500,000 Barrels And $1 Billion In Losses: The True Cost Of Canada’s Wildfire

It took the market over a day to appreciate the fallout from the devastating Canadian wildfire which has led to a state of emergency in Alberta, the evacuation of over 80,000 people in the oil sands gateway city of Fort McMurray, and the destruction of over 1,600 structures. According to insurance industry reports, losses from the fire are approaching $1 billion, and will likely set records for the country.

The average cost of a single-family home in the community was recently around CAD$627,000 ($487,000), Aon said, citing data from the local real estate industry, and cited by CNBC. That would suggest losses of CAD$1 billion ($779 million), with more to come as the fire continues to blaze out of control. Such damages would already make the fire the third-costliest insured loss event in Canadian history, the firm said.

And now that Canada has had a chance to evaluate the damage from the historic fire, the question on everyone's lips is what will be the near-term impact on oil production as a result of the fire. While initially producers located in the area denied they would be forced to reduce production, this has changed over the past 24 hours. Related: Another Major Natural Gas Pipeline Project Bites The Dust

“As more information comes in, it appears that the impact on production of the wildfires in Alberta will be significant,” said analysts at JBC Energy in Austria. Analysts noted that Shell shut its Albian Sands mine and Suncor shut its base plant, while producers Syncrude Canada and Connacher Oil & also reduced output in the region.

"Taken together this amounts to some 0.5 million b/d of capacity that is currently offline. Infrastructure is being affected too, with the 560,000 b/d Corridor pipeline shut down and movement along the 140,000 b/d Polaris pipeline significantly curtailed. On top of that, trains are not operating near Fort McMurray, according to the Canadian National Railway,” said the analysts.

But the most comprehensive answer so far comes from Morgan Stanley's Benny Wong who estimates that the total number of offline capacity will be anywhere between 400 and 500 mbbl/d, with the shut-in expected to last about 10 days, potentially reducing total market output by as much as 5 million barrels.

More details:

Production curtailed as a precaution. Producers have been reducing staff and operations to focus on providing safety, shelter and resource for workers, their families and other Fort McMurray residents who have evacuated the city. While the situation is fast evolving and information is still developing, we attempt to provide an update on the situation. Assuming partially curtailed projects with no specifics are impacted by 25-50 percent of our forecasts, we estimate there is currently at least 400-550 mbbl/d of oil sands production potentially offline, of which 90 percent is synthetic light crude ( Exhibit 1).

(Click to enlarge) Related: A 4.5-Million-Barrel Per Day Oil Shortage Looms: Wood Mackenzie

Differentials have reacted. Canadian crude prices strengthened relative to WTI as news of supply curtailment started coming to light. The Western Canada Select (WCS) heavy oil discount narrowed US$0.60/bbl to US$12.85/bbl. Synthetic pricing also strengthened by $1.25/bbl to be at a US$1.00/bbl premium to WTI ( Exhibit 3).

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SU stock pricing in ~10 days of shut-in. SU was the first one to announce the reduction of operations and demobilizing of non-critical staff. The company is also expected to be impacted most in terms of production. SU shut down base plant operations (~304 mbbl/d of bitumen in 1Q16) and reduced rates at in situ operations due to the reduce availability of diluent (Firebag and McKay River which produced 200 mbbl/d and 37 mbbl/d of bitumen in 1Q16, respectively). It is not entirely clear at this point the exact amount being curtailed as SU had a planned ~45 day turnaround at its U2 upgrader with guided impact of ~130 mbbl/d in the quarter (net of ~100 mbbl/d to be sold as bitumen blend). Given the share price underperformance of 2.2 percent (Exhibit 5) and SU's '16 multiple to find implied lost value and cash flow, we estimate the stock is pricing in ~10 days of lost volumes.

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HSE reducing Sunrise output. Upon being advised of the partial shutdown of the Polaris pipeline (Exhibit 6), which delivers diluent to several operations in the region, HSE reduced production to ~10 mbbl/d gross (the project was averaged ~20 mbbl/d gross in March). We expect minimal cash flow impact given the project is still in ramp up and not fully covering fixed cost. (One could argue HSE may be saving some money with the reduced output of negative margins). HSE has 50 percent interest in the project.

AOSP shut down. Shell shut down its Albian Sands mining operations (Muskeg River and Jackpine) which can produce up to 255 mbbl/d. RDS has a 60 percent stake and is partnered with CVX (20 percent) and MRO (20 percent). Related: Oil Prices Fall Back as Rally Hits a Ceiling

Syncrude reducing production. The project was already in the middle of a 44 day turnaround that was expected to curtail volumes by ~30 percent after averaging a strong 320 mbbl/d in 1Q16. No specifics have been provided yet on volumes. SU owns 48.7 percent, IMO owns 25 percent, MUR owns 5 percent (agreed to be sold to SU with the deal set to close at end of 2Q16).

ATH trucking diluent. As a precautionary measure, ATH is trucking diluent to its Hangingstone project given the curtailed condensate delivery in the region. No impact to the Hangingstone project is reported so far, which averaged ~7.3 mbbl/d in February and ramping up towards its 12 mbbl/d capacity.

Connacher curtails Great Divide volumes. The company announced that production has been reduced to ~4 mbbl/d. The site produced 4.6 mbbl/d in February and 8 mbbl/d in January.

No impact at Kearl yet. IMO stated there was no impact to operations midday 5/4/16 and that staffing levels were reduced to essential staff only. However, we look for an update on whether there is any impact from the partial shutdown of the Polaris pipeline. The project averaged 138 mbbl/d in 1Q16.

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By Zerohedge

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