Canada cuts steam-driven oil projects, risking permanent damage

Canada's steam-driven oil facilities are bearing the brunt of output cuts as the industry copes with low prices, and deeper reductions may risk permanent damage to the sites.

The COVID-19 pandemic has severely cut fuel demand as the global economy slows, leading refiners to reduce purchases of crude. Canada, the world's fourth-largest oil producer, has started slashing production, but analysts say the biggest cuts lie ahead.

Steam-assisted gravity drainage (SAGD) projects heat seams of tarry bitumen and account for nearly half of Canadian oil sands production.

Maintaining temperature and pressure is necessary to keeping the reservoir in shape for future production.

ConocoPhillips on Thursday became the latest producer to cut Canadian steam-driven production, chopping 100,000 barrels per day (bpd).

"Shutting down those (sites) sounds a lot easier than it actually is," Alberta Premier Jason Kenney told reporters on Wednesday, when asked about closing such sites to avoid spreading coronavirus infections. "It can cause permanent damage to their reservoir and jeopardize billions of dollars of assets."

Husky Energy and Cenovus Energy have also made cuts to steam-driven production, estimated at 15,000 bpd and up to 45,000 bpd respectively.

Such sites face cuts because they produce bitumen, a form of heavy oil that requires the added cost of blending with ultra-light oil to move it through pipelines, said Matt Murphy, upstream analyst at Tudor Pickering Holt & Co.

Canada has cut oil sands output by more than 300,000 bpd, and total shut-ins may grow to 1.5 million, TD analyst Menno Hulshof said in a note. The higher estimate represents nearly one-third of Canadian output.

Up to 80% of SAGD volumes may be curtailed, Hulshof said.

ConocoPhillips intends to reduce volumes to the lowest level possible without damaging its reservoir.

"We're not going to shy (from restoring production) if we see any risk to reservoir damage or anything that's going to impair our ability to bring it back," Chief Operating Officer Matt Fox told analysts.

Cenovus is confident that it can safely adjust production, as it has done so previously, spokeswoman Sonja Franklin said.

Companies can manage risks by injecting some steam during curtailments to maintain pressure, Murphy said.

Mines also face cuts.

Suncor Energy has cut output sharply at its Fort Hills mine, about 85,000 bpd, according to Murphy.

Imperial Oil plans to curtail output first at its Kearl mine, if necessary, because it can modulate production more easily than its Cold Lake SAGD site.

Canadian Natural Resources, by contrast, would keep mines running even in a price "meltdown" because they produce lighter synthetic crude at lower cost, President Tim McKay said last week.