Oilsands losing money, but shut-ins not likely

CALGARY – Oilsands operators have little choice but to keep pumping despite the fact they are losing money on every barrel they produce at today’s crude prices, according to an industry analyst.

The price of West Texas Intermediate crude, the closely watched U.S. benchmark, fell to its lowest level in 12 years on Tuesday, settling at $30.44 after briefly dipping below the US$30 threshold in intraday trading. That’s more than a 70 per cent decline from mid-2014 highs.

And the WTI price looks robust compared to what Canadian heavy oil producers fetch, which is discounted because it’s harder to refine and further from market. The price of Western Canadian Select now is below US$16 a barrel.

Between the paltry prices and relatively high costs, oilsands producers are losing money on every barrel they produce, said Martin King, with Calgary investment dealer FirstEnergy Capital.

But even still, any production shut-ins in the oilsands would be “extremely limited,” King told an oil and gas summit hosted by the Conference Board of Canada.

One reason is technical: to hit the off-switch in a steam-driven project could damage an oilsands reservoir. Companies have also sunk billions into projects that are meant to run for several decades, so they’ll ride out the low prices as best they can.

“I know it sounds contradictory, but just given the long time span over which these things are supposed to operate, they have to keep them running. They just don’t really have a choice,” King told reporters on the sidelines of the conference.

The Conference Board expects WTI to average just US$40 a barrel this year with little relief on the horizon, said chief economist Glen Hodgson.

“Our grind back to even something around US$60 a barrel is going to take a number of years,” he said.

The issue is that “there’s still too much supply in the world.”

The Organization of Petroleum Exporting Countries has been keeping up its output in a bid to squeeze out its competition.

“The Saudis clearly see oil as a weapon, as a way to deal with their enemies,” said Hodgson.

Michael Wittner, head of global oil and commodities research at Societe Generale, is also calling for US$40 WTI this year and sees more downside than upside risk in the short term. However, he said given the trajectory of global demand growth, a return to US$75 by 2020 is in the cards.

It’s unlikely demand can be satiated in that time frame with the crude flowing out of the Middle East and from U.S. shale formations, said Wittner. That’s where higher-cost oilsands producers can find some solace.

“We’re going to need output increases, new projects, project expansions from Canadian oilsands and deepwater offshore. If that’s the case, prices one way or another have to go back to US$75 in order to make that happen.”

Edward Morse, global head of commodities at Citigroup, said Canada’s oilpatch will find a way to make it through the downturn.

“The oil industry has proved to be remarkable adaptive with pain. The combination of adaptation, waiting it out and a bit of consolidation are the way to go,” he told reporters.

“Markets tend to balance more quickly than you think they’re going to do when you’re in the worst part of the market.”

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