Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's third quarter results. As a reminder, today's call is being recorded. At this time, all participants are in a listen- only mode. Following the presentation, we will conduct a question-and-answer session. You can join the queue at any time by pressing star one. Members of the investment community will have the opportunity to ask questions first. At the conclusion of that session, members of the media then may ask questions. Please be advised this conference call may not be recorded or rebroadcast without the express consent of Cenovus Energy. I would now like to turn the conference call over to Ms. Sherry Wendt, Vice President, Investor Relations. Please go ahead, Ms. Wendt.
Thank you, operator, and welcome everyone to Cenovus's 2022 Third Quarter Results Conference Call. Please refer to the advisories located at the end of today's news release. These describe the forward-looking information, non-GAAP measures and oil and gas terms referred to today. They also outline the risk factors and assumptions relevant to this discussion. Additional information is available in Cenovus's annual MD&A and our most recent AIF and Form 40-F. All figures are presented in Canadian dollars and before royalties, unless otherwise stated. Alex Pourbaix, our President and Chief Executive Officer, will provide brief comments and then we'll take your questions. We ask that you please hold off on any detailed modeling questions. Please follow up on these directly with our Investor Relations team after the call. Please also keep to one question with a maximum of one follow-up.
You can rejoin the queue for any other questions. Alex, please go ahead.
Thanks, Sherry, and good morning, everyone. As I do every quarter, I'm gonna start this morning's call with our top priority, which is health and safety. In late September, there was a tragic fire at our non-operated joint venture refinery in Toledo. We were devastated to learn about the fatalities of two workers there, and our hearts go out to their families and colleagues. This is a heartbreaking reminder that safety must be absolutely fundamental in our business. It is our responsibility as an industry to ensure all our workers who start a shift get home safe every day. Our focus on the Toledo refinery remains twofold. We'll continue to support our joint venture partner, as well as the staff and everyone at site in every way that we can.
We'll also continue to work closely with our partner to assess the damage and gain a better understanding of the path forward. Investigations into the cause of the fire are ongoing, but early indications from aerial and drone footage suggest the damage is localized to a small area of the refinery. Restricted access to the site has limited the operator's ability to fully assess the damage, but the refinery will remain shut down in a safe state and we'll provide further updates when we can. Turning now to the third quarter, we continued to deliver solid operating and financial results, even with increased volatility in commodity prices. The oil sands segment led the way with Christina Lake back up from its Q2 turnaround and producing over 250,000 bpd . We safely deferred our turnaround at Foster Creek to Q2 2023.
However, there was still some necessary planned maintenance that impacted production in the quarter. There was also an issue with a water tank that lowered production in August, but production was back up to normal rates in September and continues at that level. In the Lloydminster Thermals, Spruce Lake North produced first oil in early August and has since hit daily rates well above its nameplate of 10,000 bpd . Recall that when we took over the Lloyd Thermals, those combined assets were producing around 80,000 bpd . By adding Spruce Lake North, as well as continuing to apply Cenovus's SAGD expertise, we now see the Lloyd Thermals run closer to 110,000 bpd . We also closed the Sunrise deal in the quarter, where we acquired the remaining 50% working interest in that SAGD facility.
We are reporting 100% of Sunrise volumes from August 31st onward. We have seen strong performance from the re-drill and redevelopment program at Sunrise, and just drilled two of the longest wells to date at that site with 1,600 m laterals. In the conventional segment, we successfully executed a major turnaround at our Elmworth plant without incident and restarted our development rigs coming out of breakup. Conventional production was running between 125,000 BOE-130,000 BOE per day coming into October. The team has also been reactivating some base well production at a very low cost. In the offshore, our partners recently brought the MDA-MBH fields online in Indonesia. We expect them to ramp up over the fourth quarter.
Additional new fields will follow to bring total net volumes closer to 20,000 BOE /d in 2023, doubling the previous run rate. In the U.S. downstream, the throughput was up with a utilization rate of 87% compared to 75% in Q2, as we had most of the Q2 turnarounds behind us. The Cenovus-operated Lima Refinery continues to run well after its major turnaround last year, with utilization in Q3 coming in at 94%. However, there were outages at the non-operated refineries in the quarter with turnaround activity at Wood River and Toledo.
