Canadian Natural Resources Ltd., the country’s largest oil and gas producer by volume, is asking its management and employees to take a pay cut while it slashes spending by $1 billion and implements a hiring freeze to cope with rock-bottom crude prices.
Late Wednesday, Canadian Natural announced it would cut its budget by over $1 billion to $2.96 billion in planned spending for the year – but it planned to implement those cost reductions without reducing overall production for the year, which is still expected to be between 1.14 million barrels of oil equivalent per day and 1.2 million boed per day.
The Financial Post has also learned that the company implemented a hiring freeze, is cutting salaries across the company and asking its suppliers to cut fees.
Canadian Natural president Tim McKay’s salary is being cut 20 per cent, other members of the management team will see a 15 per cent pay cut and all vice-presidents will have their pay cut 12 per cent.
“This will only impact our salaried employees with reductions in the range of 0 to 10 per cent and more of the impact will be on higher salaried individuals,” CNRL spokesperson Julie Woo confirmed in an email, adding the company “does not intend at this time to undertake employee reductions due to economic reasons in response to the current low commodity price environment.”
Other oilsands companies, including MEG Energy Corp., Husky Energy Inc. and Cenovus Energy Inc., have slashed their budgets dramatically as Western Canadian heavy oil prices have fallen below the operating costs for most producers in the sector.
“We are monitoring the situation daily and are continuing to look for additional opportunities across our business to further reduce capital and operating costs, if necessary,” Cenovus spokesperson Brett Harris said in an email. Last week, the company cut its budget by 32 per cent, or by between $300 million and $500 million, as oil prices collapsed.
Cenovus shares have been particularly hard hit because the company did not have hedges in place to mitigate the fall in oil prices, analysts say. On Thursday, shares in Cenovus traded up 2 per cent to $2.36 each, which is roughly a third of the price prior to the oil price collapse on March 9.
Across the Canadian oil and gas sector, companies have announced capital spending cuts of between $5.2 billion and $6.4 billion this year, Bloomberg News reported Thursday as companies enter survival mode.
The curtailment program remains an important tool for the province
Canadian Natural Resources
Alarmed by the downturn, the Alberta government is expected to take steps as early in the coming days to help oil and gas producers, the Financial Post has learned.
The first step in a provincial government plan for relief for the embattled oil and gas industry is scheduled to be announced Friday morning, sources with direct knowledge of the matter have told the Financial Post.
Alberta Premier Jason Kenney had previously said the government is willing to use stricter production limits for oil in the province to lift prices and protect government revenues, which directly impacted by low commodity prices.
CNRL and Cenovus both supported the provincial government implementing a curtailment program at the end of 2018 – the last time Canadian heavy oil prices collapsed – and CNRL continues to support curtailment given the current price collapse.
“The curtailment program remains an important tool for the province,” CNRL said in an emailed response to questions. “The province was reviewing the curtailment program on a month-to-month basis, we expect that this review will continue and appropriate action taken to protect jobs and revenues in Alberta.”
As global oil prices have collapsed in the past two weeks, the Canadian industry has been hit particularly hard as Canadian heavy oil prices have fallen below US$10 per barrel this week, substantially lower than average break-even operating costs in the industry.
“The worst of this may not be here yet,” said Kevin Birn, vice-president, North American crude oil markets at IHS Markit. “We’re really in uncharted waters as the situation that precipitated this, the coronavirus, is still in growth mode and that’s sapping the global demand for transportation fuels.”
We’re really in uncharted waters
Kevin Birn, vice-president, North American crude oil markets, IHS Markit
Edward Morse, global head of commodities research and managing director at Citi Group, dramatically lowered his forecasts for oil prices in the second quarter this week to US$17 per barrel for the Brent benchmark.
In its bear-case scenario, Citi forecasts the global Brent crude benchmark could average just US$5 per barrel in the second quarter.
“Given radically deepening contangos and storage congestion, some pricing points could even see prices below zero,” Morse wrote.
For context, Brent usually trades at a premium to West Texas Intermediate, which in turn, trades at a US$12 to US$20 premium to Western Canada Select.
WCS staged a rally of nearly 40 per cent to $12.75 per barrel on Thursday, after falling below US$8 at one point on Wednesday, its lowest point ever.
The collapse in crude prices creates “a very challenging operating environment for Canadian oil and gas companies,” BMO Capital Markets analyst Randy Ollenberger wrote in a research note Thursday, which noted Canadian oil producers need an average crude price of US$23 per barrel to over their cash costs and another $6 per barrel to cover sustaining capital.
“At sustained prices below this level, we expect some Canadian production, such as heavy oil, to be shut in,” he wrote, but cautioned that oilsands companies are generally hesitant to shut in steam-based operations over fears they could permanently damage their reservoirs.
Many oilsands producers are cautious about reducing volumes at steam-based oilsands projects since now-defunct Connacher Oil and Gas Ltd. tried to reduce production during a previous oil price downturn, but ended up damaging its reservoir by letting the formation go cold.
Connacher company was never able to pump oil at the same rate after it attempted to re-stimulate the reservoir and is now cited as a cautionary tale in the Canadian industry. The company filed for creditor protection in May 2016.
“In thermal operations, the idea of a protracted, full-scale shutdown has many risks,” IHS Markit’s Birn said, adding that concerns about permanently damaged reservoirs and costs associated with shutdowns would act as a disincentive to shutting in oilsands barrels.
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