Cenovus Energy Inc. continued to deliver on its commitments in 2013, increasing oil sands production 14% and maintaining a strong balance sheet as it expanded its oil operations. In addition, the company’s refining operations again performed well, generating significant operating cash flow to support Cenovus’s long-term business plan. Cenovus also achieved solid growth in its oil reserves.
The increase in production from the company’s oil sands operations in 2013 was largely driven by its Christina Lake project. Christina Lake volumes increased 55% as phase D reached full production capacity and phase E, the company’s 10th oil sands phase, began production in July. The company expects to achieve full production capacity from this phase in the first quarter of 2014. The successful addition of these phases further demonstrates the importance of the company’s manufacturing approach to developing its oil sands assets. Cenovus expects Christina Lake to achieve production of between 124,000 bbls/d and 136,000 bbls/d gross this year. This represents production volumes of 95% of design capacity, which the company is targeting for the current phases.
“We have an excellent track record of delivering oil sands projects on schedule and at industry-leading capital efficiencies,” Ferguson said. “We plan to continue our disciplined approach to developing our oil sands assets.”
Higher production at Christina Lake more than offset an 8% year-over-year decline in volumes at Foster Creek. The decrease at Foster Creek was partially the result of catching up on well maintenance that was deferred in 2012. In addition, the evolution to common steam chambers in the initial project areas at Foster Creek prompted Cenovus to evaluate its long-term reservoir management plan and apply new techniques to optimize production performance. This includes determining the optimal reservoir pressure, drilling more wells using Wedge WellTM technology and moving more wells to the final stage of production, which is called the blowdown stage. Blowdown enables the company to move steam from older well pads that no longer need it for continued production to new areas of the reservoir. For the fourth quarter of 2013, Foster Creek output was in line with company expectations.
Total conventional oil production, including the heavy oil operation at Pelican Lake, averaged almost 77,000 bbls/d for the year, up 1%. Pelican Lake production increased 8%, from the previous year, due to infill drilling in 2012 and 2013. The company also achieved increased production volumes from its horizontal well program in southern Alberta. These increases were offset by the July sale of the Shaunavon tight oil assets in Saskatchewan, which resulted in a production decline of approximately 2,300 bbls/d on an annual basis compared with 2012.
Integrated operations provide financial stability.
The company generated cash flow of $3.6 billion in 2013, in line with the previous year. Cenovus’s integrated strategy, which combines upstream oil production with downstream refining capacity, provides protection against volatile light-heavy oil differentials. Integration acts as a natural economic hedge against discounted heavy crude prices by providing lower feedstock costs to the company’s refineries. The company’s two jointly owned refineries performed well in 2013 and generated operating cash flow in excess of capital invested of approximately $1 billion, net to Cenovus. Operating cash flow was negatively affected by declines in market crack spreads and higher costs for renewable identification numbers (RINs). Market crack spreads were more than 20% lower for the year compared with 2012. The cost of RINs increased to $153 million, net to Cenovus in 2013, an almost five-fold increase from the previous year. Refineries that do not blend renewable fuels such as ethanol into their gasoline and diesel are required to purchase RINs in the open market to comply with the Renewable Fuel Standards set by the U.S. Environmental Protection Agency (EPA). The EPA has proposed reducing biofuel blending quotas for 2014, which has led to a significant drop in the cost of RINs recently.
The impact of lower market crack spreads and higher RIN costs was substantially offset by strong operational performance from Cenovus’s refining assets in 2013. The company’s refineries processed 222,000 bbls/d of heavy oil, up 12% from 2012, the highest level since Cenovus became joint owner of the Wood River and Borger facilities in 2007. The ability to process higher volumes of less expensive heavy oil resulted in an improved feedstock cost advantage. Total refined product output increased 7% to average 463,000 bbls/d in 2013.
Continued additions to reserves and contingent resources
Cenovus continued to strengthen its reserves and resources base. The company’s proved bitumen reserves increased 8% to more than 1.8 billion bbls at the end of 2013, according to its independent reserves and contingent resources evaluation. Total proved reserves reached almost 2.3 billion barrels of oil equivalent (BOE) in 2013, up 5% from the previous year, resulting in a 214% production replacement ratio. Proved plus probable bitumen reserves increased 6% to more than 2.5 billion bbls, while the company’s total proved plus probable reserves increased 4% to 3.2 billion BOE. Economic bitumen best estimate contingent resources increased 2% from 2012 to 9.8 billion bbls. Cenovus’s 2013 proved finding and development (F&D) costs, excluding changes in future development costs, were $14.51/BOE compared with $9.04/BOE in 2012. The three-year average was $9.05/BOE. The 2013 recycle ratio was 2.2 times.
Capital investment focused on existing projects
The company’s long-term business plan of creating shareholder value by increasing its planned capacity to approximately 525,000 bbls/d of net oil production within the next decade remains on track. In support of that, Cenovus invested approximately $3.3 billion to grow its business in 2013. Almost $1.5 billion was invested last year in Cenovus’s two operating oil sands projects, Christina Lake and Foster Creek. Cenovus began construction of the phase A plant at its Narrows Lake project late in 2013, investing $152 million for the year.
Total capital investment in 2013 declined by 3% from 2012 primarily due to lower spending on Cenovus’s conventional business after the sale of its Shaunavon tight oil assets and a slowing of investment at Pelican Lake.
Cenovus’s successful delivery of oil sands projects to date is largely attributable to its manufacturing approach to development. This includes constructing projects in templated and repeatable phases to help manage cost, quality and scheduling. As well, the company plans to continue to invest in its future by assessing its resource base and drilling more than 300 gross stratigraphic test wells in each of the next five years. This helps Cenovus to better define existing reservoirs and lays the groundwork for potential future reserves additions and project expansions.
Cenovus expects to invest between $2.8 billion and $3.1 billion in 2014, a 10% decrease from 2013. The company has built a large inventory of regulatory approved projects and is now allocating more of its capital to develop this established inventory. This includes projects now under construction at Foster Creek, Christina Lake and Narrows Lake, as well as Grand Rapids and Telephone Lake, which are anticipated to receive regulatory approval in 2014.
Foster Creek expansion update
The company has adjusted its timeline for achieving total expected production capacity at Foster Creek phases F, G and H. The total capacity numbers include the initial design capacity plus additional barrels anticipated to result from optimization. That optimization work focuses on the entire facility rather than individual phases. Optimization of the steam to oil ratio (SOR) can be achieved through innovations such as the use of Cenovus’s Wedge WellTM technology, optimizing reservoir pressures and effectively moving well pads to blowdown as they mature. Plant optimization can be accomplished through debottlenecking and facility upgrades such as improving the fluid handling capability at the plant.
As a result of the steam chamber changes mentioned earlier, the company intends to delay the optimization until it’s had more time to assess its new operating procedures. That means the optimization volumes are no longer expected to coincide with the start of production at each new phase. Cenovus expects phases F, G and H to ramp up to a combined 90,000 bbls/d gross – the initial design capacity. Once those phases are complete, as planned in 2016, the company anticipates moving ahead with the optimization work. Optimization is anticipated to take about three years and bring the project up to its expected total full production capacity for phases A though H.
“Our confidence in Foster Creek and the reservoir’s ability to eventually produce more than 300,000 barrels per day gross remains unchanged,” Ferguson said. “This is one of the best SAGD projects in the industry. As we move forward, we’ll be focusing our capital at Foster Creek on investment that will bring the best value to shareholders.”
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