MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, FEBRUARY 4, 1998 (2)
FEATURE STORY
Weak commodity prices have pushed PanCanadian Petroleum Limited into cutting at least 200 jobs, closure of two field offices and a yet to be determined cutback in heavy oil production, the company revealed Tuesday.
"This weak price environment appears likely to continue for some time, which means we must act now to eliminate unprofitable production and bring costs in line with world and North American market conditions," David Tuer, president and chief executive officer, told a Calgary briefing for staff.
The reductions in operational costs and 10% cut in permanent and contract staff will occur in all units of the company and result in the closure of field offices at Elk Point and Provost, Alberta.
Most of the approximately 60 workers at these two offices will continue to work out of other PanCanadian district offices.
PanCanadian is continuing to review its 1998 $1-billion capital spending program and will determine soon how much it will reduce efforts in heavy oil production. Heavy crude represents about an average of 35,000 bbls per day out of an overall oil yield of around 140,000 bbls a day.
Some of the company's heavy oil properties were acquired through its $521-million acquisition of CS Resources Limited, which saddled it with another $56 million in debt.
"The current price environment, coupled with bottlenecks in export pipelines and much higher differentials between heavy and light oil, presents Canada's oil industry with a substantial challenge," Tuer said.
In the past year, he pointed out, Canadian benchmark prices for light oil sold to Alberta pipelines and refiners have fallen by more than $10 a bbl or 30% to about $23 a bbl. At the same time, the price for Imperial Oil Limited's Bow River heavy oil dropped more than $13 a bbl or about 48% to about $14 a bbl.
"By addressing these operational cost issues now, we will be able to weather the current market environment and continue to build value into our company," Tuer told employees.
PanCanadian recently reported lower net income and cash flow for 1997 compared to 1996 and was particularly hard hit in the fourth quarter, when revenue also declined versus the period in the previous year. The company blamed lower oil and gas prices for the declines.
Despite the cutbacks, PanCanadian said it still plans an active drilling program of about 1,400 wells, mostly in Western Canada. It will also pursue exploration and development prospects off Canada's East Coast, in the Gulf of Mexico and a number of overseas locations.
Some see the PanCanadian layoffs as a minor blip for the oilpatch and economy
Two hundred layoffs at PanCanadian Petroleum Ltd. don't necessarily signal a bust in the current Alberta economic boom, say analysts.
Greg Mason, an economist with Prairie Research Associates in Winnipeg, is bullish about the Alberta economy and its prospects over the next few years, projecting three per cent growth.
"We look at the Alberta economy with some envy," he said. "One of the things over the past two decades is that the Alberta economy has been diversifying.
"If you look at the number of companies with Calgary head offices, for instance, these kinds of stories (PanCanadian layoffs) are not anywhere as important as they were 10 years ago."
PanCanadian announced the layoffs this week because of weak oil prices, especially for heavy oil.
Ian Doig, who publishes an oil industry newsletter, said there's likely going to be a shift from oil exploration to drilling for natural gas because of the number of export pipeline proposals on the drawing board.
"I'm not panicking," he said. "There's going to have to be an increase of anywhere from 16 to 25 per cent in natural gas production. "I think that's going to be the carrot that's going to drive people." Doig said once the winter drilling season ends, and if oil prices remain flat, there could a reassessment of exploration plans. "People might sit back then and scratch their navel and contemplate where it's all going."
Mike Percy, dean of the faculty of business at the University of Alberta, said the province's economy will cool off, but it won't be soon. He also added there won't be a repeat of the massive oil industry collapses witnessed in the 1981, 1982 and 1986. "This is very much sectoral. It's also an indication of firms keeping a very close eye on the bottom line - never again a 1981. "At some point, a couple of years down the road, the other shoe will drop. Investment intentions will decline and we'll reach the end of the investment phase of this cycle. "But whenever it ends it will not be like 1981, 1982 (crushing interest rates and NEP) or 1986 (price collapse of world oil prices)."
Robert Mansell, head of the University of Calgary's economics department, said the one saving grace for both the provincial government and the oil companies is that their budgeting has been based on oil prices of $18 US a barrel. "Even when prices were high the economics were based on $18, so as a result there will be no significant short-term changes," he said. "People might get a little uncomfortable ... if a year from now it's still $16. "
Mansell said diversification has helped to reduce Alberta's dependence on the oilpatch, but it still accounts for about 50 per cent of the province's economy. "If they stop drilling we're in trouble, we just wouldn't be in as much trouble as 1986 or 1982." In the meantime, Mason doesn't see much change in store for Calgary or Alberta. "I think PanCanadian is being taken with a grain of salt as the up and down of a particular industry," he said. "I still hear the sound of pounding feet headed for Calgary."
FEATURE STORY
Petroleum Explorers Target East Coast
Offshore oil and gas successes are creating an El Nino effect on the climate of East Coast petroleum activity. Onshore exploration is heating up in the Atlantic provinces and it's Hibernia crude, Sable Island gas and the Maritimes pipeline that's driving it.
"There's no shortage of interest in the Maritimes," said David Copley, president of Marico Oil and Gas Corp., which is drilling in New Brunswick. "I think the offshore and the pipeline have a lot to do with it."
