Cenovus to reduce capital investment in 2014, focus on production

CALGARY—Canadian oil and gas giant Cenovus Energy Inc. expects to to spend as much as $3.1-billion next year on capital projects—a decline of 13 per cent compared to 2013.

In its 2014 business strategy published this week, Cenovus said the spending will be focused on oil projects that will lead to production growth in the near-term, and specifically over the coming four years.

Company president and CEO Brian Ferguson said that the last four years for Cenovus have been spent fighting for regulatory approval for its vast array of projects, and 2014 marks the year it will start to cash in on some of those assets.

“Since our launch in late 2009, Cenovus has concentrated on gaining regulatory approvals for our robust inventory of oil sands opportunities while also growing oil reserves,” Ferguson said in the business strategy released by the company Dec. 12.

“In 2014, we will focus on investment that will achieve cash flow and earnings growth from our approved projects in order to create the greatest value possible for shareholders.”

The company said its long-term business strategy—calling for net oil production of 525,000 barrels per day (bpd) within the next decade—remains on track and unchanged.

Cenovus expects its conventional oil, natural gas and refining operations to continue to generate strong operating cash flow to support the growth of its oil sands projects.

The company’s two producing oil sands operations—Christina Lake and Foster Creek, both located in northeastern Alberta—are expected to help Cenovus generate operating cash flow of between $3- and $3.7-billion in 2014.

“Cenovus is well-positioned as we head into our fifth year as a company,” said Ferguson.

Oil production

Of the $2.8- to $3.1-billion the energy giant plans to invest in capital projects next year, approximately 90 per cent will be spent in upstream oil assets.

Cenovus said it plans to invest between $680- and $760-million to expand its operations at Foster Creek, a project located on the Cold Lake Air Weapons Range about 330 kilometres northeast of Edmonton, which represents a 12 per cent decrease compared to the project’s budget forecast for 2013.

Investment at Christina Lake, about 50 kilometres north of the Foster Creek project, is expected to be between $750- and $820-million, an increase of 15 per cent over 2013.

Together, the two projects account for roughly 50 per cent of the company’s 2014 projected capital budget.

At Narrows Lake, about 150 kilometres north of Edmonton, Cenovus plans to invest between $210- and $230-million, a 42 per cent spike compared with the previous year.

Cenovus said engineering, procurement and construction continues there, with production expected to start in 2017.

All three projects are jointly owned by Cenovus and ConocoPhillips, with the former in charge of operations.

As part of its strategy to focus on approved assets, Cenovus said it will decrease its spending on emerging oil assets by almost 40 per cent to between $140- and $160-million next year.

It also said it plans to decrease its spending on conventional oil assets by 22 per cent to between $540- and $590-million in 2014.

“In 2014, we will be more focused on developing our existing portfolio of approved projects,” Ferguson said. “We have a huge opportunity to create value in the oil sands over the next few years.”

Refining operations

Cenovus expects its refining operations to continue to generate “significant” cash flow in 2014.

The company plans to invest between $150- and $160-million next year at its refineries in the United States, which are jointly owned with Phillips 66.

That represents a 41 per cent increase when compared with 2013, mainly due to “routine safety initiatives,” meeting new low sulphur gasoline regulatory requirements and additional capital investments at the Wood River Refinery in Illinois.

It also said it expects to undertake a project to relieve bottlenecking at that refinery in Roxana, Ill., across the river from St. Louis, Mo., in the first quarter of 2014.

Operating cost reductions

Cenovus said it continues to look for ways to reduce operating costs across the organization, including limiting hiring in the coming years and improving operating efficiency.

The company has centralized some of its functions, such as drilling, and is also working on improving waste treatment processes and optimizing chemical usage at its oil sands operations.

“As we start to see costs creeping higher, it’s important that we focus even more attention on attacking them,” said Ferguson. “We’ve worked hard to gain a reputation as a low-cost operator and we intend to keep it that way.”

The company’s cost reduction strategy also includes reducing the number of new hires and reallocating staff to projects that are anticipated to add production growth in the next four years.

Cenovus is also working on initiatives to improve productivity across the board.

“We have a lot of talent at Cenovus,” Ferguson said. “Over the next year, we’re going to continue to direct our staff to work as efficiently as possible by ensuring we have the right organizational structure in place to support our focus on developing current and near-term oil growth opportunities.”

Supply agreements

Cenovus said it has secured a number of supply agreements moving forward, including a commitment to moving 200,000 bpd on the proposed Energy East pipeline.

It has inked other deals to move another 175,000 bpd on proposed pipelines to the Canadian Pacific Coast and 150,000 bpd on planned pipelines to the U.S. Gulf Coast.

In addition to pipelines, Cenovus also plans to begin using rail to transport some of its oil sands production by mid-2014, and expects to begin taking delivery of 825 coiled and insulated leased rail cars in late 2014.

The company said it expects to have the capacity to move up to 30,000 bpd of its blended oil volumes by rail by the end of 2014.

“Our predictable, reliable oil sands growth and financial strength give us the confidence to make long-term transportation commitments,” Ferguson said. “We are targeting to have firm transportation by pipeline and rail for half of our gross forecast marketable production over the medium term.”

Cenovus was spun off of Encana Corp. in December 2009.