Alberta fires threaten to scorch oil patch profits

Share

The fires ravaging northern Alberta's forests are also burning up substantial profits for the energy industry, which is losing millions of dollars a day in a broad spate of production cuts.

Nearly 150,000 barrels of oil-equivalent production has been halted amid a massive string of blazes that has threatened some energy infrastructure and created major logistical hurdles for many crude operators.

On Thursday, Cenovus Energy Inc. shut the last trickle of crude from its Pelican Lake operations, where 22,000 barrels of daily oil production now stands idle, waiting for the fires to abate so a crucial pipeline can reopen and output can resume.

No one knows how long that might take, since the fires are unpredictable and companies remain uncertain about how much infrastructure has been affected, especially the electrical transmission lines that are needed to run pipeline pumping stations.

What is clear, however, is that the impact for a crude-heavy province is substantial. With roughly 150,000 barrels of shuttered crude production, Alberta companies are losing more than $10-million per day in revenue. That assumes a crude price of $75, which analysts said is a reasonable average given that much of the closed production is heavy oil that sells at a discount.

For Alberta, that translates into roughly $1.7-million per day in lost royalties, a tally that adds to the significant blow already faced by a province that has committed $50-million toward massive rebuilding costs after the fires.

For the oil patch, the losses are heavy enough that analysts are beginning to alter expectations for second-quarter results, although they cautioned that the impact will depend entirely on the duration of an outage that could last several days - or several weeks.

"If it's just a few days or even a week, it's not going to be a huge deal. But this is oil production that's down in a $100 oil price environment. It's going to affect their earnings for the quarter," said Kyle Preston, an analyst with Canaccord Genuity.

But those revenues are "not lost forever," he said. "The important thing here is you're not losing those reserves. You're pushing out the collection of that cash by however long this thing is down."

The fires have hurt production at several companies, although some have only had to close off several hundred barrels. Most affected is Penn West Exploration. Cenovus and Canadian Natural Resources Ltd. have together turned off the taps on more than 60,000 barrels per day. Others affected include Royal Dutch Shell PLC, Apache Corp., Murphy Oil Corp., Pengrowth Energy Corp., ARC Resources Ltd., Husky Energy Inc. and Baytex Energy Corp.

Work has also been halted on several oil sands construction sites and on Pembina Pipeline Corp.'s Nipisi and Mitsue pipelines, a $440-million project being built to move 100,000 barrels of crude and 20,000 barrels of an oil-thinning product called condensate.

Like many other companies, Pembina is not certain what impact the fires have had on that project. "Because there has been an evacuation, we haven't been allowed back in to double-check," spokeswoman Shawn Davis said.

A key question involves when electricity will be brought back to areas that have been threatened by fires. A decision to halt power delivery to some parts of northern Alberta for safety reasons has forced the closing of the Rainbow pipeline, a Plains All American line that must reopen before companies can resume large-scale crude shipments.

Companies are also worried that Plains may have to contend with damage to transmission lines before it can restart Rainbow, although the company can power pipeline pumping stations with portable generators.

When that might happen, however, is "unknown right now, because no one knows if there's been any damage to any of the infrastructure in the area," said David Goldie, vice-president of Greater Pelican Assets for Cenovus.

Even when crude can begin to flow, it will take Cenovus four to five days to build back up to full production, Mr. Goldie said. The wells at its downed Pelican field produce an emulsion of oil and water. When production is halted, the crude separates from the water inside oilfield pipelines, which creates difficulties in processing the product before it can be shipped to market.

"It takes some time to flush those through the system and get back to regular production," he said.