In addition, Toledo was taken back offline on September 20 following the incident I mentioned earlier. Lima operations have shown significant improvement through the year, and our goal is to continue to demonstrate this level of operating capability across our U.S. refining operations as we restart the Superior Refinery and take on operatorship of Toledo. Our priority for the U.S. refining business is establishing a solid track record of safe and reliable performance. This is one of the company's greatest opportunities in the near term. Turning to our financial results, the quarter's adjusted funds flow was nearly CAD 3 billion, while free funds flow was about CAD 2.1 billion. Excess free funds flow was about CAD 1.8 billion, and this included a cash payment of about CAD 400 million on closing the Sunrise acquisition, which was fully offset by net proceeds recorded on closing the retail fuels network sale.
The volatility in commodity prices in Q3 manifested in two primary ways. First, in oil sands operating margin, and here the lag on condensate pricing was seen in realized pricing in the oil sands assets, where higher price condensate purchased in earlier months was blended and included in sale volumes through the quarter. Second, in U.S. manufacturing operating margin. Processing crude oil purchased in prior periods at higher prices and manufactured later in the quarter when pricing decreased had an impact of almost CAD 420 million. Throughput increased and unit costs came down relative to Q2. However, the volatility of commodity prices had a much larger impact on operating margins in the U.S. downstream. We also began incurring increased expenses for the startup of the Superior Refinery, which combined with the Toledo outages to add operating expense drag without throughput.
Taking out the inventory and FIFO gains in Q2, along with the FIFO losses in Q3, the U.S. manufacturing segment performed better this quarter compared to last. We also experienced cash flow headwinds related to the cost of higher-priced feedstock and condensate from earlier periods included in our products and sales volumes in the quarter, or in other words, FIFO impacts. These dynamics serve as tailwinds on our results in a rising price environment, but serve as a headwind in a falling price environment like we've just experienced in Q3. In accordance with our shareholder returns framework, we've allocated half of Q3 excess free funds flow to shareholder returns. This is over and above our base dividend. We also continued our opportunistic and disciplined approach to share buybacks through the quarter. This resulted in a return of about CAD 660 million to shareholders through the NCIB program.
The Board of Directors has approved a variable dividend of about CAD 220 million, or roughly CAD 0.114 per common share, with this variable component fulfilling our commitment for 50% of excess free funds flow going back to shareholders. The current NCIB program will expire in early November. Our board has approved the application for another NCIB program. It will provide capacity to repurchase approximately 136 million additional common shares over the next year. We also completed a tender transaction in the quarter, repurchasing about CAD 2.8 billion of debt, bringing our total of repurchased notes this year to CAD 4.3 billion. This exercise mitigated refinancing risk for the company until 2027.
It also reduced our weighted average coupon rate and will save about CAD 200 million in annual interest expense going forward. Our net debt reduction was accelerated this quarter by a working capital release and now sits at about CAD 5.3 billion. To put things in perspective, we started this year with CAD 9.6 billion in net debt. That is a reduction of CAD 4.3 billion of net debt in just three quarters. Q3 was another great example of how our financial and shareholder returns framework delivered. Up to and including Q3, we will have returned nearly CAD 2.9 billion to our shareholders this year through our base dividend, share buybacks, and the variable dividend, while at the same time also deleveraging.
At the same time as paying down our debt and providing returns to our shareholders, we are also making significant contributions to government. When the oil and gas sector does well, Canada does well. Recent Peters & Co analysis shows that oil and gas companies are expected to contribute about CAD 50 billion in royalties and taxes to the Canadian federal and provincial governments in 2022. That's money that pays for healthcare, education, arts and culture, and much more across this country. To put this in perspective, our sector's anticipated government contributions this year are equivalent to more than two-thirds of the funding for all of Canada's hospitals last year. That's at a time of heavy demand under the strain of COVID.
Cenovus and our peers are further bolstering the economy by investing our revenues back into our businesses, supporting jobs, and providing economic benefits for suppliers and manufacturers in every province. That same Peters & Co analysis shows our sector making capital investments of about CAD 40 billion this year alone. It's much more when you add in our spend on annual operating costs. These investments include money for environmental and GHG reduction initiatives. In fact, our sector is the largest spender on environmental services in Canada. The Pathways Alliance, Cenovus jointly founded with five of our oil sands peers to get to net-zero emissions by 2050, recently announced that our decarbonization projects will require investments of more than CAD 24 billion by 2030 alone. This includes the Alliance's foundational carbon capture and storage pipeline and hubs, as well as energy efficiency, cogeneration, and electrification projects.
