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TheStreet Open House

Steam Generators At Cenovus's Christina Lake Operation In Northern Alberta

Stocks in this article: CVE

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.

Steam generators at Cenovus's Christina Lake operation in northern Alberta

Steam generators at Cenovus's Christina Lake operation in northern Alberta

“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.

Budget forecast

 

  2013 budget   2012 guidance   % change 3

Cash flow 1,2 ($ billions)

3.1 – 4.0 3.7

-3

Per share diluted ($/share) 4.05 – 5.20 4.90

 

Operating cash flow 1,2 ($ billions) 4.1 – 5.0 4.5 -
Total capital investment ($ billions) 3.2 – 3.6 3.3 – 3.4 1
Total oil and NGLs production (Mbbls/d) 180 – 196 165 14

1 2013 based on WTI of US$91 per bbl, a WTI/WCS differential of $28, NYMEX gas of US$4 per Mcf, US$/C$ at $1.00 and a Chicago 3-2-1 crack spread of $20. 2 Cash flow and operating cash flow are non-GAAP measures as defined in the Advisory. 3 Percentage change based on the midpoints of the ranges.

Christina Lake leads 2013 production growthCenovus 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.”

Average production forecast
    2013 budget   2012 guidance   % change 1
Foster Creek (Mbbls/d) 55 – 60 58 -
Christina Lake (Mbbls/d) 47 – 52 31 60
Total oil sands (Mbbls/d) 102 – 112 89 20
Pelican Lake (Mbbls/d) 26 – 28 23 17
Other conventional oil and NGLs (Mbbls/d) 52 – 56 53 2
Total oil and NGLs (Mbbls/d) 180 – 196 165 14
Natural gas (MMcf/d) 485 – 540 590 -13

1 Percentage change based on the midpoints of the ranges.

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 sandsCenovus’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.

Conventional oil opportunitiesAt Pelican Lake, approximately $560 million to $620 million of 2013 capital is earmarked for the continued development of the polymer flood, infill drilling and facility expansion. Capital investment in other conventional oil is forecast to be between $670 million and $740 million in 2013. The company continues to direct resources to tight oil opportunities, especially in southern Alberta where Cenovus has had good results and holds a competitive cost advantage due to its fee land holdings. Cenovus plans to invest only $25 million to $30 million in its natural gas assets. These properties are expected to make a strong contribution of more than $400 million in operating cash flow in excess of the capital spent on them.

Capital investment by asset ($ millions)
    2013 budget   2012 guidance   % change
Foster Creek

790 – 870

710 – 730

15
Christina Lake 570 – 630

575 – 590

3
Narrows Lake

140 – 160

Emerging oil sands assets 1 270 – 300

370 – 380

-24
Pelican Lake 560 – 620

520 – 540

11
Other conventional oil 670 – 740

770 – 790

-10
Natural gas 25 – 30

50 – 55

-48
Refining 100 – 125

120 – 130

-10

1 Includes assets such as Grand Rapids and Telephone Lake.

Guidance updatedAlong with issuing 2013 guidance, the company has adjusted its 2012 guidance to reflect lower than anticipated cash flow in the fourth quarter of this year. The change is primarily a result of wider light-heavy differentials combined with lower benchmark crude oil prices. In addition, there were longer than expected turnarounds at the company’s jointly owned U.S. refineries and a one-time cash tax expense in the fourth quarter that’s expected to result in cash tax benefits in future years. Cenovus’s forecast 2012 oil production volumes remain on track. The guidance documents are available at www.cenovus.com.

2013 milestonesCenovus has set specific milestones for 2013 that will help direct its progress and aid shareholders in measuring the company’s success. These milestones include:

  • drilling 350 to 400 gross stratigraphic test wells and assessing results
  • submitting regulatory applications for Foster Creek phase J and Christina Lake phase H expansions
  • achieving first production in the third quarter at Christina Lake phase E (previously fourth quarter)
  • beginning facility construction at Narrows Lake phase A
  • initiating construction of an additional oil battery at Pelican Lake
  • receiving regulatory approval for Grand Rapids in the fourth quarter
  • further evaluating tight oil and other oil opportunities
  • growing reserves and contingent resources
  • almost doubling rail shipping capacity for oil to approximately 10,000 bbls/d
  • evaluating debottlenecking opportunities at the Wood River Refinery.

Reserves additions expectedCenovus believes it will be in a position to add more than 250 million barrels of proved reserves at its oil sands operations in 2012. The majority of the additions are a result of the regulatory approval of Narrows Lake and the recent partner approval of the project’s phase A. The Cenovus-wide 2012 reserves evaluation, prepared by independent qualified reserves evaluators, is due in February 2013. Cenovus anticipates corporate proved finding and development costs in 2012 to be in the range of $8.00 to $10.00 per barrel of oil equivalent (boe), not including changes to future development costs. The company expects its three-year average finding and development costs will be about $6.00/boe based on 2010 and 2011 actuals and the midpoint of the 2012 range.

Transportation and refiningThe company continues to support various proposed pipeline projects through commitments that it expects will lead to increased shipping capacity of Canadian oil to foreign markets. The full utilization of Cenovus’s firm shipping capacity of 11,500 bbls/d on the Trans Mountain Pipeline system to the West Coast is helping to develop markets in California and Asia. Cenovus believes pipelines are still the most economical way to transport oil, though rail provides a practical alternative to get oil to markets that are currently inaccessible by pipeline. The company anticipates almost doubling its capacity next year for moving oil by rail to approximately 10,000 bbls/d, providing greater marketing flexibility.

The coker and refinery expansion (CORE) project at the jointly owned Wood River Refinery in Illinois has increased heavy oil processing capacity to between 200,000 and 220,000 bbls/d. The volume processed will be dependent upon the quality of the available crudes and will be managed to maximize economic benefit. The CORE project is contributing significantly to the company’s integrated strategy. Cenovus and its partner, Phillips 66, plan to evaluate possible debottlenecking opportunities next year in order to expand the refinery’s capacity and allow more crude oil to be processed into refined products. Cenovus anticipates capital investment of between $100 million and $125 million in 2013 at the jointly owned Wood River and Borger refineries, primarily dedicated to maintaining refinery capacity, ensuring reliable operations and progressing safety initiatives.

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