Cenovus CEO says discount on Canadian oil taking ‘extraordinary’ toll on economy
Heavy crude originating in Canada trades for significantly less than its U.S. counterpart, resulting in what Alex Pourbaix described as a "transfer of wealth from Alberta and Canada to U.S. refiners"
CALGARY—Higher discounts being paid for Canadian heavy oil versus American crude are having an “extraordinary impact” on the Canadian and Alberta economies, says the CEO of oilsands producer Cenovus Energy Inc.
Every U.S. dollar increase in the price difference between Western Canadian Select bitumen blend and New York-traded West Texas Intermediate costs the company $125 million in revenue, Alex Pourbaix said Feb. 15.
He estimated a US$10 improvement in the difference on Alberta’s overall output of 3.2 million barrels per day of heavy oil would result in C$50 million a day spilling back into the provincial economy.
“This issue of the spread between Canadian heavy and WTI is having an extraordinary impact on the Canadian economy and the Alberta economy, not just upstream producers,” Pourbaix said, adding the situation amounts to a “transfer of wealth from Alberta and Canada to U.S. refiners and U.S. consumers of refined products.”
Cenovus reported fourth-quarter net income of $620 million or 50 cents per share on Thursday, well ahead of $91 million, or 11 cents per share, in the year-earlier period, thanks to better refinery profits, stronger oil prices and production that almost doubled after it bought out its oilsands partner, Houston-based ConocoPhillips, last year.
Analysts said the company beat expectations mainly due to the U.S. refining operations of its 50-50 partner, Phillips 66, which contributed $261 million in income in the last three months of 2017, versus $54 million in the same period of 2016.
Cenovus’s revenue was $5.1 billion, ahead of analyst predictions of $4.7 billion as reported by Thomson Reuters.
The WCS-WTI differential was US$25.68 on Wednesday but hit US$29.40 last Friday, more than double its typical level. The higher discounts over the past two months are blamed by many observers on a shortage of capacity on export pipelines out of Canada.
Cenovus said sales volumes in the fourth quarter were about seven per cent lower than oilsands production due to the two-week shutdown and subsequent volume constraints on TransCanada Corp.’s Keystone pipeline following an oil spill in November in South Dakota.
Pourbaix said it’s believed the pipeline will be able to return to its 590,000 barrels per day capacity soon and that, along with more crude-by-rail shipments, will help to narrow differentials.
He said Cenovus hopes to ramp up volumes at its Edmonton-area rail-loading facility from about 12,000 bpd in the fourth quarter to closer to its capacity of about 75,000 bpd and is in negotiations with both of Canada’s major railroads to provide locomotives.
Pourbaix said he appreciates Alberta Premier Rachel Notley’s efforts to convince B.C. to allow the Trans Mountain Pipeline expansion to proceed but wouldn’t comment on her moves to ban B.C. wine imports and set up a task force on the issue.
Since taking over as CEO last fall, Pourbaix has been aggressively cutting costs. The company completed a 15 per cent cut to its workforce in January and February, eliminating between 500 and 700 jobs, as part of its plan to trim $1 billion in cumulative capital, operating and administration costs over two years.
On a call with analysts, Pourbaix said the company is looking at selling more assets from its current 1.2 million hectares of Deep Basin exploration rights in northwestern Alberta and northeastern B.C. to pay down debt, in addition to a Deep Basin package it is marketing now.
Cenovus reported total production of 555,000 barrels of oil equivalent per day in the fourth quarter, up from 283,000 boe/d in the same period last year, as oilsands production rose to 361,000 bpd from 164,000 bpd.