Cenovus plans to invest between $1.2 billion and $1.4 billion in 2019, with the majority of the budget going to sustain base production at its Foster Creek and Christina Lake oil sands operations. The company also plans to complete construction of the Christina Lake phase G expansion. The 4% reduction in total planned capital spending, compared with Cenovus’s 2018 forecast, is largely the result of efficiency improvements at the company’s oil sands operations and reduced development plans for the Deep Basin as a result of the current commodity price environment.

The structural improvements Cenovus has achieved at its oil sands operations have resulted in reduced costs for maintaining base production and adding new production and have positioned the company to create additional value with more efficient use of capital. Cenovus expects to continue to realize low per-barrel oil sands operating and sustaining capital costs in 2019. 

“We remain focused on delivering on our commitments to shareholders,” said Alex Pourbaix, Cenovus President & Chief Executive Officer. “With our low cost base and strong operations, we already set the performance standard for the in situ oil sands industry. And, as a result of our recent efforts to reduce costs and maintain capital discipline, I believe we are an even stronger and more resilient company than we were a year ago, and are well positioned to create additional value and return cash to shareholders over the long term.” 

Market access

Cenovus made significant progress in strengthening its long-term market access position in 2018 through previously announced three-year strategic agreements with major rail companies to transport approximately 100,000 bbls/d of heavy crude oil from northern Alberta to various destinations on the U.S. Gulf Coast. The company has already begun shipping under these contracts and anticipates ramping up to 100,000 bbls/d through 2019 using Cenovus’s wholly-owned Bruderheim Energy Terminal near Edmonton, Alberta as well as existing contracted capacity at USD Partners’ oil-loading terminal in Hardisty, Alberta. The Bruderheim facility, which Cenovus purchased in 2015 to increase its transportation options, has current gross capacity of approximately 100,000 bbls/d, the majority of which supports third-party shipping. Cenovus plans to spend a moderate amount of capital in early 2019 to increase Bruderheim’s gross capacity to 120,000 bbls/d.

In addition to its rail agreements, Cenovus has firm capacity to the West Coast of 11,500 bbls/d on the existing Trans Mountain pipeline and 75,000 bbls/d of capacity to the U.S. Gulf Coast on the Flanagan South system. The company is also well positioned for future market access through its committed capacity on the proposed Keystone XL pipeline project and the Trans Mountain Expansion Project.

Including Cenovus’s net share of processing capacity at its jointly owned Wood River and Borger refineries in the U.S., existing pipeline commitments and plans to ramp up its crude-by-rail capacity, the company has the potential to protect between 55% and 60% of its forecast blended heavy oil volumes against the impact of low Western Canadian Select (WCS) prices.

Oil sands

Cenovus benefits from having best-in-class in situ oil sands assets, with top-tier resources and industry-leading steam to oil ratios and low operating costs. As a result of improvements achieved over the past few years, the company’s oil sands facilities continue to demonstrate the ability to deliver safe and reliable operational performance at reduced cost, which will continue to be a focus in 2019.

Cenovus plans to spend 2019 sustaining capital of $575 million to $650 million, or $3.50/bbl to $4.00/bbl of installed capacity, to maintain base production at Foster Creek and Christina Lake. Approximately $100 million to $125 million has been allocated to complete construction of Christina Lake phase G, which has approved capacity of 50,000 bbls/d. Phase G is proceeding very well and is expected to be completed with full-cycle capital efficiencies of between $15,000 and $16,000 per barrel of capacity, which is industry leading. Phase G remains on track to begin production in the second half of 2019, assuming mandated production curtailments have been lifted. This coincides with the expected ramp-up of significant crude-by-rail takeaway capacity in Alberta and the potential start-up of Enbridge’s Line 3 Replacement project. Cenovus will continue to monitor oil price differentials and takeaway capacity to determine the optimal timing for the start-up of phase G. The company also plans to spend a minimal amount of capital on Foster Creek phase H, Christina Lake phase H and Narrows Lake to continue to advance each one to sanction-ready status.

Cenovus will continue to focus on maintaining its position as an in situ cost leader. In 2019, the company expects total per-barrel oil sands operating costs to increase slightly compared with its 2018 forecast. The increase is mainly associated with the expected start-up of Christina Lake phase G, including higher initial steam rates, and planned maintenance at Christina Lake in early 2019. Companywide per-barrel operating costs are expected to remain essentially in line with Cenovus’s 2018 forecast.

The company is forecasting average oil sands production of 377,000 bbls/d to 395,000 bbls/d in 2019, a 3% increase at the midpoint compared with the midpoint of its forecast for 2018, largely due to the expected start-up of Christina Lake phase G, offset by planned turnaround activity at Christina Lake. Cenovus conducted minimal turnaround activity in its oil sands business in 2018. Forecast production for 2019 does not currently include the impact of mandated production curtailments scheduled to take effect on January 1, 2019.

Deep Basin

Cenovus has a large land base in the Deep Basin fairway in northwestern Alberta and northeastern British Columbia with high-quality producing and development assets. Initial well results following the company’s modest 2018 drilling and development program have been very encouraging. However, in response to the current commodity price environment and the company’s continued focus on near-term debt reduction, Cenovus has reduced its investment and drilling plans for the Deep Basin in 2019. Over the course of the year, the company will be working to optimize its operating model in the Deep Basin, with the goal of reducing costs, improving efficiency and maximizing value.

Cenovus plans to invest between $50 million and $75 million in the Deep Basin next year, with minimal capital allocated to drilling and completions activities. Production is expected to be between 95,000 barrels of oil equivalent per day (BOE/d) and 105,000 BOE/d in 2019, down 17% from forecast 2018 levels, mainly due to asset divestitures in 2018 and natural production declines that reflect the reduced capital spend in late 2018 and 2019. The company made good progress in reducing operating costs in the Deep Basin in 2018 and expects to make further improvements to hold per-barrel operating costs essentially flat next year compared with its 2018 forecast, even as production declines.

Corporate

Cenovus anticipates 2019 general and administrative (G&A) costs of $1.91/BOE compared with its 2018 forecast of $1.87/BOE. Total G&A costs for 2019 are expected to be between $325 million and $350 million, consistent with the 2018 forecast.

As part of its plan to increase workspace efficiency while reducing overall real estate costs, Cenovus expects to move all of its Calgary based staff into Brookfield Place over the course of 2019, starting in January. The company has allocated approximately $100 million next year to essentially complete the build out of the Brookfield Place office space. Cenovus remains focused on reducing its real estate costs through an active subleasing program and is not renewing existing Calgary office leases as they expire. The company recently made significant progress in reducing its long-term fixed real estate costs by subleasing additional floors of The Bow. To date, the company has subleased approximately 40% of its space at The Bow and will focus on subleasing additional excess office space as staff transfer to Brookfield Place.