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Cenovus Energy (NYSE:CVE)

Q2 2013 Earnings Call

July 24, 2013 11:00 am ET

Executives

Jim Campbell

Brian C. Ferguson - Chief Executive Officer, President and Non-independent Director

John K. Brannan - Chief Operating Officer and Executive Vice-President

Ivor Melvin Ruste - Chief Financial Officer and Executive Vice President

Harbir S. Chhina - Executive Vice-President of Oil Sands

Donald T. Swystun - Executive Vice President of Refining, Marketing, Transportation and Development

Analysts

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Paul Y. Cheng - Barclays Capital, Research Division

Philip R. Skolnick - Canaccord Genuity, Research Division

Mark Polak - Scotiabank Global Banking and Markets, Research Division

David McColl - Morningstar Inc., Research Division

Peter K. Ogden - BofA Merrill Lynch, Research Division

Fai Lee - Odlum Brown Limited, Research Division

Menno Hulshof - TD Securities Equity Research

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Cenovus Energy's Second Quarter 2013 Financial and Operating Results.

As a reminder, today's call is being recorded. [Operator Instructions] Please be advised that this conference call may not be recorded or rebroadcast without the expressed consent of Cenovus Energy.

I would now like to turn the conference over to Jim Campbell, Vice President, Government Affairs and Corporate Responsibility.

Please go ahead, Mr. Campbell.

Jim Campbell

Thank you, operator, and welcome, everyone, to our second quarter 2013 results conference call. I would like to refer you to the advisory located at the end of today's news release. This advisory describes the non-GAAP measures referred to today and outlines the risk factors and assumptions relevant to this discussion. Additional information is available in our annual information form and second quarter report. The quarterly results have been presented in Canadian dollars and on a before-royalties basis.

Brian Ferguson, President and Chief Executive Officer, will begin with an overview of our results; John Brannan, Executive Vice President and Chief Operating Officer, will then discuss our operating performance. And Ivor Ruste, Executive Vice President and Chief Financial Officer, will discuss our financial performance. Brian will provide closing comments before we begin the question-and-answer portion of our call. Please go ahead, Brian.

Brian C. Ferguson

Thanks, Jim. Good morning. I'm pleased to share with you some of the highlights from Cenovus' second quarter performance and our outlook for the remainder of the year.

Our oil growth remains on track and our integrated strategy continues to deliver on our commitment to shareholders to build net asset value.

At Christina Lake, we completed phase E, which achieved first steam on June 22, and first production last week. Christina Lake phase E represents our 10th phase of SAGD growth, another major milestone. This phase adds another 40,000 gross barrels per day. Production capacity at Foster Creek and Christina Lake, combined, now totals 258,000 barrels per day. We expect a smooth ramp up to full production over the next 6 to 9 months at Christina Lake. John will provide more detail related to our operational performance in a few moments.

Our second quarter upstream results benefited from stable production, rising oil prices and a narrowing light-heavy differential compared with the first quarter. We also posted strong results from our refining operations, highlighting the benefit of our integrated model.

We anticipate that the remainder of 2013 will continue to experience oil price volatility due to ongoing pipeline congestion. But I am confident that our reliable oil growth, our downstream integration and our flexible conventional programs will continue to translate into strong financial performance.

During the quarter, we announced the sale of our Lower Shaunavon assets for $240 million. This transaction was completed in early July. Ivor will provide a more detailed review of our financial performance later in the call, but I want to briefly comment on the nonrecurring pretax adjustments in our Conventional business that impacted our financial results this quarter.

We recognized an additional $57 million in depletion expense related to the sale of our Lower Shaunavon asset. We also elected to discontinue our exploration effort in a tight oil plant in Saskatchewan, and expensed our cumulative $46 million investment during the second quarter.

We also recognized a onetime $63 million pre-exploration expense during the second quarter. This expenditure related to participation in an early-stage farm-in opportunity within our conditional business.

Cenovus has demonstrated meaningful growth from conventional oil, increasing production, year-to-date, by 5% compared to the same period last year. Our Conventional business generates significant operating cash flow that we use to support long-term oil sands development.