We are ready to move forward with more advanced investment decisions about these significant decarbonization projects once governments provide assurance that the necessary policy mechanisms and support are in place. Cenovus and our peers continue to work with government officials on these details so we can all continue to achieve the shared goal of emissions reductions. We are committed to both investing in our business, including decarbonization projects, and providing strong returns to investors. These two things combined are what will support a strong oil and gas sector in this country and enable us to continue contributing in a significant way to the Canadian economy for a long time to come. Recapping what we've achieved at Cenovus this quarter and where we're headed. Our upstream operations continue to build on momentum towards 800,000 bpd and above and delivering meaningful value and returns on investment.
Our downstream performance is not yet fully shown what it can do in this environment, and that will be management's focus going into Q4 and 2023. Overall, we've posted another solid quarter highlighted by strong operational results and substantial further deleveraging towards our CAD 4 billion net debt floor. At current strip, we expect to reach that level around the end of this year. We look forward to delivering 100% of excess free funds flow to our shareholders for periods when we're at that level. With that, we're happy to take your questions.
Ladies and gentlemen, as a reminder, you can join the queue to ask a question by pressing star one. We will now begin the question- and- answer session and go to the first caller. We'll go to Greg Pardy with RBC Capital Markets.
Yeah, thanks. Good morning. Thanks, Alex, for the rundown. Just a couple of questions for you guys. I guess the first one is you've talked about, you know, the downstream improvements that you're focused on. If we just maybe talk about the upstream for a minute, do you continue to see sort of a favorable rate of operational change occurring? Then if so, where is that happening?
Sure. No, I'm happy to talk about the upstream and I'll probably pass it on to Jon and Keith and Norrie at some point. You know, I think, Greg, how I look at it, you know, since we've been able to get the Husky deal done, you know, we've had a really good run of finding a lot of what I would call kind of brownfield opportunities to continue to grow production, drive our operating costs down, drive our SORs down. You know, we've picked a bit of the low-hanging fruit, but I think from my perspective, you know, we see that opportunity continuing. I think Sunrise, you're gonna see significant things from Sunrise going forward. Maybe I'll pass it on to Jon and he can give some thoughts.
Yeah. Thanks, Alex. Greg, you know, one of the things this industry and this company hasn't really done over the last five or six years through the commodity cycle downturn is put a lot of money or put any money into growing production and harvesting some of the low-hanging fruit that Alex has mentioned. You know, that goes for Cenovus, but it also goes for the assets that we acquired through the Husky acquisition. When we look at our portfolio, you know, we see lots of opportunity for kind of incremental growth that, you know, starts to rerate your cost base and starts to recalibrate not just production, but the cost base that goes with it. Alex mentioned Sunrise. That's a great example. Hasn't had a new well pad since 2017.
We acquired the other half of that this quarter, and we see, you know, lots of potential growth there for marginal capital. Similar in our conventional business, we see the same thing happening there. I think what you can expect from us is, you know, similar to what we just did at, you know, Spruce Lake North and what we've done in Indonesia and what we're about to do with TerraNova is kind of add incremental production through time that comes with relatively modest capital requirements, but does, you know, kind of provide that 5% rate of growth through time.
Okay, terrific. Thanks for that. I'll switch gears and so small special dividend, you know, how should we think about maybe special dividends versus base dividend growth? Because clearly you've got the financial wherewithal to go and raise the base dividend now.
Greg, it's a good question, and I think I would say to you that over the long term, I would view that one of the primary ways that companies like Cenovus add value is growing their base dividend. You know, to do that, ultimately, you need to grow both your top line and your bottom line. You heard Jon, you know, we think we can continue to grow at a pretty reasonable pace, as described by Jon, just by kind of keeping to our knitting with those sort of organic and brownfield opportunities. I think we do see, you know, we see opportunity over time to grow both the base dividend and, you know, obviously there'll be opportunities for variable dividend.
