CALGARY - Connacher Oil and Gas Ltd (CLL.TO: Quote, Profile, Research, Stock Buzz) said on Monday it will cut bitumen production at its Alberta oil sands project as prices sink below costs, the first Canadian producer to take such action in the wake of falling oil prices.
Connacher said it will restrict output from its Great Divide project to 5,000 barrels a day for an undetermined period, down from recent rates of about 9,000 barrels a day.
"It recently became evident we could not secure adequate pricing for our bitumen sufficient to cover operating costs and royalties," Richard Gusella, Connacher's chief executive, said on a conference call. "Frankly, it does not make sense for us to produce away our reserves ... at a loss."
The company is the first Canadian producer to announce it would slash output because of low oil prices but others may follow if the discount, or differential, to light crude for the tar-like bitumen produced in Alberta's oil sands region doesn't narrow, an analyst said.
"Should oil price continue to trade in the $40 to $50 range and differentials remain wide then we will start to see more companies make a hard decision," said Menno Hulshof, an analyst at Dundee Securities. "I think it's inevitable."
Bitumen's discount to lighter crudes typically gets deeper in the winter when the paving season ends, since much of the heavy oil is used to produce asphalt. But the seasonal drop has been exacerbated as demand for oil wanes because of the North American recession.
"The differential certainly has widened out with the pull back in crude," said Martin King, an analyst with FirstEnergy Capital. "Some of the bitumen prices are certainly under $20 a barrel right now ... They've been pulled into the downdraft in the broader market for crude."
Crude prices were rising on Monday on hopes that OPEC would make its biggest ever supply cuts when it meets on Wednesday.
Some of the cartel's members are calling for cuts of up to 2 million barrels a day to boost oil prices that have slumped by nearly $100 a barrel since July.
Indeed, Connacher said in a statement it was looking to supply cuts to restore prices.
"We anticipate (higher prices) will emerge from the probability of an excess of supply destruction, with production cutbacks arising from very low crude oil prices," the company said.
Great Divide is a steam-assisted gravity drainage project, in which the company pumps steam into the ground to loosen the bitumen, allowing it to be pumped to the surface in wells.
Connacher also said it will temporarily suspend construction at its C$345 million ($278 million) Algar project.
The company has already spent C$110 million on its second steam-driven project and said suspending construction for six-months would add C$18 million in costs. It said the halt would last "until there is more clarity and certainty to the economics of the project."
Connacher said it has about C$500 million in cash and available credit lines and continues to produce conventional oil and operate a Montana refinery.
Connacher said it will restrict output from its Great Divide project to 5,000 barrels a day for an undetermined period, down from recent rates of about 9,000 barrels a day.
"It recently became evident we could not secure adequate pricing for our bitumen sufficient to cover operating costs and royalties," Richard Gusella, Connacher's chief executive, said on a conference call. "Frankly, it does not make sense for us to produce away our reserves ... at a loss."
The company is the first Canadian producer to announce it would slash output because of low oil prices but others may follow if the discount, or differential, to light crude for the tar-like bitumen produced in Alberta's oil sands region doesn't narrow, an analyst said.
"Should oil price continue to trade in the $40 to $50 range and differentials remain wide then we will start to see more companies make a hard decision," said Menno Hulshof, an analyst at Dundee Securities. "I think it's inevitable."
Bitumen's discount to lighter crudes typically gets deeper in the winter when the paving season ends, since much of the heavy oil is used to produce asphalt. But the seasonal drop has been exacerbated as demand for oil wanes because of the North American recession.
"The differential certainly has widened out with the pull back in crude," said Martin King, an analyst with FirstEnergy Capital. "Some of the bitumen prices are certainly under $20 a barrel right now ... They've been pulled into the downdraft in the broader market for crude."
Crude prices were rising on Monday on hopes that OPEC would make its biggest ever supply cuts when it meets on Wednesday.
Some of the cartel's members are calling for cuts of up to 2 million barrels a day to boost oil prices that have slumped by nearly $100 a barrel since July.
Indeed, Connacher said in a statement it was looking to supply cuts to restore prices.
"We anticipate (higher prices) will emerge from the probability of an excess of supply destruction, with production cutbacks arising from very low crude oil prices," the company said.
Great Divide is a steam-assisted gravity drainage project, in which the company pumps steam into the ground to loosen the bitumen, allowing it to be pumped to the surface in wells.
Connacher also said it will temporarily suspend construction at its C$345 million ($278 million) Algar project.
The company has already spent C$110 million on its second steam-driven project and said suspending construction for six-months would add C$18 million in costs. It said the halt would last "until there is more clarity and certainty to the economics of the project."
Connacher said it has about C$500 million in cash and available credit lines and continues to produce conventional oil and operate a Montana refinery.
