Cenovus Energy Inc. (TSX, NYSE: CVE) plans to make a significant investment in its oil assets next year as it continues to focus on growing production. The company expects to invest between $3.2 billion and $3.6 billion in 2013, building on its successful 2012 capital program.
“We remain committed to protecting and enhancing that cash flow through integration, expansion of market access for our product and the continuation of our price-hedging program. Our integrated strategy has been a significant contributor to our success so far.”
“We’re in an excellent financial position with a strong balance sheet that gives us the flexibility to invest for future growth and maintain our focus on delivering solid total shareholder return. That includes plans to increase our dividend as we grow,” said Brian Ferguson, Cenovus President & Chief Executive Officer. “We anticipate taking substantial steps again next year toward achieving our long-term objective of increasing oil production three-fold between 2012 and the end of 2021.”
Cenovus expects continued robust growth in oil production in 2013, mainly due to expanded capacity at its Christina Lake oil sands operation. Investment in the company’s other oil operations is also expected to start paying off with production increases anticipated next year. The company remains squarely focused on its long-term strategy with a majority of the capital budget contributing to oil production growth beyond 2013.
“In our first three years as a company, we’ve consistently delivered on the commitments we made to investors,” Ferguson said. “That includes meeting and, in several cases, exceeding the milestones we laid out in our long-range strategic plan.”
Cenovus is anticipating strong total cash flow of between $3.1 billion and $4.0 billion in 2013. The company’s oil production and refining operations are expected to generate the majority of operating cash flow. Cenovus is forecasting a slight decline in 2013 total cash flow compared with 2012 due to the company’s expectations of lower realized oil prices.
Based on November 30 commodity strip pricing, total cash flow for 2013 would be higher than the expected 2012 total cash flow.
Christina Lake leads 2013 production growth
Cenovus expects oil production to average between 180,000 and 196,000 barrels per day (bbls/d) net in 2013, an increase of 14% compared with forecast 2012 production. The increase is anticipated to come largely from Christina Lake where phase D is expected to start producing at full capacity during the second quarter of 2013. When phase D is fully operational, the project is forecast to have production capacity of 98,000 bbls/d gross. An additional increase of 40,000 bbls/d in gross production capacity is expected in the third quarter with the start-up of phase E, a few months earlier than expected and within budget. Christina Lake oil production is expected to average between 47,000 and 52,000 bbls/d net in the coming year, a 60% increase compared with forecast average 2012 production.
Startup times at Christina Lake have been greatly improved due to production commencing in a higher-quality area of the reservoir. In addition, start-up times were enhanced by the commercialization in 2012 of the company’s accelerated start-up technology using steam dilation, which is among 140 technology development projects the company is working on. Cenovus considers its investment in innovation and technology development to be essential to its continued success.
The company’s Foster Creek facility demonstrated excellent operating performance in 2012, running near, and even beyond its plant design capacity of 120,000 bbls/d gross for much of the year. Expansion work at phases F, G and H at Foster Creek is now underway with added production capacity expected in 2014. Final partner approval of the first phase for the 130,000 bbls/d gross Narrows Lake project was just received. Foster Creek, Christina Lake and Narrows Lake are jointly owned with ConocoPhillips.
Production from conventional oil projects is expected to contribute to higher volumes in 2013 as well. Cenovus expects a 17% increase in oil production at Pelican Lake in 2013 due to infill drilling and the expansion of the polymer enhanced oil recovery program. The company plans to increase production from its tight oil assets in southern Alberta and build upon the success of this year’s drilling programs.
“The anticipated increase in oil production for next year keeps us on track to reach our target of 500,000 barrels per day of net oil production by the end of 2021,” said John Brannan, Cenovus Executive Vice-President & Chief Operating Officer. “The ability of our staff to reduce oil sands project start-up times and continuously improve our production techniques while successfully advancing new projects gives me the confidence that we’ll continue to reach our milestones and maintain our status as a low-cost developer and operator of oil sands projects.”
Focus on operating costs
“Additional effort will be made in 2013 to address operating costs, including using our size and scale to the company’s advantage,” Brannan said. “We understand the importance of being an efficient operator and keeping costs in check as we continue our expansions.”
Total operating costs in 2013 are anticipated to be slightly higher mainly due to increased prices for natural gas and electricity needed to fuel the company’s operations. Cenovus is also expecting higher chemical costs, mostly for polymer at Pelican Lake. The company will work to increase efficiency across its operations. This includes lowering drilling and completion costs, improving waste treatment processes and reducing the number of well workovers. The company is forecasting overall cost inflation to remain between 3% and 5%.
