For large parts of the summer, the weather has been unusually wet. Roads and rail lines have been washed out. Construction, drilling and completions projects have all experienced delays due to the extreme weather conditions. At the same time, crude oil pricing has tumbled from the low 50s to the low 40s—putting renewed financial pressure on operators.
Folks in Northern B.C. are used to dealing with adversity. We take our challenges in stride, and somehow find a way to get things done. Roads and rail lines get repaired. Project delays get caught up. This persevering attitude has also helped some oil companies to thrive despite the adverse price environment. Here is how they do it.
Futures markets can be used by savvy operators to lock in selling prices for future production. Light Sweet Crude Oil (aka West Texas Intermediate or WTI) futures traded on the New York Mercantile Exchange have actively traded contracts for future month deliveries stretching out 18 months and more. A futures contract is a commitment to buy or sell a quantity of a commodity at a specific delivery location at a specific time in the future. WTI contracts are for 1,000 barrels each, delivered to storage facilities in Cushing, Oklahoma. Contracts are defined by month of delivery. Currently (and for the last few months), WTI futures pricing for next month’s delivery is lower than pricing for future month’s delivery. For example, WTI promised for delivery in February 2017 commands a premium of more than $3/barrel over September 2016 WTI.
Even though Northeast B.C. production will never get to Cushing, Oklahoma, buyers and sellers routinely use WTI as a price reference for transactions in other locations. If an operator wants to assure himself of the selling prices that he will get for his future production, he can use futures markets to lock in those selling prices. By doing so, he forgoes any further possible upside in the selling price of his production—in return for protecting against possible reductions in his selling price.
The price of WTI recovered from the low 30s to the mid 50s between April and June of 2016, giving operators the opportunity to confirm their operating plans and lock in their selling prices for the fall of 2016 and winter of 2017. The term structure of the futures markets (i.e. the fact that future months are trading at a premium to the current month) has also helped operators to lock in acceptable selling prices on their future crude sales from their winter drilling and production programs.
Using futures markets effectively allows operators to keep their businesses running, employing staff and producing products needed by consumers despite the adverse pricing conditions. Hats off to those operators who have the figured out how to work in the “financial” rain.
Tim Maryon is vice-president of sales and business development at Peace Country Petroleum in Fort St. John.