From my perspective, you know, to the extent we can afford it at the bottom of the commodity cycle, it would certainly be management's goal to continue to grow the base dividend also.
Yeah, maybe I'll just add on to that, Greg. I mean, the two things are kind of synergistic. You invest in the business and generate returns at $45, which just gives you more capacity to grow your dividend through time. You know, the incremental investment that you make in the business just, you know, supports that growth that Alex talked about of the base dividend through time, which is kind of at the core of this company in terms of returning cash to shareholders.
Understood. Thanks very much.
Yeah, no worries. Thanks, Greg.
Thank you. We'll take our next question from Neil Mehta with Goldman Sachs.
Hey, this is Nicolette Slusser on for Neil Mehta. Thanks for taking the time. Just kind of a follow-up on the capital allocation side. Can you provide any insight around the timing in reaching the CAD 4 billion net debt target at the curve? Any sort of carry forward implications we should be thinking about after the announced variable?
I mean, I think I mentioned it in my call notes, but we see us hitting the CAD 4 billion, all things being equal, probably right around the end of the year. You know, we are you know if there's one thing we strive to demonstrate, it's discipline. We've committed that once we hit that CAD 4 billion, we're moving to a 100% payout, and that is still our intention. No changes there.
Great. Thank you. As a follow-up, just curious how you're thinking about next year's spend outlook, and also if we should be thinking about any sort of updated maintenance capital range on the back of elevated costs?
You wanna talk about that, Jon?
Yeah. I think we've been pretty clear and we'll come out with a more formal budget set of guidance later next month. I think we've been pretty clear that you know the strategy is pretty much set and we are in a world where you may see some incremental dollars go towards growth, but it will be exactly, that'll be marginal and incremental. Don't think about next year's budget as being much different than this year's. You know, I think there will be some monies to get after some of that low-hanging fruit that we talked about that allows us to you know maintain sort of that 5% growth rate you know right across the business, upstream, downstream, and conventional. You know, I think that, you know, we'll flesh that out more so in the next month. Sorry, I forgot the second part of your question.
Just on the maintenance capital range, if there's any sort of update we should be thinking there.
Yeah. Okay. On the maintenance capital, you'll remember that when we acquired Husky, we came out with a number of CAD 2.4 billion as being the number that's required to keep production flat and keep our fixed plants in a safe and stable condition. What we have done over the course of this year, if you think about the assets that we've acquired, the other half of Sunrise, our anticipated acquisition of Toledo, and then some allowance for inflation, we kind of expect that number to move up in sort of the CAD 2.7 billion-CAD 2.9 billion range. I think that's a good number moving forward. We'll provide even more color on that once we get through the budget, but that's kind of a run rate number that you should be thinking about for the next five years.
Okay, great. Thanks for the clarification there.
Thank you. We'll take our next question from Menno Hulshof with TD Securities.
Thanks, everybody, and good morning. Just maybe I'll start with Pathways. In the release, you talked about Canada facing intense pressure on CCS from the U.S., Norway, and the Netherlands. Maybe you could just give us a refresh on how Canada currently stacks up. I think everybody on the call has a good sense of what that looks like for the U.S., but where do we stand relative to Europe. You also mentioned that g overnment discussions are ongoing, but just in terms of the track to resolution, is it possible that we see something before the end of the year, or is 2023 more realistic?
It's a good question, Menno. I'll give you my thoughts and Rhona may jump in with some color on it. You know, look, I mean, where we are now, you know, we've had ongoing discussions with the federal government and the provincial government now, you know, for many months. Earlier this year, that kind of one of the initial outcomes of that was the investment tax credit that the federal government put forward for CCUS. You know, I think we really viewed that as a strong commitment from the federal government.
You know, that was something that, you know, was more reasonably equivalent to the U.S. 45Q support that they were giving to carbon capture. You know, since that time, the U.S. government has come out with the Inflation Reduction Act, which added significant support for industrial decarbonization through including CCUS. You know, that right now in the U.S., producers in the U.S. are getting s upport both for capital investment and for operating costs. You know, I think our perspective, you know, this goal of decarbonizing, not just the oil and gas industry, but every major heavy industrial industry in Canada is a massive task. It is a huge lift. You know, industry is gonna spend many billions of dollars on it ourselves.
