Canadian producer’s shoes! The headwinds facing Western Canada’s heavy oil sands these days would try the patience of a saint. Prices for benchmark Western Canadian Select (WCS) blend in Alberta traded as low as $12.50/Bbl in January 2016 – clawing back to $14.06/Bbl on February 10, 2016. But by the time gathering, transport and diluent purchase costs are subtracted, the netback (market price less transport cost) at the lease is negative for many producers – especially when shipping by rail.  To be clear, that’s below zero at the wellhead!  Yet there are few signs that production is falling off – at least in the short term. Today we lament the ongoing plight of Canadian producers.

The US Energy Information Administration ranks Alberta’s bitumen oil sands reserves second or third to those of Saudi Arabia and Venezuela. However, evidence from the field and new research indicate that Western Canada’s oil reserves are possibly far larger and could rival or exceed those of the Saudis or the Venezuelans. Today contributor Mike Priaro begins a two part series describing Western Canada’s vast bitumen resources.

NYMEX WTI crude traded at over $100/Bbl for most of March through May this year. With today’s close at $79.21/Bbl, the price is down 28 percent from this year’s highs. Canadian heavy crude bitumen postings fell to $64/Bbl last week. Could a press release from a small Canadian oil exploration company last week be the first indication of investor concern? In today’s blog, we ask whether Canadian Oil Sands production costs are too high to justify new investment.