Husky's plan to boost heavy oil production while reducing exposure to heavy oil discount
Husky Energy says it is continuing to work towards increasing its production of thermal heavy oil, while slowly reducing its exposure to the Canadian heavy oil discount.
Total thermal bitumen production, which includes output from the Tucker and Sunrise oil sands facilities, as well as the Lloyd thermal properties, averaged 123,200 bbl/day net to Husky in the second quarter, unchanged from the first quarter but up 5% from the same time last year. Operating costs averaged $11.10 per barrel across all thermal operations.
The company says it remains committed to growing its total thermal output, including Sunrise, to 200,000 bbl/day by 2022, eventually accounting for almost 50% of Husky's total upstream production.
RAMPING UP PRODUCTION OUT OF COLD LAKE
Output from the Tucker Lake in-situ facility in the Cold Lake region averaged 23,400 bbl/day in Q2, and is continuing to ramp up as new wells come into production. A three week turnaround is planned in the fall, where de-bottlenecking work will bring production closer to its nameplate capacity of 30,000 bbl/day by the end of the year.
MAKING PROGRESS AT SUNRISE
The Sunrise SAGD facility hit a peak daily rate of 54,000 bbl/day (gross) in the second quarter, prior to commencing a program of well workovers. Q2 production averaged 49,400 bbl/day up almost 30% y/y. Husky says Sunrise will hit its rated capacity of 60,000 bbl/day by the end of 2018.
A 3,000 bbl/day debottlecking project is scheduled to begin production in 2019, while a second 6,000 bbl/day expansion will come online sometime after 2021.
The company says it is looking at a 20,000 bbl/day modular "repeatable, cookie-cutter" design to further increase output at the oil sands facility, targeting 76,000 bbl/day by 2022.
Operating costs at Sunrise have declined from over $25/bbl in 2016 to less than $15 this year, and is expected to fall below $10/bbl in 2022.
Sunrise is jointly owned with BP and already has regulatory approvals in place for 200,000 bbl/day of gross production.
BANKING ON PARTIAL UPGRADING TO CUT BLENDING COSTS
The company is also progressing construction of its Husky Diluent Reduction (HDR™) pilot project at the Sunrise facility. The partial upgrading technology holds the potential to cut diluent needs in half, while reducing GHG emissions.
Once operational, 500 bbl/day of diluted bitumen from Sunrise will be heated, soaked, cracked and quenched, under conditions similar to thermal cracking. Husky claims the process reduces the acidity of the crude (TAN) and minimizes coke production, converting residue to lighter fractions. The process also includes a hydrotreating step to eliminate olefins in the final product. The $25 million pilot project has received funding from both the provincial and federal levels of government, and is scheduled to run continuously for a 6 month trial.
ADDING MORE THERMAL CAPACITY IN SASKATCHEWAN
A big part of Husky's plan to grow its heavy oil production lies in its Lloyd properties, located in the Lloyminster region of Saskatchewan and Alberta. The company is currently developing six 10,000 bbl/day thermal bitumen projects, with the first property, Rush Lake 2, already steaming and expected to begin production early next year. Three additional 10,000 bbl/day phases are expected to come online in 2020, while another two tranches, Edam Central and Westhazel, were sanctioned late last year and are expected to be brought online in 2021.
Husky says the projects are constructed with a modular, scalable design, that leverages shared infrastructure in the region. Total Lloyd thermal production is expected to rise from the current 77,000 bbl/day to 135,000 bbl/day by 2022. The company says it hopes to sanction two 10,000 bbl/day projects annually.
REDUCING EXPOSURE TO THE DREADED HEAVY OIL DISCOUNT
Heavy oil processing capacity at the company's refineries is also expected to rise from the current 190,000 bbl/day to 220,000 bbl/day over the next five years. The increase will push Husky's total heavy oil processing capacity from 48% to 55%, and reduce exposure to the Canadian heavy oil discount.
Production from the Lloyd thermal properties are upgraded and refined at Husky's Lloydminster Complex, which straddles the Alberta and Saskatchewan border. Transportation costs from the field to the upgrader/refinery were $3.56 a barrel in the second quarter, bringing netbacks to almost $51 for the integrated process. Engineering is underway to double capacity at its Lloyd Asphalt Refinery, from the current 30,000 bbl/day to 60,000 bbl/day, increasing its ability to absorb heavy oil production in the region.
Production from the Sunrise SAGD facility is processed at Husky's Toledo refinery in Ohio. Transportation to the Midwest region was just under $16 a barrel in Q2, bringing operating netbacks to $40/bbl, including diluent blending costs. Husky says it is working to increase Toledo's capacity for more acidic crudes in order to boost its capacity to process bitumen produced at Sunrise. The 70,000 bbl/day Toledo Refinery is operated by JV-partner BP.
Aside from Lloyd and Toledo, the company is also working to improve its feedstock flexibility at the 165,000 bbl/day Lima Refinery in Ohio, boosting the facility's heavy crude processing capacity to 40,000 bbl/day by the end of this year.
Husky also has over 3 million barrels of storage capacity at Hardisty and 75,000 bbl/day of transport volumes booked on the existing Keystone pipeline to the Gulf Coast, where Canadian heavy oil fetches a much better price than in Alberta. The company currently has no plans to ship volumes by rail, which can be considerably more expensive.
Husky stock (TSX:HSE) has rebounded nicely from the lows of early 2016, when it suspended its dividend. The company reinstated its dividend payouts this quarter, as share prices close in on a 3-year high.
CEO Rob Peabody reassures investors that the company's sustaining capital budget and dividend are fully fundable with free cash flow.