Pretty much every jurisdiction in the world that is proceeding on carbon capture and storage is really doing that with significant involvement of multiple levels of government. You know, you've heard me talk about the U.S. Norway is in a similar position. I mean, you know, I think Canada needs to be focused on competitiveness. You know, this is an incredibly important business for the Canadian economy and Canadians. As I said, we're gonna do our part, and we are doing our part. You know, there's more discussions needed with both levels of government. I don't know, Rhona, if you have anything to add on that.
Yeah. I think that the importance of what you said, Alex, is that the focus has to be on both the capital costs and the operating costs. That's what we've seen in examples around the world, where significantly large CCS projects have gone forward. There's been anywhere from two-thirds to getting to close to full support from governments when across the project. These are multi-decade projects. The capital is great. That's the first thing that you talk about, but you also have to look at balancing the operating costs over the life of these projects because that's the most significant part of them. You know, CCS is the focus right now because that's a proven technology. Anywhere in the world right now, there's CCS everywhere.
Our companies have experience with CCS when it's linked to enhanced oil recovery, because then it makes sense to go ahead without having to partner with governments. This truly, we're looking at the CCS projects that we're talking about where they are not in the oil sands, partnered up with enhanced oil recovery. These are joint projects that we wanna do with the government. This is infrastructure that's for the Canadian good, and it's infrastructure that is going to result in tens of thousands of jobs. That will be a real next construction boom in Alberta. There are so many levels of benefit to these projects going ahead.
T hanks, Rhona. Menno, just to be responsive to your last question about timing. You know, my kinda guess on this is, you know, there is a lot of discussion that is ongoing with government. Just given the complexity of this issue and the need to make sure it is done right, and we deliver, you know, what is needed, I would suspect that this will ultimately extend into the new year.
Okay. Thanks to you both. That's very helpful. I'm just gonna flip over to the Superior rebuild project. You're still targeting Q1 restart. Where do you see the risk in the ramp-up process, if at all? What should we be modeling for utilization for the first half of 2023?
Hey, Menno. It's Keith Chiasson. Yeah, you know, we're really happy with the progress on the project. We've always been forecasting, you know, ramping up through Q1 2023, and we're still on that track. We're actually in the process of transitioning from construction into commissioning. We brought our first set of crude into the tanks at Superior and have floated the roofs at those tanks and filled up our inventory. So, you know, we're imminently getting ready to commission the crude unit and start that up. Really, still on track to ramp up through Q1 2023, as we've been saying for the past several quarters.
Thanks, Keith.
Thank you. As a reminder, star one, if you would like to ask a question. We'll go next to John Royall with JP Morgan.
Hey, good morning, guys. Thanks for taking my question. On downstream, if I heard this right, I think you mentioned the results were better than 2Q in 3Q when you strip out FIFO and inventory impacts. Can you talk about the drivers there? I know you had less downtime and better throughputs overall, but anything you're seeing on the cost or the margin side that improved in 3Q?
Yeah. Hi, John. It's Keith Chiasson. You know, we saw a really strong throughput at our Lima refinery. We actually set a throughput record in the quarter at Lima. Obviously, the cracks are very supportive in the quarter as well. You know, as we think about kinda what the forward view looks like, you know, we're really excited about this set of assets, because right now, you know, we're still incurring a lot of costs without any throughput at Superior. As you know, with the tragic fire at Toledo, you know, we were down for most of the quarter at that joint venture-operated asset.
You know, as those assets come on stream, we're even more encouraged about, you know, what the U.S. structure can perform at. As you know, with WCS differentials kind of where they are, these refineries are well set up to consume, you know, Canadian heavy, you know, both Superior, Toledo, our joint venture at WRB as well as, Lima. You know, really constructive heading into this as well as kind of the very constructive crack. Pretty exciting time for the U.S. manufacturing as those assets come back on stream and continue to perform.
Great. Thank you. That's helpful. Just flipping to upstream, when I look at royalties for Foster , Christina, and Sunrise, it looks like all three went up in terms of the rate in 3Q versus 2Q, despite price going down, assuming I'm doing my calculation right. Anything you would point to that's driving those rates higher in 3Q versus 2Q?