Notwithstanding the growing interest in what lies beneath the rocky soil of Atlantic Canada, Copley's company hasn't had any luck so far in its search. Marico, a subsidiary of Ardent Resources of New York, has drilled two exploratory wells near Moncton, N.B., at a cost of over $1 million and has come up empty.
It will begin drilling its third well in the next few days. The latest well will be deeper than the previous two and in a different location on the ancient basin being explored in southern New Brunswick.
"Hope springs eternal," Copley said. "We're on to the third prospect, which is entirely different from the others.
We're very hopeful this will be the ticket. It's a much deeper well than either of the other two. They were in the 1,300 to 1,500 metre range, this is going to be about 2,100 metres."
The company is looking for a natural gas reserve like the one discovered in the Stoney Creek basin, which supplied the city of Moncton with gas for nearly a century. The last Stoney Creek wells were capped in 1991 after producing roughly $400 million worth of gas.
Marico is drilling in the same general area as Stoney Creek. But it's also looking further afield in the Atlantic region. Marico holds licences for about 405,000 hectares in New Brunswick, including 160,000 hectares in the Fredericton area.
It's also hoping to get in on a major offering of 405,000 hectares of Crown land in northern Nova Scotia along the Northumberland Strait and the Minas Basin.
Maurice MacDonald of the Nova Scotia Petroleum Directorate said bids for the parcels of land are currently being reviewed and an announcement is expected soon, probably this month.
"This is the first significant call for onshore, conventional oil and gas exploration in Nova Scotia in many years," MacDonald said, adding that interest in the proposals is keen.
"I think it's because of what's going on offshore. People are looking at the whole potential of Atlantic Canada."
Copley thinks the $4-billion offshore drilling and pipeline project to exploit natural gas reserves near Sable Island off Nova Scotia is spurring interest in onshore exploration. "The offshore has a lot to do with it," Copley said.
"It's no coincidence that those basins put up in Nova Scotia almost one for one follow the route of the proposed Maritimes and Northeast Pipeline. The areas that we're exploring in New Brunswick, they're relatively close to that pipeline as well. The pipeline offers so many opportunities for transportation of natural gas. I'm sure that has a lot to do with the interest now."
FEATURE STORY
Syncrude Canada Ltd. announced the operating and business results of Syncrude today for the fourth quarter and full year for 1997. For the 16th time in 19 years of operations, Syncrude set another annual production record with shipments of over 75.7 million barrels (207,000 barrels/day). In 1996, annual production totaled 73.5 million barrels (201,000 barrels/day). In addition, shipments in the fourth quarter established a new record and were 21.6 million barrels (235,000 barrels/day), compared to 19.1 million barrels (207,000 barrels/day) in 1996. The previous quarterly record was set in the third quarter of 1997 when 21.3 million barrels (232,000 barrels/day) were produced.
Lower oil prices clipped 1997 revenues at Syncrude Canada Ltd., but the oilsands consortium says it's continuing to trim costs to hold margins as it begins a $6-billion expansion. The company said yesterday revenue for 1997 was $2.1 billion, down from $2.14 billion a year ago. A 4% drop in average crude oil prices more than offset an increase in production to 207,000 barrels a day, from 201,000 in 1996.
"They did really well, but we will have to see what happens this year because of oil prices," said Toronto-based Christopher Lee, ratings specialist with Standard & Poor's Inc. "From a profitability point of view, they are well positioned" relative to conventional oil and gas producers.
The price for Syncrude sweet blend (synthetic crude produced at the oilsands operation near Fort McMurray, Alta.) averaged $27.84 a barrel at the plant gate, down from $29.08 in 1996. Overall unit costs were $13.78 a barrel, up from $13.70.
Lower commodity prices were a significant drag on fourth-quarter results. Revenue was $593 million, down from $618 million last year.
However, the cost of producing oil was the lowest in Syncrude's history - $11.14 a barrel, down from $12.23 in fourth-quarter 1996.
"We have been putting an enormous amount of effort into cutting costs - that's the only thing we can control," said spokesman Peter Marshall. Even at today's low prices, the margins are still high enough, so "we can ride out price swings."
The low C$ also helps to offset low oil prices, he said. Thirty per cent of Syncrude's production goes to U.S. refineries, 40% to Edmonton and 30% to Eastern Canada.
Syncrude is a joint venture owned by AEC Oil Sands LP, AEC Oil Sands Limited Partnership, Athabasca Oil Sands Investments Inc., Canadian Occidental Petroleum Ltd., Canadian Oil Sands Investments Inc., Gulf Canada Resources Ltd., Imperial Oil Resources, Mocal Energy Ltd., Murphy Oil Co. Ltd. and Petro-Canada.
"Looking ahead, 1998 will be another challenging year. Our goal is to produce 80 million barrels at an even lower unit cost," said chairman and chief executive Eric Newell. The consortium produced more than 75.7 million barrels in 1997.
Syncrude announced plans last fall for a staged, $6-billion expansion that will modernize and expand its surface mining operation and further reduce costs to $9 to $10 a barrel. When the expansion is completed in 2007, production is expected to be 480,000 b/d.
NOTE: syncrude.com for more information about Syncrude as well as downloadable photographs of the operation located in the Library area of the site.
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