Overall, I am satisfied with our conventional oil growth and free cash flow generation. Our primary focus remains on developing our oil sands assets and growing future production. In fact, about 60% of our capital expenditures this year are targeted at increasing cash flow beyond 2013.

We have also updated a few items in our full year guidance. Production, operating costs and some capital spending ranges have been adjusted to reflect actual results, as well as our projections for the second half.

We have not updated our price deck or cash flow expectations, but I would like to point out that using our actual results for the first 6 months of the year and June 30 strip pricing for the second half that our forecast total cash flow for the full year remains essentially unchanged.

This highlights the benefit of our integrated operations in times of ongoing price volatility. John will touch upon the elements of our guidance that have been updated.

Overall, I am pleased with our operating performance during the quarter and we look forward to maintaining our momentum through the second half of 2013.

I will now turn the call over to our Chief Operating Officer, John Brannan.

John K. Brannan

Thank you, Brian, and good morning. During the second quarter, our integrated operations performed well. Steady production from oil sands and conventional were complemented by another good quarter from our refining assets. I would like to start by talking about the flooding in Alberta, which occurred in late June. The impact from the flooding to Cenovus' operations was very minor, and we estimate that we lost approximately 1,000 barrels a day for the quarter. The impact was limited to some temporary shut-ins in southern Alberta and a few interruptions at our oil sands assets.

This quarter, at Christina Lake, we completed our first major plant turnaround during late May and early June. The turnaround included 11 days of full production outage, as well as a few days of ramp down and ramp up. This was slightly longer than planned, due to an expanded scope of work, but everything was completed safely as we tied in key components related to phase E and the C, D and E optimization project. The production impact of the turnaround was approximately 7,600 barrels net per day for the quarter, roughly 2,500 barrels per day more than we originally planned. Production has since ramped back up and we have been running over 100,000 barrels per day gross for the past few weeks. We expect production at Christina Lake to be in line with our full year guidance. Operating costs at Christina Lake averaged $16.83 per barrel during the second quarter, and largely reflect the impact of the planned turnaround.

Lower production volumes versus Q1, combined with higher costs related to the turnaround, resulted in a higher per unit operating cost. Our full year operating cost expectations at Christina Lake are $12.80 to $13.60 per barrel.

As Brian mentioned, we achieved another major milestone this quarter as we commissioned phase E on time and on budget. We delivered phases C, D and E with a capital efficiency of to $24,000 per flowing barrel. Our teams did a tremendous job of competing this project, and we will be working hard to ramp up to full production over the next 6 to 9 months. We are also well underway with phases F, and G at Christina Lake.

Earlier this quarter, we announced a plan to optimize phases C, D and E at Christina Lake. This project will add 2 blowdown broilers that we expect will increase gross production capacity by about 22,000 barrels per day. We anticipate this optimization phase will be completed in 2015 and cost roughly $10,000 per flowing barrel. This is another example of Cenovus' demonstrated ability to advance oil sands development to build net asset value.

Now turning to Foster Creek. Production was down slightly relative to the first quarter and averaged just over 55,000 barrels per day on a net basis or about 92% of production capacity.

We anticipate steady second half volumes as we continued to reduce the backlog of workover activity required on some of our producing wells. Our updated guidance also reflects the rescheduled turnaround at Foster Creek, which will be completed in late September and into October. We expect it to result in a production outage of about 5,000 barrels per day for the third quarter and about 2,000 barrels per day in the fourth quarter.

Operating costs at Foster Creek averaged $16.19 per barrel this quarter, which reflects increased workover activity and higher power costs. Power costs have gone up across our operations, but at Foster Creek, it was also impacted by our cogen units coming down for maintenance in the quarter. This increased our external power consumption and resulted in the higher costs.

The cogen units have since been brought back online and are operating at 100%. Our full year operating cost guidance for Foster Creek is $14.90 to $15.90 per barrel.

Construction on the expansion phases F, G and H at Foster Creek continues to progress very well. We are now just over 78% complete at Foster Creek phase F central plant and we are pleased that inflationary pressures have moderated over the past several months.

