Husky Energy (TSX: HSE) is prudently advancing its resilient thermal production portfolio as its fully integrated Downstream business captures incremental profits from the wellhead through to the refinery rack.
"In 2010 we set out our balanced growth strategy, which included the decision to remain an integrated company with a diverse portfolio of low sustaining capital projects," said CEO Asim Ghosh. "Thermal developments have long production lifespans, low sustaining capital costs and are supported by Husky's Downstream assets, strengthening the Company's resiliency in a low oil price environment.
"In a lower for longer world, where oil price is being increasingly determined by the strength in supply, these lower sustaining capital projects become even more strategic," added Ghosh.
Husky expects to add about 35,000 barrels per day (bbls/day) of new Lloydminster heavy oil thermal production by the end of 2016, including the Rush Lake Project which achieved first oil in July. Rush Lake surpassed its nameplate capacity of 10,000 bbls/day just four weeks after startup of production.
An additional four 10,000 bbls/day thermal projects have been identified for development in the 2017 to 2021 timeframe, including a second phase at Rush Lake.
Further thermal momentum is being added from the Sunrise Energy Project, which is now producing about 10,000 to 11,000 bbls/day (gross), compared to the 5,500 to 6,000 bbls/day reported in late July. The project continues to be ahead of plan and is expected to ramp up to full production of about 60,000 bbls/day (30,000 bbls/day net to Husky) around the end of 2016.
Thermal Growth Project Updates
Lloydminster Heavy Oil Thermals
"Husky has accumulated an unmatched land and infrastructure position in the Lloydminster region and this gives us a significant advantage," said Ghosh. "Utilizing thermal technology, we have been able to turn our heavy oil business from one that was essentially in decline into one of our strongest growth engines.
"Heavy oil thermal projects represent low-risk, bite-sized investments, with much higher recovery rates than conventional technologies. We have gained substantial expertise in how to develop and build these projects, and most importantly, these are the kinds of growth projects that are profitable even in a low oil price environment."
Husky continues to advance a series of heavy oil thermal projects in the Lloydminster region of Saskatchewan, which are expected to add about 35,000 bbls/day of new production by the end of 2016, including the Rush Lake Project.
By using a standardized, modular approach to construction, the Company has been able to achieve cost savings and efficiencies in construction and ongoing operations.
- Engineering costs have been reduced by more than two-thirds by reusing proven designs.
- Construction is managed in-house and construction crews are generally sourced from the Lloydminster region, eliminating the need for work camps.
- As a result of construction efficiencies, projects can generally progress from sanction to first oil in less than 30 months, including the regulatory approval process.
- Since plants are standardized, operators can be pre-trained in an existing plant and seamlessly move into a new facility once it comes online.
- Personnel can also more easily be moved between facilities, making operations and maintenance more efficient.
Heavy oil thermal production has risen from about 18,000 bbls/day in 2010 to about 55,000 bbls/day in 2015. Unlike oil sands thermals, which have long ramp up cycles, heavy oil thermals typically reach full production volumes in about four to eight weeks after first oil. It is common for heavy oil thermals to exceed their nameplate capacities in their early operations.
Sunrise Energy Project
The Sunrise Energy Project continues to ramp up ahead of plan, with average gross volumes in the range of 10,000 to 11,000 bbls/day, which is up from the 5,500 to 6,000 bbls/day reported in late July.
Steam operations commenced earlier this month at the second of two processing plants at Sunrise, with the second plant set to begin processing bitumen later this year. Bitumen is currently being produced from 25 of 55 well pairs and all 55 pairs are being steamed.
Production volumes are being deliberately increased at a controlled pace. Industry experience has shown that steady ramp ups allow ideal steam chambers to form, yielding better long-term results and helping to protect well integrity. Sunrise is expected to reach its full nameplate capacity of about 60,000 bbls/day (30,000 bbls/day net to Husky) around the end of 2016.
As operations continue to ramp up, the Company has identified further opportunities to reduce costs and implement production efficiencies. These include:
- A walking rig, which was used to drill two new production sustaining pads, allows for the closer placement of wellheads, resulting in a more compact field facility. The two new sustaining pads are about 40 percent smaller than earlier pads and require about 60 percent less piping and equipment.
- Drilling times have improved by about 40 percent.
- The use of multi-phase metering has eliminated the need for separators at each pad.
The various cost savings initiatives have reduced the overall capital cost of a new sustaining pad by about one-third.
Production from Sunrise is being transported to the Company's jointly owned refinery in Toledo. About 250,000 barrels of Sunrise dilbit were processed at the Toledo refinery in August.
Tucker Thermal Project
Husky continues to make steady advances at the Tucker Thermal Project near Cold Lake and is using insights gained from extensive 3-D seismic surveys to improve well placement, tap new reservoirs, increase production and improve returns.
A new sustaining well pad has been drilled to help offset natural declines. All wells are steaming, and overall production at Tucker is now averaging about 14,000 bbls/day. This compares to average production of about 6,000 bbls/day in 2010.
Through an analysis of 3-D seismic surveys on the Tucker lease, the Company has identified a new reservoir.
The Colony formation has similar characteristics to the heavy oil reservoirs in the Lloydminster region and is suitable for development using thermal technology. A steam generator is being added to the Tucker plant at a modest cost, increasing steam capacity by about 15 percent. The increased capacity will be used to access the Colony formation, with steaming expected in the first quarter of 2016, followed by first production in the second quarter.
Production volumes at Tucker are expected to progressively increase towards approximately 20,000 bbls/day in the 2017 timeframe.
Strong Downstream Infrastructure Position
Husky's momentum in thermal production is supported by its integrated Downstream business, which is designed to extract incremental value from its heavy oil production. The margin-based Downstream business further increases the Company's resiliency, mitigates exposure to oil price differentials and provides flexibility to adapt to market conditions.
This heavy oil value chain includes the Saskatchewan gathering system, the Lloydminster Upgrader and asphalt refinery, and storage capacity at Hardisty. The asphalt refinery supplies 20 percent of Canada's asphalt needs and about five percent of North America's asphalt requirements, or the equivalent of 28,000 lane kilometres per year.
These top-quartile assets are enhanced by a midstream infrastructure that further improves margins and supports Western Canada crude oil and bitumen production. This in turn is supported by long-term pipeline capacity commitments which provide connectivity to Husky's strategically located U.S. refineries.
Third Quarter Activity Update
The Company plans to announce its third quarter results at the end of October. Production continues in line with the Company's previous guidance and the following are updates on activities during the quarter:
- An 18-day turnaround was successfully completed on the SeaRose Floating Production, Storage and Offloading (FPSO) vessel in August.
- A 10-week maintenance program on the Terra Nova FPSO concluded in early July and production is ramping up.
- Husky's Lloydminster Upgrader was shut down for maintenance at the beginning of June and returned to normal operations in the third week of August.
- Heavy oil differentials widened substantially in the quarter. Various refinery outages, including an outage at one of the largest refineries in the U.S. Midwest, reduced demand for Canadian heavy oil and resulted in a sharp widening of differentials.
- FIFO accounting methodology impacts net earnings quarter to quarter. In a rising commodity price environment, FIFO positively impacts the Company's results, while the reverse is true when prices decline.