Husky Energy is temporarily reducing heavy oil production including Lloydminster thermal oil as a price strategy to counter wide Canadian heavy oil differentials.
It will substitute discounted third-party crude as feedstock for their downstream operations to optimize the value captured.
Despite persistent discounts on Canadian heavy oil, Husky reported a profit of $248 million in the first quarter, a 250 per cent increase from $71 million in the same period a year ago.
“It appears the market dynamics behind the wide differential maybe with us on and off for awhile,” said Husky CEO Rob Peabody in a conference call last Thursday.
“Industry continues to wait on additional rail capacity and ultimately pipelines to clear the glut.”
The company has lowered its 2018 production output by about 10,000 barrels per day with the production cuts and a slower than expected ramp-up at its BD project in Indonesia.
It has also advanced a planned turnaround at its Tucker bitumen site in the Cold Lake area into the third quarter due to the price gap between Western Canadian Select and North American benchmark West Texas Intermediate oil.
The decision to reduce production is a marketing strategy that began in the first quarter with a cut back of about 5,000 barrels per day of Lloydminster thermal heavy oil.
“We could make more money using the capacity we had to pick up other barrels that were sitting in Alberta that were quite ‘distressed,’” explained Peabody.
He said those were barrels from other oil producers who didn’t get allocated pipeline space and had no storage available.
“That was just such a compelling opportunity rather than just producing our own production,” he added, stressing Husky’s integrated corridor is purpose built to capture the margin available from the reservoir to the refinery rack regardless of these types of market locations.
“We have the ability to upgrade and refine in Canada and in the United States and we benefit from significant long-term transportation capacity to end users in the U.S. midwest and Gulf Coast refinery complexes,” he said.
“This gives us the flexibility to quickly adjust to any environment.”
Husky’s sensitivity to the differential is largely mitigated through their existing Keystone pipeline capacity (75,000 bbls/day) and downstream assets.
“With the integrated corridor, we are essentially covered on our heavy oil exposure until 2021,” said Peabody.
The temporary reduction of Lloyd thermal heavy oil in the quarter was accomplished by bringing shut-in wells back online at a slower pace than they would have done in a different price environment.
“So that was less about shutting in wells, large numbers of wells; it was more about slowing the pace we brought them back,” said COO Rob Symonds.
Thermal bitumen production from Lloyd thermal projects, the Tucker thermal project and the Sunrise Energy project averaged 123,200 bbls/day in the quarter.
“We continue to advance 60,000 bbls/day of new Lloyd thermal production that we expect to bring online by 20121,” said Symonds.
Also in the Lloydminster region, construction of the central processing facility at Rush Lake 2 is ahead of schedule, with first steam now expected in the third quarter and first oil in the fourth quarter in 2018.
Rush Lake 2 will be the 11th Lloyd thermal the company has brought on production.
Construction at the Dee Valley thermal began in March and the first modules for the central processing facility have been arriving on site.
Meanwhile, site clearing is underway at Spruce Lake North and Spruce Lake Central with all three projects expected to be on production in 2020.
“We are advancing Westhazel and Edam Central which were sanctioned last November,” added Symonds.
In downstream operations, the Lloydminster upgrader experienced 100 per cent utilization capacity in the quarter.
Synthetic crude sales averaged 56,000 bbls/day at the upgrader along with 6,400 bbls/day of diesel.
A five-week partial turnaround is scheduled at the Lloydminster upgrader in the second quarter with throughput expected to be maintained at 80 per cent.
The Lloydminster asphalt refinery ran at 99 per cent utilization in the first quarter.