At Pelican Lake, we continue to see incremental volumes associated with our infill drilling and polymer flood programs, although slower than we initially expected. Production averaged about 24,000 barrels per day during the second quarter, and we have revised our production guidance downward to reflect the more moderate ramp up.

Our plan to grow Pelican Lake remains unchanged but the ultimate growth rate will be dictated by the level of funding that we choose to pursue.

Now turning to the Conventional operations. Our teams continued to demonstrate success. So far this year, we have added approximately 3,200 barrels per day, most of which come from tight oil plays on fee lands in Alberta.

Production gains in Southern Alberta were offset by a reduced volume from the Lower Shaunavon, which produced about 3,600 barrels per day for the quarter, reflecting natural declines prior to the asset sale. Overall, our conventional guidance remains unchanged and excludes lower Shaunavon volumes and Bakken assets that are still being marketed.

In terms of overall capital expenditures, our updated guidance ranges reflect about $90 million lower spending at Pelican Lake. This is primarily related to the facility work and infill drilling that we have deferred, and roughly $50 million of incremental spending at Christina Lake related to acceleration of drilling activity and the phase F expansion. We have also allocated an additional $35 million to tight oil development in Southern Alberta based on recent successes.

Overall, we aren't seeing significant changes in inflation and still forecast about a 3% to 5% increase across our operations on an annual basis. We continue to generate significant operating cash flow from our refining operations, highlighting the benefit of our overall integrated strategy. During the quarter, Wood River and Borger average 96% utilization, of which approximately 230,000 barrels per day were heavy crude, including 109,000 barrels per day of high-TAN crude. June utilization was lower than we planned, and was impacted by an unplanned outage related to the hydrocracker at Wood River that just resulted in some minor repairs. We believe Wood River and Borger are well-positioned to take advantage of what we expect to be a good refining market due to ongoing price volatility and pipeline congestion.

In closing, Cenovus posted another solid quarter in terms of our operations. We continue to show predictable oil growth, bringing on our 10th phase of SAGD operations. Our team remained focused on safe and reliable execution of our plans for the second half of the year. I will now turn the call over to Ivor.

Ivor Melvin Ruste

Thanks, John, and good morning, everyone. Ongoing project execution, combined with solid performance from our integrated operations, allowed us to maintain our strong financial position in the second quarter. Cenovus reported fully diluted cash flow per share of $1.15, compared with consensus estimates of $1.19 per share. As Brian mentioned, this quarter we recognized a pre-exploration expense in our Conventional business of $63 million or $0.08 per share, which accounted for the cash flow variation.

Our reported operating earnings of $0.34 per share were below consensus expectations of $0.51 per share. The variance relates primarily to 3 items: the $63 million pre-exploration expense, the $57 million of depletion on the sale of our Lower Shaunavon asset; and the $46 million exploration expense on the conventional tight oil play. These 3 items totaled about $0.22 per share.

Commodity prices remained volatile during the second quarter, as light-heavy differentials tightened in June. The narrowing differential positively impacted our netbacks during the quarter, but this also had a negative impact on our refining results as heavy oil feedstock was more expensive and contributed to lower refining margins. Refining operating cash flow was $316 million in the quarter. Using a LIFO inventory method as is done in the U.S., our operating cash flow would've been $33 million lower.

General and administrative expenses were $3.54 per barrel of oil equivalent in the second quarter, compared with $2.51 per barrel of oil equivalent for the same period last year. G&A reflects higher workforce and office rent costs compared to last year. Our balance sheet metrics remain strong, exiting the quarter with a debt-to-capitalization ratio of 33% and a debt-to-adjusted EBITDA of 1.2x, both at the bottom end of our long-term target ranges.

Our financial strategy remains unchanged. Our plan continues to support our growth plans in oil production and also -- while also providing a dividend to our shareholders.

I'll now turn the call back to Brian.

