Helpless against the low prices championed by the Organization of the Petroleum Exporting Countries, the rest of the industry has, in turn, waged a war on costs. Deep in the paper trenches, executives are hacking away at years of profligate spending. Survival, not growth, is the new mantra.
But it’s unclear whether they have done enough.
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Executive teams in Calgary have huddled together in boardrooms to find efficiencies and slashed headcounts, wages and dividends. That led to a net loss of 19,600 jobs in Alberta last year — a 33-year high — and the shelving of projects across the basin. In some cases, every line on the books has been scrutinized.
“We have reviewed every cost in the company,” said Corey Zahn, chief financial officer at Citadel Drilling, which began operations three years ago. “We are continuously looking at improvements in every area just to save even pennies these days. That’s how bad it is.”
An early look at a forthcoming CanOils report on full-cycle costs shows 30 out of 56 Canadian companies last year had costs above Western Canada Select’s average price of US$35.64. Their operating costs were lower, but they still need higher prices if they harbour hopes of growth.
To understand the oilpatch’s cost structure, it’s important to divide the industry into two camps. The long-life oilsands reserves require higher upfront capital cost and years to complete projects, but then they produce barrels for decades.
Conventional and shale basins, such as those in the Montney and Duvernay straddling Alberta and British Columbia, can come online at lower costs more quickly and are far more fleet-footed in responding to oil price fluctuations, but they wear out pretty quickly.
A common thread running through both segments is the high cost of labour, distance to markets and lack of pipeline access that discounts the value of Canadian oil.
Add the sniping between provinces on pipelines, lengthy reviews of major projects and new regulations around climate-change policies, and the price tag of operating in Canada can be daunting.
IHS Energy estimates costs for new oilsands projects rose 70 per cent from 2000 to 2014, but they were trimmed by around 20 per cent last year. Companies such as Suncor and Cenovus are still reviewing project designs to lower costs.
“There’s savings as we go forward… on the labour component and on new phases to redesign, and also to look at where and how we’re sourcing things,” Cenovus chief executive Brian Ferguson told the Financial Post.
A relentless focus on workforce reductions and rate negotiations has also helped the company.
“For the first quarter, our oilsands operating costs averaged $9.52 per barrel, which is nearly a 13-per-cent reduction from where we stood a year ago,” Drew Zieglgansberger, Cenovus’ executive vice-president of oilsands manufacturing, told investors on Wednesday.
Husky Energy Inc.’s operating costs at its Lloyd Thermal heavy oil project has fallen to $6.63 per barrel, compared to $9.53 per barrel last year.
“Hopefully, this will put to rest the myth that all Canadian thermal crude production is amongst the highest-cost crude production in the world,” Robert Peabody, chief operating officer at Husky, told investors.
Wood Mackenzie data show some of Canada’s major companies require Brent prices of US$53 per barrel to remain cash-flow neutral this year, compared to US$92 barrel last year — a 42-per-cent drop and in line with oil majors across the world.
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But that’s just to stem the bleeding of capital this year and survive, said Fraser McKay, a Houston-based analyst at Wood Mac. “But that doesn’t mean that oilsands projects will be sanctioned at current prices,” he added.
The Canadian shale basins are facing a different set of issues. Unlike oilsands producers, many shale and conventional producers have chosen to cut production to preserve capital.
Like many producers, Advantage Oil & Gas Ltd. has focused its energies on finding operational efficiencies to withstand a precipitous 50-per-cent drop in prices over the past 18 months.
“From 2014 to today, we probably saw a 30-to-40-per-cent cost reduction, and at least half of that was driven operationally, if not more,” said Andy Mah, Advantage’s chief executive.
Negotiating better rates with service providers helps since a lot of it is grunt work: reducing steps to complete wells and utilizing more efficient equipment and tools to generate more barrels out of wells.
“It’s like a science experiment,” Mah said. “But if you improve on operational efficiencies, they can stay with you, whereas the cuts in service costs can go away.”
Ruthless rounds of cost-cutting, layoffs and pressure on oilfield service providers has yielded savings of around 20 per cent to 30 per cent for the group, said Brook Papau, the Calgary-based managing director at RS Energy Group.
“The costs are absurdly low relative to other years,” he said.
RS Energy research shows only four non-oilsands Canadian companies last year were profitable, but that number will likely shoot up to 13 this year.
Some Canadians companies also have a secret weapon: drilled but uncompleted wells, or so-called DUCs, which can generate new production with little or no additional cost, thereby reducing the cost per barrel.
“A lot of production is sitting behind pipe — it’s very, very cheap production to bring on,” Papau said.
Similar to the fracklogs in the U.S., there are around 150-200 DUCs in the Montney basin alone, according to Advantage’s Mah.
Advantage is sitting on 18 DUCs along with 14 others that require a mere $2.5 million each to bring on stream.
Analysts will also be looking at the hedging strategies of companies. Dividend-paying Canadian companies on average hedged 24 per cent of their production this year, compared to six per cent last year, AltaCorp Capital Inc. data show.
Non-yield companies have locked in a third of their production this year in hedging plans, compared to around a tenth in 2015, according to the Calgary energy investment bank’s data.
As many as seven Canadian companies have filed for bankruptcy since the oil-price downturn started and others are taking extreme measures.
“We are changing the entire corporate structure of our company from a wage perspective,” said Zahn at Citadel, which is seeking to put in some competitive bids for contracts. “We would just park our equipment, unless we changed our cost structure. Everyone is getting their wages cut, which we have already done previously.”
But the question remains whether all this is enough to sustain the industry.
“At this point, they are pulling every string they have,” Papau says. “There’s not a lot to trim to even operate these asset — they are doing everything they can.”
For the oilsands, a lot of capacity has been built up over the past decade and that inflated labour service and equipment costs. Those pressures are unlikely to return any time soon.
Ferguson believes Cenovus will be able to retain a majority of its cost efficiencies even in a US$60 world.
“That’s because there are structural changes either in how we’re organized or structural changes in the business process,” he said. “That’s about two-thirds of the savings that are related to the structural changes, which are sustainable.”
But the other big risk is whether the cost cuts have gone too deep.
“Some are definitely into the meat,” Birn said. “And some are into the bone and that sets you up to be less responsive as oil prices rise.”
With a file from Geoff Morgan