No, it's Jeff here. No, there's nothing structural. I'll just remind you of the framework. It's those Foster Creek and Christina Lake are post-payout, so they'll range from 25%-40% of a payout there. Basically, your revenue, less your op cost, less your CapEx. They've been running in and around 30%, but there's nothing structural. It's just a factor in. When we're in post-payout, it's an annual calculation, so there's always just true ups in different pieces. That's how you should be thinking about it.
Understood. Thank you.
Thanks, John.
We'll take our next question from Dennis Fong with CIBC World Markets.
Hi, good morning, and thanks for taking my questions. The first one for me is just really around the share repurchase program. I know previously you've discussed focusing on intrinsic value at a mid-cycle pricing, and I was just curious, just given what we've seen most recently from macro in general, has that maybe driven you to revise or update your view on what mid-cycle quote-unquote is, and how you guys would like to think about repurchasing shares?
You know, once again, I kinda just go back to the this concept of remaining disciplined and, you know, conservative of how we think about things. We still think about mid-cycle as kind of in or around $60 WTI. I'm, you know, I mean, I think at this point, I'm not convinced that the world is not gonna go back, you know, to where it's been over the last 50 years. You know, we're gonna stick with $60 as kind of representative of mid-cycle commodity prices. I, you know, I'd remind everybody that, from our perspective, we do prefer buybacks, all things being equal over variable dividends when we're trading below intrinsic value.
You know, I think if, you know, as people think about, you know, even, like, until we hit CAD 4 billion and after we hit CAD 4 billion, you know, it really. Like, think about the share price. If that share price is looking like CAD 30, you know, people should expect a lot of variable dividends. And conversely, if that share price is trending below CAD 20, they should expect share buybacks. That's really directionally how we think about it.
Great. Thanks. My follow-up here is maybe just tacking on to Greg's question earlier. I know you've made pretty good progress on some of the optimization of your existing assets, both historical Cenovus and Husky. Just curious as to whether or not you can provide us a bit of an update on further down the line projects like, say, connecting Narrows Lake and Christina Lake, where that potentially happens to be at or where the next leg of upstream optimization could stem from, ex Sunrise. Thanks.
Yep. Hi there, Dennis. It's Norrie Ramsay here. We are progressing at Christina Lake. The pipeline that connects up over the next three years will connect up Narrows Lake down to Christina Lake. You should expect to see production come from that north area there. Similarly, in Sunrise, Jon kinda mentioned earlier, now that we're 100% owner, we've a lot of flexibility, and there haven't been pads drilled there since 2017. We're making really good progress on the next three lots of well pads there, and expect those over the next 24 months to kinda show up. At the same time, we're doing a lot of redrill, redev in areas in Sunrise, so we haven't done it for a number of years. So, you know, we have that.
I mean, the other side of it, we have Terra Nova out in Atlantic coming back from an asset life extension, which we're looking forward to at the end of the year. There'll be another 10,000 bpd . I think, I mean, over to Drew's area in Indonesia, we have Drew , if you wanna mention it.
Yeah, sure. Yeah. Dennis, we've got, you know, the MDA- MBH project that's just coming on now. We've got the MAC field that'll come into that same floating production unit here mid-year next year. You're gonna see Indonesia production double. You know, very low capital for those types of investments as the FPU is leased.
You know, we've got lots of good, to Jon's point earlier around, you know, brownfield, very efficient use of capital to have continued growth here for the next little while, where we know it makes sense that, you know, even in the conventional world, like, you know, don't be surprised if you see us probably, you know, add an incremental CAD 100 million or so into next year to keep kinda driving the performance of that business, whereas we fill more and utilize a lot of our infrastructure that, you know, has not been invested in over the last five to six years. You know, it's not only just your unit OpEx that really improves, it's your capital efficiencies that improve.
Your underlying net backs and affordability to keep, you know, with small growth, but, you know, basically keep the underlying ability of these assets to generate future free cash flow, is just really good business. Then we've got lots of those opportunities across just about every aspect of our upstream.
Great. Thanks. I'll turn it back.
Thanks, Dennis.
Thank you. That will conclude the analyst portion of the Q&A portion. We will now take questions from members of the media. Once again, star one for questions from media callers. We'll take our first question from Chris Varcoe with Calgary Herald.