Capital investment focuses on oil sands
Cenovus’s forecast capital investment of $3.2 billion to $3.6 billion focuses on its oil assets and is consistent with the company’s long-term strategy. Cenovus is positioning itself well for the future, with approximately 60% of the capital invested next year expected to contribute to production and cash flow beyond 2013.
Approximately $2 billion of the capital budget is considered to be committed capital that is dedicated to maintaining current operations and building already approved oil sands expansions. The remaining budget is discretionary capital that is focused on advancing oil sands projects through the regulatory process and increasing conventional oil production. The discretionary capital dedicated to future growth projects gives Cenovus a great deal of flexibility in its spending so the company can react quickly to changing market conditions and adjust plans if circumstances change. The phased nature of the company’s oil sands expansions provides additional flexibility since the project plans can be slowed if necessary. More than half of total 2013 capital investment is focused on the company’s oil sands assets, primarily for expansions at Foster Creek and Christina Lake, stratigraphic well drilling and the development of Narrows Lake.
Capital investment at Christina Lake is anticipated to be in the range of $570 million to $630 million in 2013. The next expansion at Christina Lake, phase E, is about 65% complete and phase F construction is advancing. Engineering and design work is underway for Christina Lake phase G. Cenovus plans to submit a regulatory application in 2013 for a proposed phase H expansion at Christina Lake. Total production capacity is expected to reach 288,000 bbls/d by the end of 2019, potentially increasing to as much as 300,000 bbls/d with optimization.
Foster Creek capital investment in 2013 is expected to be between $790 million and $870 million.The next three expansions at Foster Creek, phases F, G and H, made significant progress in 2012, with overall work at phase F now 65% complete and start-up anticipated in the third quarter of 2014. Progress is also being made on phases G and H.
Cenovus anticipates submitting an application to regulators in 2013 for an additional Foster Creek expansion, phase J. Ultimately, Cenovus expects Foster Creek will have the capacity to produce 295,000 bbls/d and potentially as much as 310,000 bbls/d gross with optimization.
“We expect to continue delivering new phases at Foster Creek and Christina Lake at industry-leading capital efficiencies due to the talent of our workforce and our manufacturing approach to the development of these high-quality reservoirs,” Ferguson said. “We anticipate expansions at both projects will be brought on at a cost of $22,000 to $25,000 per flowing barrel.”
Site preparation is already underway at Narrows Lake, with construction of the phase A plant scheduled to start in the third quarter of 2013. The first phase of the project is anticipated to have production capacity of 45,000 bbls/d, with first oil expected in 2017. Capital investment in the project is forecast to be between $140 million and $160 million next year.
Capital efficiencies at Narrows Lake are anticipated to be in the range of $28,000 to $32,000 per flowing barrel, which are well below the industry average. That’s higher than at the company’s existing oil sands operations because Narrows Lake is a greenfield site, meaning all infrastructure, including that needed to implement solvent aided process (SAP) has to be built. Cenovus has been piloting SAP technology at Christina Lake. The company mixes butane with the steam injected into the reservoir, helping to make the oil thinner so it flows more freely to the producing well. It’s expected this will help to increase production and reduce impacts on the environment as less water and natural gas are used. Narrows Lake would be the industry’s first use of SAP with butane on a commercial scale.
Additional capital will be invested in emerging steam-assisted gravity drainage (SAGD) projects at Grand Rapids and Telephone Lake, both 100%-owned by Cenovus. The company anticipates regulatory approval of the Grand Rapids project late next year. Construction for the installation of a third mobile steam generator is moving ahead at Grand Rapids. Steam injection started on the second well pair during the third quarter of 2012, with first production expected early in 2013. The company is encouraged by the steam distribution that it has measured along the 1,200-metre long well. At Telephone Lake, Cenovus is advancing the regulatory application for the project. The company continues to operate its dewatering pilot, with water production and air injection progressing as anticipated.
Cenovus expects to drill between 350 and 400 gross stratigraphic test wells in 2013 to help advance regulatory applications for additional expansions at Foster Creek and Christina Lake and assess new oil sands resources. Capital investment in the company’s undeveloped oil sands assets is expected to be a key component in building net asset value as assessment work in these areas is intended to help move the associated resources into the contingent category and eventually to reserves.
Source: Business Wire
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