Canadian Fires: Impact on supply

[dan_s]

From Simmons & Co. 5/10
C O N C L U S I O N
Given the magnitude of wildfire-induced Canadian oil production outages (~1 mb/d), we
have conducted an asset by asset analysis and numerous channel checks to assess
the ultimate impact upon supply. Although the situation remains fluid, our preliminary
conclusion is that supply outages, while meaningful, are transient. We believe ~540
kb/d of production could be shut-in on average during May, translating to almost ~17
mb of cumulative oil and a downward bias of ~45 kb/d to full year growth forecasts.
Additionally, we continue to fundamentally highlight that global unplanned disruptions
remain significant at a time of minimal OPEC spare production capacity.

Canadian Wildfires – Where Do We Stand? As we have written about previously (see
our 5/4/16 note), and as has been widely covered by the press, wildfires continue to
burn across Canada, although the situation in and around Ft. McMurray has improved.
The fire has resulted in a material amount of Canadian Oil Sands production shutins,
which we believe peaked over the weekend at north of 1 mb/d. Our leading edge
estimate is that ~900 kb/d to ~1 mb/d of production remains shut-in following the partial
restart of production by Shell at its ~255 kb/d Albian plant (announced Monday). Various
pipeline operators (notably Enbridge) have shut down lines, and BP, Statoil, Suncor, and
Phillips 66 have all issued force majeure notifications to customers due to likely supply
disruptions.

Bottom Line Impact: Enduring or Transient? Importantly, supply outages, while
material, appear transient at this stage. This is mainly because no actual production
facilities have been damaged by the fires, aside from minor damage to Nexen’s Long
Lake thermal operations (72 kb/d capacity) that were already operating at severely
reduced rates prior to the fire-induced shut-down. We do recognize there may be some
risk around the timeframe for mobilizing the workforce necessary to broadly restore
operations in a timely manner. Recall that much of the Athabasca Oil Sands workforce
lives in and around Ft. McMurray - where ~20% of homes have reportedly been
destroyed, power remains down, roads have been damaged, and water is not drinkable.
However, our discussions with Oil Sands operators lead us to believe companies are
already working on workforce mobilization plans and are confident that this will not be
a lasting impediment to production restart. We tend to agree with this assessment, yet
recognize there is risk.

Quantifying the Impact to Canadian Oil Supply: Our detailed asset by asset analysis
and channel checks with Oil Sands operators lead us to the conclusion that for May,
an average of ~540 kb/d of production could be shut-in, translating to almost ~17 mb
of cumulative oil. We believe full year production growth forecasts for Canada (a key
source of non-OPEC supply growth) have a downward bias of ~45 kb/d as a result of the
fires. Our framework is premised upon the view that operators will begin the production
resumption process by early next week, that it will take 3 to 5 days (on average) to
mobilize the workforce and begin the production ramp-up process, and that mining
operations will take 4 days to achieve prior production levels while SAGD operations will
take 9 days, on average. We believe that production could be restored back to pre-fire
levels by the end of the month. The framework behind our conclusions is documented
in greater detail within this note.

Detailed Analysis - How Long Until Operators Decide to Resume Production? To
resume production, we believe operators must be confident in two critical issues: 1) that
they can safely mobilize a significant amount of employees to sites without jeopardizing
their safety, and 2) that they can safely evacuate their production via pipelines. Our sense
is that confidence in safely mobilizing the workforce could collectively develop (with the
government’s input) over the next few days. It is less clear to us the timeframe over which
Enbridge and other pipeline companies may give the go ahead for pipeline restarts. On the
one hand, all parties involved are heavily incentivized to expedite the restart process, given
the economic damage to the province and lost revenue stream from shuttered operations.
On the other hand, the integrity of pipeline operations has become something of a hot-button
issue in recent years given a number of high profile spills, resulting in burdensome regulatory
oversight. With respect to actual operations, we do not believe there has been any meaningful
damage to pipelines (they are underground), although there could be some minor damage
(electrical lines for example) that may need to be assessed. Bottom line, we currently believe
operators will make the decision to resume production by early next week, although there is
a decent amount of uncertainty around this assumption.

Detailed Analysis - How Long Until Production is Back up to Pre-Fire Levels? Once
the decision has been made to resume production, operators will begin to mobilize
their workforces (if they have not already begun this process prior to communicating
commencement of restart). We believe workforce mobilization and restarting production could
take 3 to 5 days. Once production has been restarted, the question becomes how long
it may take to ramp up production to peak levels. The ramp-up process appears more
straightforward for mining operations, which account for roughly 2/3rds (or ~650 kb/d) of
current outages. Our working assumption is that mines can ramp up to prior peak levels over
a period of 3 to 5 days. There will be greater variability around the ramp-up profile around
SAGD operations. Our conversations with operators lead us to the conclusion that the SAGD
ramp up process can take anywhere from a few days to two weeks, and can be quite variable
from one well to the next, contingent upon a number of variables. We have therefore assumed
that, on average, SAGD operations will be restored to prior peak rates over a nine-day period.

Global Unplanned Outages Remain Elevated at a Time of Limited Spare Capacity: As
we have previously highlighted, unplanned oil supply disruptions have been a key element
this year that have contributed to a tighter oil market than was otherwise expected, at a time
when global spare production capacity remains minimal. In addition to Canadian wildfires,
we highlight that Nigerian turmoil persists, resulting in the lowest production in 20 years due
in part to attacks against facilities. CVX recently shut in ~90 kb/d of production following an
attack on a platform, incremental to the ~250 kb/d force majeure previously declared by Shell
due to pipeline sabotage. Additionally, recall that OPEC spare production capacity is just 2.7
mb/d (vs. global demand of 95 mb/d), per the IEA, with the vast majority of this spare capacity
concentrated in Saudi Arabia. We believe this estimate is likely overstated.