Hi, this is a question for Alex. Alex, in the past week, we've seen the Federal Environment Minister Guilbeault call out the Canadian oil industry to start spending more money on clean energy instead of share buybacks. Those are his words. Meanwhile, down in the United States, we've seen President Biden call for more production from the industry and hinting at a windfall tax, potentially, if they don't do so. How do you view these kinda comments and the criticism of the sector?
I think, Chris, you know, you probably heard my opening comments where I talked about the contribution that the Canadian oil and gas industry is already making. As I said in those initial remarks, Peters & Co estimates that the Canadian upstream industry is going to contribute CAD 50 billion in royalties and taxes at all levels of government in Canada. I think we have a very progressive system in Canada, which is quite a bit different than the U.S., whereas you know, as the cash flow in the industry goes up, you know, the contribution to government coffers goes up.
I think any characterization that the Canadian industry is not contributing is just fundamentally inaccurate. That being said, you know, I think our industry has shown that we're very serious about decarbonization. We support the federal government's effort for our country to make significant emission reductions on a path to net zero by 2050. You know, we have that same goal as Cenovus and with our Pathways Alliance peers. I think, you know, really getting there requires a practical and realistic approach to emissions reduction, you know, in order to protect jobs, investment in Canada, and help provide global energy security. You know, I would just have you look at those things. Yeah, I think I'll turn it back to you.
Sure. Just to follow up on that then, the federal government is expected to release their fall fiscal update soon, I think later this week. What are you expecting or what are you hoping to see from Ottawa as it relates to their investment tax credit on, CCUS?
You know, Chris, we are still very much in the discussion and consultation phase with the federal government. You know, I think there's more work to be done on the investment tax credit. You know, I think we've seen our own federal government acknowledge that with the moves that the U.S. government has done in their Inflation Reduction Act, that you know, that's something that Canada is going to have to look at in terms of you know, having a program that is competitive with the U.S. program. I'm not you know, I'm not expecting anything earth-shattering coming out of the fall statement here tomorrow.
Just to, I guess, ask you one last question as it relates to that front. Do you need to see changes from the federal government and the provincial government for the Pathways group to give the green light to those projects? Are we sort of at a stalemate here right now?
No, I don't think we're at a stalemate at all. I think, as I said, we're having quite productive discussions. You know, I mean, as I said, you've heard me talk about, I think it's important that the contribution of government has equivalence with what is going on in the U.S. At the same time, we are absolutely committed that we are moving down this path of decarbonization. We just require some certainty, you know, in all of the, you know, in terms of the various government programs. When I say that, I mean, I'm not just referring to the federal government, and I'll give you an example, would be pore space.
You know, in order to proceed on our CCUS foundational project for Pathways, we actually have to have absolute certainty that, you know, we have that pore space. We need to understand, this would be a joint federal-provincial issue, but we need to understand, for example, you know, the environmental permits that are required. Are we going down a federal path or a provincial path? You know, these are decisions that need to be made before the industry. You know, we're not in a position to execute on those projects till we have more certainty on those kind of issues. You know, I think the discussions are going very well. I think everybody ultimately shares the goal of emissions reduction coming out of the industry.
I think so far it's been going productively. I ultimately see a path that I think if everybody is reasonable, I think there's a path to a resolution that works both for governments and for the industry and for the province.
Thank you.
Thanks, Chris.
We'll take our next question from Rod Nickel with Reuters.
Hi, Alex. Just wondering if you can elaborate a bit on you keeping $60 as kind of a mid-cycle price. Futures price strip would seem to indicate that the Street doesn't expect a price like that for several years at least. Can you explain maybe why you're taking a more cautious view of prices down the road?
You know, Rod, like, four years ago, the forward strip wasn't expecting a price over $60. You know, it's interesting to me what the futures market is speculating about where price is going. You know, if there's one thing that we have been focused on beyond anything other than safety at this company, it is on discipline, and that is investment discipline, financial discipline, and delivering what the company has promised to deliver, you know, for its stakeholders. You know, if you look back, I haven't run the numbers recently, but if you look at the average price over the past 10 years, I'm sure it is well below $60 /bbl .
We, you know, can hope for the best, but we gotta plan for reality. I think at this point it is the right thing to do for our company at this time to still think about $60 as a sort of a mid-cycle price.
