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ConocoPhillips Finally Fires Back Up This Key Oil Growth Project

By Matthew DiLallo - Jun 9, 2016 at 12:05PM

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Wildfires that shut down ConocoPhillips Surmont facility have finally abated.

Surmont. Image source: ConocoPhillips. 

Canada's energy sector has been hit hard over the past couple of years. Not only have very weak oil prices impacted producer profitability, but the recent wildfires in the oil sands region have impacted production. That said, with the wildfires moving away from the region, producers like ConocoPhillips (COP 0.39%) are finally starting to reactivate facilities that were shut down as a precaution. It's an important step for the company because it had been expecting the oil sands to be a key growth driver during the downturn.

Slowly ramping back up

This past week ConocoPhillips (COP 0.39%) and its joint venture partner Total (TTE -0.29%) started to reactivate wells at their Surmont oil sands project, which had been shut down for nearly a month. As of earlier this week the company had activated 25% of the wells, with hopes of restarting all 156 wells as quickly as possible. That said, the partners don't expect Surmont to be back up to its pre-fire production level of 60,000 barrels per day until early July.

For most oil companies having a project as large as Surmont offline for that lengthy period of time would be quite the blow. However, the 50/50 partners won't see as dramatic an impact on their overall production due to the sheer size of their global operations. In ConocoPhillips' case, it had expected to produce 1.5 million to 1.54 million barrels of oil equivalent per day, or BOE/d, during the second quarter, so it could still be within its guidance range despite the reduced output from Surmont. Meanwhile, output at Total would also be minimally impacted given that it's production was nearly 2.5 million BOE/d last quarter.

Growth remains on track

Having said all that, while Surmont is a relatively minor portion of both companies' current production it's expected to be a key driver of growth going forward. That's because the partners recently completed a major expansion of the project, which is expected to boost its production up to a peak of 170,000 barrels per day when it completes its ramp up by the end of next year. That increased production is going to be material for ConocoPhillips because it was expected to help offset its declining production from U.S. shale.

The good news is that the company believes that it is still "absolutely on track" to hit its production peak on time despite the minor setback from the wildfires. That's largely due to the fact that the company found very minor damage to the facility, leading to no impact on its operations going forward nor its ability to ramp production.

 

Foster Creek. Image source: Cenovus Energy Inc.

No impact to FCCL

While ConocoPhillips and Total had to shut down their Surmont facility due to the wildfires, ConocoPhillips and its other Canadian oil sands joint venture partner, Cenovus Energy (CVE 1.14%), didn't need to shut down their Foster Creek/Christina Lake (FCCL) joint venture. That's noteworthy because those facilities are actually more meaningful to ConocoPhillips' current production given that the two facilities combined to produce nearly 138,000 barrels per day net to ConocoPhillips last quarter. Further, both projects are also in the midst of being expanded, which will add approximately 100,000 barrels per day additional production capacity by the end of the year, which will be split evenly between ConocoPhillips and Cenovus Energy. Given their larger current size, if both facilities went offline for an extended period of time it would have had a more meaningful impact on ConocoPhilips' production than Surmont. Though, that would have paled in comparison to the potential impact on Cenovus Energy's production given that last quarter the FCCL joint venture accounted for roughly 70% of the company's total oil output.

Investor takeaway

With the wildfires moving away, ConocoPhillips can finally restart its Surmont project. Even better, that project wasn't damaged, which keeps it on pace to ramp up its production as expected. That positive outcome, along with the fact its other oil sands joint venture wasn't impacted by the wildfires, means ConocoPhillips dodged a real bullet given that it was counting heavily on its oil sands growth projects to keep its production afloat during the downturn.

 

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Stocks Mentioned

ConocoPhillips Stock Quote
ConocoPhillips
COP
$105.02 (0.39%) $0.41
TotalEnergies Stock Quote
TotalEnergies
TTE
$54.70 (-0.29%) $0.16
Cenovus Energy Inc. Stock Quote
Cenovus Energy Inc.
CVE
$21.36 (1.14%) $0.24

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