CALGARY, Alberta - Canadian energy companies have yet to start shutting down large volumes of oil production due to low prices, but the market meltdown has started to fuel some nervousness about the prospect.
So far, a 66 percent drop in crude prices since July, coupled with the credit crunch and still-high construction costs, has prompted numerous oil sands developers to defer and rethink their plans for new projects and expansions.
But at $50 a barrel, the taps on existing Canadian production of conventional light and heavy oil and oil sands-derived crude -- a key energy source for the United States -- have not been seen to be closing.
"You've got to think that it's starting to get a little bit closer to the bone," FirstEnergy Capital Corp analyst William Lacey said.
"They're still making money, albeit it's a lot less than what they were."
Canada pumps about 2.8 million barrels of oil a day, and about 1.8 million of that is exported to refineries in the United States, many in the Midwest.
Energy companies shut off production when operating and other costs exceed their ability to earn a return. That's also when job losses begin.
Shutting in is a much easier prospect for conventional wells than with complex oil sands mining and upgrading, or steam-assisted gravity drainage (SAGD), where steam is pumped into the ground to allow the heavy crude to be pumped to the surface.
"I'm sure that's being thought about, but frankly I don't think we're at that point yet," said Steve Fekete, an oil-market analyst with energy consultants Purvin & Gertz.
"And our assumption is that the SAGD guys are going to go forward, the projects that are existing, and on the conventional side. They're still covering their costs and so on."
Some analysts have said new integrated oil sands projects that mine the tar-like oil in open pits and upgrade it into refinery-ready light crude require oil prices above $100 a barrel to earn an acceptable return due to high costs.
The energy-market drop has forced such companies as Petro-Canada (PCA.TO: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research, Stock Buzz) and Canadian Natural Resources Ltd (CNQ.TO: Quote, Profile, Research, Stock Buzz) to slow down the development of their multibillion-dollar projects.
Such deferrals have fueled expectations that the Canadian Association of Petroleum Producers, the industry's main lobby group, will have to cut its oil sands output forecast for a second time in two years.
Last June, CAPP reduced its outlook to 2.8 million barrels a day by 2015, down from the previous forecast of 3.4 million.
But in terms of existing operations, Syncrude Canada Ltd, the biggest oil sands project, has never cut output due to low prices, said Siren Fisekci, spokeswoman for Canadian Oil Sands Trust, Syncrude's largest interest owner.
The operation produces about 350,000 barrels a day from its sprawling site in northeastern Alberta.
Fisekci pointed out its production costs this year have been about C$35 a barrel and its sustaining capital is about C$10 a barrel. Meanwhile, crude in Canadian dollar terms is worth about C$64.50 a barrel, leaving a reasonable cushion.
"Secondly, if we were in a sustained period of lower oil prices, you would look to reducing costs in the areas you could and how much flexibility you had to do that. I don't think that's been fully determined at this point," she said.
So far, a 66 percent drop in crude prices since July, coupled with the credit crunch and still-high construction costs, has prompted numerous oil sands developers to defer and rethink their plans for new projects and expansions.
But at $50 a barrel, the taps on existing Canadian production of conventional light and heavy oil and oil sands-derived crude -- a key energy source for the United States -- have not been seen to be closing.
"You've got to think that it's starting to get a little bit closer to the bone," FirstEnergy Capital Corp analyst William Lacey said.
"They're still making money, albeit it's a lot less than what they were."
Canada pumps about 2.8 million barrels of oil a day, and about 1.8 million of that is exported to refineries in the United States, many in the Midwest.
Energy companies shut off production when operating and other costs exceed their ability to earn a return. That's also when job losses begin.
Shutting in is a much easier prospect for conventional wells than with complex oil sands mining and upgrading, or steam-assisted gravity drainage (SAGD), where steam is pumped into the ground to allow the heavy crude to be pumped to the surface.
"I'm sure that's being thought about, but frankly I don't think we're at that point yet," said Steve Fekete, an oil-market analyst with energy consultants Purvin & Gertz.
"And our assumption is that the SAGD guys are going to go forward, the projects that are existing, and on the conventional side. They're still covering their costs and so on."
Some analysts have said new integrated oil sands projects that mine the tar-like oil in open pits and upgrade it into refinery-ready light crude require oil prices above $100 a barrel to earn an acceptable return due to high costs.
The energy-market drop has forced such companies as Petro-Canada (PCA.TO: Quote, Profile, Research, Stock Buzz), Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research, Stock Buzz) and Canadian Natural Resources Ltd (CNQ.TO: Quote, Profile, Research, Stock Buzz) to slow down the development of their multibillion-dollar projects.
Such deferrals have fueled expectations that the Canadian Association of Petroleum Producers, the industry's main lobby group, will have to cut its oil sands output forecast for a second time in two years.
Last June, CAPP reduced its outlook to 2.8 million barrels a day by 2015, down from the previous forecast of 3.4 million.
But in terms of existing operations, Syncrude Canada Ltd, the biggest oil sands project, has never cut output due to low prices, said Siren Fisekci, spokeswoman for Canadian Oil Sands Trust, Syncrude's largest interest owner.
The operation produces about 350,000 barrels a day from its sprawling site in northeastern Alberta.
Fisekci pointed out its production costs this year have been about C$35 a barrel and its sustaining capital is about C$10 a barrel. Meanwhile, crude in Canadian dollar terms is worth about C$64.50 a barrel, leaving a reasonable cushion.
"Secondly, if we were in a sustained period of lower oil prices, you would look to reducing costs in the areas you could and how much flexibility you had to do that. I don't think that's been fully determined at this point," she said.
