Page 6 - NorthAmOil Week 16

NorthAmOil COMMENTARY NorthAmOil
More woes for Canada as SAGD cuts continue
A growing number of oil sands producers using the SAGD method are curtailing output, amid growing fears over the impact of oil price declines
ALBERTA
WHAT:
Growing volumes of oil sands produced using SAGD are being shut in.
WHY:
Using SAGD typically costs more, as the heavy oil produced requires blending and WCS prices are falling.
WHAT NEXT:
Oil sands mines are also at risk, and things stand to worsen as crude prices fall further.
CANADA’S oil industry is suffering blow after blow. The latest came this week, as US bench- mark West Texas Intermediate (WTI) prices collapsed into negative territory before recov- ering somewhat but staying perilously low. (See previous story) Western Canadian Select (WCS) trades at a discount to WTI, and the crash pushed the grade’s price functionally below zero as well.
This has made it even less economically attractive for Canadian producers to keep oper- ating. A number of output cuts have already been announced in recent weeks. Last week, Cono- coPhillips became the latest to curtail oil sands production, saying that it would cut 100,000 barrels per day (bpd) of output at its Surmont project by May.
Output at Surmont, which is a steam-as- sisted gravity drainage (SAGD) project, will drop to 35,000 bpd after the cut is implemented. ConocoPhillips, which operates the project in a 50:50 joint venture with France’s Total, cited the unfavourable WCS price as the driver behind its decision.
SAGD sagging
The move to cut output at Surmont comes as SAGD projects more broadly are bearing the
brunt of oil sands production curtailments – though mining projects are not immune either.
Husky Energy and Cenovus Energy have also cut steam-driven oil sands production, with their reductions estimated at 15,000 bpd and up to 45,000 bpd respectively.
The SAGD process typically requires pro- duced bitumen to be blended with ultra-light crude at an additional cost to enable it to flow in pipelines. At mining projects, by contrast, most of the produced bitumen goes to onsite upgrad- ers to be turned into synthetic crude oil (SCO).
In the current market, some producers are thus finding mining to be a more economically viable option, which could explain the curtail- ments at SAGD operations. Conversely, Cana- dian Natural Resources Ltd’s (CNRL) president, Tim McKay, has said that his company will keep its mines running even in the event of a price “meltdown”, as they can produce at a lower cost.
SAGD accounts for nearly 50% of oil sands production, and a TD Securities analyst, Menno Hulshof, has predicted that up to 80% of steam- driven volumes may be curtailed.
Technical challenges
Shutting down SAGD operations is not entirely straightforward, however, and there have been
The SAGD process typically requires produced bitumen to be blended with ultra-light crude at an additional cost to enable it to flow in pipelines.
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Week 16 23•April•2020