Calgary – Husky Energy is continuing its cookie-cutter development of thermal projects in northwest Saskatchewan, with five of these 10,000 bpd projects on the go over the next three years.
That was one of the key points for Saskatchewan in Husky’s 2019 year-end and fourth quarter report, issued on Feb. 27.
Thermal Production
Five new Saskatchewan thermal bitumen projects with a combined nameplate capacity of 50,000 bpd are being advanced through 2023. The Spruce Lake Central project is 92 per cent complete, with startup expected by mid-year 2020. The Spruce Lake North project is 60 per cent complete, with first oil planned around the end of 2020.
Spruce Lake East project is expected to be completed by approximately the end of 2021. It’s 15 per cent complete. Edam Central project is five per cent complete, and expected to be done in 2022. Dee Valley 2 project is in planning, and expected to be completed in 2023.
So far, 11 thermal projects of this type are now producing. They include Bolney, Celtic, Pikes Peak South, Paradise Hill, Sandall, Rush Lake, Edam East, Vawn, Edam West, Rush Lake 2 and Dee Valley. Facility costs for each of the 10,000 bpd sites is in the range of $250 million to $300 million. (The earlier sites were not the now-standard 10,000 bpd size.)
This has been a continual shift to thermal nearly a decade in the making. As far back as 2012, Husky’s total thermal production was an average 24,000 bpd, before it began its cookie cutter 10,000 bpd projects in earnest. That year saw the company’s dramatic shift in its drilling focus in northwest Saskatchewan, from cold heavy oil production with sand (CHOPS), to thermal. In September 2012 Pipeline News reported in a story on Husky, “Only three CHOPS wells were drilled in the second quarter of 2012 compared to 60 such wells in the second quarter of 2011, as thermal proves to be a cost-efficient alternative.”
As of the fourth quarter of 2019, Husky’s combined average thermal bitumen production from Lloydminster thermal projects, the Tucker Thermal Project and the Sunrise Energy Project for the end of 2019 was 137,800 bpd (Husky working interest). This takes into account extended production quotas in Alberta, compared to 132,900 bpd (Husky working interest) in Q4 2018. Overall production from the Lloyd thermal portfolio averaged 88,300 bpd compared to 80,500 bpd in the year-ago period, with an average of 92,000 bpd in December.
The company’s production of 290,000 boepd was within its guidance for 2019. It expended $3.4 billion on capital expenditures, including its Superior, Wisconsin, refinery rebuild.
Project execution included the startup of the 10,000 barrel-per-day Dee Valley thermal bitumen project, north of Maidstone, ahead of schedule. They also completed the Lima Refinery crude oil flexibility project and the sale of the Prince George Refinery.
With regards to the massive offshore West White Rose Project, the company completed the fourth quadrant of the concrete gravity base at the ahead of schedule. The Newfoundland offshore project is now 57 per cent complete with first oil planned for around the end of 2022.
Financials
Shareholders are making some money as dividends declared during the year totalled $0.50 per common share. In 2019, the company returned $503 million in cash payments to shareholders, up from $276 million in 2018.
Husky generated funds from operations of $3.3 billion in 2019, including $469 million in the fourth quarter. Cash flow from operating activities, including changes in non-cash working capital, was $3 billion in 2019, including $866 million in the fourth quarter.
Fourth quarter operating results were negatively impacted by several factors, including:
- Lower U.S. crack spreads and an extended shutdown of the Lima Refinery to complete the crude oil flexibility project
- Lower infrastructure and marketing margins compared to Q4 2018, primarily due to narrower location differentials, and an outage on the Keystone pipeline in November, which impacted Husky’s ability to capture the differential
- Severance costs related to staff reductions
“We delivered on critical milestones during the year, including our top priority of improved safety performance,” said CEO Rob Peabody in a release. “We met our production and capital guidance, achieved first oil at the 10,000 barrel-per-day Dee Valley thermal bitumen project and have completed the safe startup of the Lima Refinery crude oil flexibility project.”
In the fourth quarter, Husky recognized asset impairment and other charges of $2.3 billion (after tax), largely related to long-term price assumptions and reductions in the Company’s long-term capital expenditure plans.
Downstream
Canadian throughput, including the Lloydminster Upgrader, Lloydminster Asphalt Refinery and Prince George Refinery, averaged 111,700 bpd. A project to increase diesel production at the Upgrader from 6,000 bpd to nearly 10,000 bpd is expected to be completed in the second quarter. The Upgrader captured margins of $20.21 per barrel.
U.S. refinery throughput averaged 91,700 bpd, compared to 179,100 bpd in the year-ago period.
The Lima Refinery average throughput was 21,400 bpd, which takes into account an extended shutdown to complete the crude oil flexibility project. This, along with lower crack spreads, contributed to an overall negative operating margin of $169 million for the U.S. refining segment, compared to an operating margin of $45 million in the year-ago period.
The Superior Refinery rebuild is under way with a return to full operations expected in 2021. Rebuild costs are expected to be substantially covered by property damage insurance. Pre-tax business interruption insurance recovery in the fourth quarter was $116 million. Insurance recovery related to the rebuild (not included in funds from operations) was $194 million.
The operating margin for the combined Upgrading and Canadian Refined Products segments was $126 million. The overall Downstream operating margin was negative $43 million, compared to a positive operating margin of $296 million in Q4 2018.
A strategic review of the potential sale of the Canadian retail and commercial fuels business continues to progress.
Resource Plays
The company continues to pace investment in its liquids-rich resource play business in Western Canada with an ongoing focus on lowering costs, optimizing production rates and reducing cycle times while supplying natural gas to its thermal operations. In the Montney Formation, six liquids-rich wells at Wembley were started up in the fourth quarter.
Fourth quarter impairments
Total non-cash asset impairments and other charges were $2.3 billion (after tax) in the fourth quarter of 2019. These were primarily related to the company’s upstream assets in North America, including the Sunrise Energy Project and the Atlantic and Western Canada segments, and were largely due to lower long-term commodity price assumptions and a reduction in future capital spending. The reduction in future capital spending has the effect of reducing reserves, which in turn reduces asset values. Other charges included exploration-related write-downs and asset de-recognition at the Lima Refinery associated with redundant equipment following the completion of the crude oil flexibility project.
Average realized pricing for upstream production was $46.06 per boe compared to $25.47 per boe in the same period in 2018. Realized pricing for oil and liquids averaged $47.52 per barrel compared to $18.93 per barrel in Q4 2018, and natural gas pricing averaged $7.02 per thousand cubic feet (mcf), compared to $6.86 per mcf in the year-ago period.
Upstream operating costs were $15.25 per boe compared to $13.75 per boe in Q4 2018, primarily due to higher energy and transportation costs, and lower production.
Upstream operating netbacks averaged $27.48 per boe compared to $9.42 per boe in the year-ago period.
Upgrader and refinery throughput was 203,400 bpd, compared to 286,900 bpd in the same period in 2018. This takes into account an extended turnaround at the Lima Refinery to complete the crude oil flexibility project.
