Canadian heavy oil prices fell below $30 for the first time in more than six years as Bank of Montreal warned that oil sands producers must cut costs.
Western Canadian Select fell 59 cents to $29.85 at 12:28 p.m. Mountain time, the lowest since Feb. 18, 2009, according to data compiled by Bloomberg. The grade’s discount to U.S. benchmark West Texas Intermediate narrowed 80 cents to $13.60 a barrel. Crude futures settled at a six-year low of $43.88 in New York on concern record supply may strain storage capacity.
The cash costs of oil sands producers must shrink to remain competitive in the “new normal of lower oil prices for longer,” BMO analyst Randy Ollenberger said in a note today. The majority of Canada’s crude comes from oil sands in Northern Alberta and is among the most expensive to produce. Companies including Royal Dutch Shell Plc and Cenovus Energy Inc. have cut costs and suspended projects as prices plunged.
“You will see companies do another round of budget cuts if oil settles in the low 40s,” Ollenberger said.
Crude from oil sands is produced from bitumen, which must be dug or pumped out of the ground after it’s melted by steam. The bitumen is upgraded to lighter synthetic crude or is diluted with condensate and shipped by pipeline or rail car thousands of miles to refineries, most in the U.S.
Shell withdrew an application to develop the Pierre River mining project to focus on existing ones, Shell Canada President Lorraine Mitchelmore said in a statement last month. Cenovus suspended construction on Christina Lake Phase G with work to resume when market conditions improve, Chief Operating Officer John Brannan also said last month. Both companies, along with Suncor Energy Inc., have also cut staff to reduce costs.
Major sources of costs savings that may have been overlooked include lower royalty rates and reduced blending costs, Ollenberger said in his note today. Per-barrel costs can be cut with increased production through existing facilities, he said.
Canadian Oil Sands Ltd., among the largest five producers, needs a WTI price of about $50 a barrel to sustain business with no production declines, Chief Financial Officer Robert Dawson said March 11. Smaller companies are facing financial troubles. Southern Pacific Resource Corp. has defaulted on debt and Connacher Oil and Gas Ltd. says it’s in danger of not being able to pay creditors.
Canada’s oil sands production will grow 8.3 percent this year, the country’s National Energy Board said Feb. 10. Projects to extract bitumen require billions of dollars of up-front investment.
Most producers will continue producing from existing operations and complete projects under construction, Jackie Forrest, vice president of Calgary-based ARC Financial Corp., said in a Jan. 29 e-mail.
WTI crude would have to stay between $30 and $35 a barrel for at least six months before wells and mines are shut, Dinara Millington, a vice president at Canadian Energy Research Institute, said Feb. 19.