I assume that's the reason that you would be looking at just a very similar modest increase, if anything, to your capital budget next year, that you're keeping sort of a cautious approach to where prices might go in the next 12 months.
Well, yeah. We're probably, if anything, we're a little more disciplined on our investment decisions. You know, when we look at all major investment decisions, those investments have to return their cost of capital at what we would call a bottom of the price cycle or a resiliency price deck. That's more of a $45 WTI. I would tell you the good news is that all of those projects that you heard John and Nori talk about on this call, everything that we have been continuing to invest in meets that hurdle. We are blessed with a great deal of continued opportunities to grow production that have high returns and are resilient even at the lowest commodity prices.
Thanks, Alex.
Thanks, Rod.
We'll take our next question from Robert Tuttle with Bloomberg News.
Yeah. Hi, good morning. I'm kind of wondering the price of Canadian heavy oil. I mean, we got all the pipelines in now, pipeline space. There's been very little apportionment. Yet here we are near $30 /bbl differentials. Do you see this and it's been very weak for a long time now, I mean, more than $20, at least through the summer. Do you see this continuing? What, you know, factors would bring the price down to a more normal, or the differential down to a more normal level?
Yeah, no, I'm happy to give some thoughts on that, Robert. I mean, you know, I think the first thing I would say, and this is kind of different from our historical experience, but right now, you know, my observation would be that these really relatively wide light heavy differentials are being driven more by global issues, you know, which is a lot different than previous years in Alberta, where a lot of those wide differentials were actually being driven by pipeline constraints out of Alberta. Just to kind of, I'll give you just a couple of thoughts on, you know, what is kind of creating a supply imbalance in the heavy market.
If you look globally, you know, right now, the high cost of refining heavy sour grades in Asia and Europe, you know, that is due to spiking natural gas prices in those markets. Obviously, gas being a significant input into processing of heavy. On top of that, you do have some limited heavy processing capacity driven by a number of both planned and unplanned maintenance at refineries in both globally but in North America. Then I guess the final point I would focus on would be the Strategic Petroleum Reserve.
I think everybody is aware that the U.S. government has been, you know, significantly bringing those volumes to the tune of 1 million bpd coming out of the Strategic Petroleum Reserve. Those are, you know, the majority, I think about two-thirds of those crudes that are coming out of the SPR are, you know, medium heavies and sours. That's putting more temporary pressure. I, you know, don't think this is. I think this is ultimately something that is resolved. I would view it as a temporary issue that could persist, you know, into 2023. I think ultimately, you know, it gets resolved as those issues I referred to get resolved.
Okay, great. Just one more thing. You guys have all these CCUS projects planned, and they're all gonna be about at the same time. These major construction projects. How are you gonna manage that with everything? Labor, resources. I mean, how is that gonna happen when you have all of this stuff being built at the same time? I mean, it looks like CAD 24 billion or something of investment in a very short [crosstalk].
Yeah. I mean, it is a good question. The one thing I would tell you, Robert, is, you know, this industry has learned a lot over the past 20 years of constructing projects and managing construction projects in overheated environments. You know, I think one of the reasons why, you know, we give advice to the government that, you know, everybody understands the ambitions to reduce emissions coming out of the upstream sector. We also have to think of other issues that you may exacerbate other issues if you move too quick on that.
One of them would be, you know, if there was a mad rush to the gate on CCUS projects, you could very significantly see both capital cost escalation, but also project delays. There's only a finite, you know, amount of craft labor in trades, and frankly, procurement and other issues. I mean, I think we are very acutely aware of this challenge historically. I think one of the great things about the Pathways partners coming together is it gives us a forum where, you know, we can actually work together, for example, on that foundational CCUS and capture project in the Cold Lake area. You know, it gives us the ability to do some coordination, hopefully, and make sure we minimize that. The key is that we have a reasonable timeline in which to decarbonize.
Thank you.
Yeah, no worries. Thanks, Robert.
As it appears, there are no further questions, I'd like to turn the conference back over to Mr. Pourbaix for closing comments.
Well, I think I would just, as I always do, thank the investment community and our shareholders for their continued interest in the company and your time today to listen to us talk about the quarter and our plans. With that, I'll wish everybody a good morning, and we'll sign off.
Once again, that does conclude today's conference. We thank you for your participation. You may now disconnect.