Brian C. Ferguson

Thanks, Ivor. Our operating performance, strong refining business and a reliable oil growth profile position us well. The stability of our cash flow gives us confidence in our long-term growth objectives, allowing us to maintain our focus on increasing total shareholder return, which includes paying a meaningful dividend to our shareholders. The completion and first production from Christina Lake phase E and the recent announcement of the C, D and E optimization project at Christina Lake is a continuation of our manufacturing approach to oil growth. We expect to deliver a new 40,000- to 50,000-barrel per day phase of oil sands growth every year for the next several years. The outcome is an oil production profile that we anticipate will reach 0.5 million barrels net to Cenovus by 2021. We are on track to achieve our cash flow guidance for the full year. Wherever we have provided an update to our guidance document, it reflects changes to a few individual items. Overall, our integrated operations continue to perform well, and we continue to build on asset value. We are committed to total shareholder return, which includes growing our dividend. Our teams are focused on a strong second half for this year.

With that, the Cenovus team is now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Arjun Murti with Goldman Sachs.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Brian, 2 questions. The first is, one of the possible solutions if there's pipeline congestion or permitting or regulatory delays is, obviously, rail. And no question, it's a very tragic and unfortunate situation that happened in Québec. Can you provide any comments on how you see rail progressing in light of that very unfortunate situation for industry and/or for yourself?

Brian C. Ferguson

Thanks, Arjun. As you pointed out, it is truly a very tragic situation. There was tremendous loss of life, which is never, never supposed to happen in these kinds of situations. There is an ongoing investigation into the root cause of the accident and why it was so catastrophic. We continue to believe, for Cenovus, that we can safely move crude by rail. We are targeting to have 10,000 barrels per day moving by rail later this year. We have committed to some medium-term leases on additional railcars, which will see us in a position to move up to 30,000 barrels a day by rail next year. We continue to believe that crude oil can be moved very safely by rail. And what it does is give us access to a variety of niche markets that will help us to be able to optimize our overall realized pricing.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

I guess -- and again, I certainly appreciate the sensitivity of the issue, but at least, up to this point, the plans you have are on track, you guys are going to be as safe as possible, but you haven't had to slow down or face any other issues in terms of what you're doing today and/or your future plans?

Brian C. Ferguson

That's correct, Arjun. Safety in all of our operations is of paramount importance to Cenovus. And we will continue to make sure that we do absolutely everything that we can to ensure that every barrel that we produce and every barrel that we transport is done in a very safe fashion.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

That's great. And then a second unrelated question, I can't remember if it was last quarter or 2 quarters ago, you talked about blowdown on a portion of Foster Creek. Has that started? And where are you in that process? The production numbers certainly look very much in line or as expected. So I just want to see if you are already seeing the impact of that in the numbers.

Brian C. Ferguson

I'll ask Harbir to respond to that one, Arjun.

Harbir S. Chhina

Regarding the blowdown, you're absolutely right. We do have 3 pads ongoing, one is on complete blowdown. We do transition from steam injection to full blowdown. We turn off the -- there's a transitioning phase where we slow down on the steam injection and ramp up on the gas injection. And so we have 2 pads that are in that mode, which we call kind of a ramp down mode. So really, we only have one pad. So we're -- right now, a very small percentage of the field is on blowdown, and that's why you're not seeing any effect on total project SOR yet.

Arjun N. Murti - Goldman Sachs Group Inc., Research Division

Got it. And then when you're done with those 3, you continue to progress? Or this just happen to be the oldest portion that needed it right now? If there's a -- kind of an update on how blowdown would progress across the rest of the complex?

Harbir S. Chhina

Right. So the main metric that triggers when a well goes on blowdown is really the recovery factor. Once we start to get to somewhere around 50% to 60% recovery factor from a pad basis, we start to go on blowdown and blowdown will keep going on that pad for about 10 years. And then we'll continued to add more pads on blowdown. So as FGH comes on, we put new wells on and new pads on, but we start to retire the old ones to the ramp down and the blowdown phases with time. And so over the years, you will start to see our steam-oil ratio start to come down to close to that 2.0 level.

Operator

The next question comes from the line of Paul Cheng with Barclays.

Paul Y. Cheng - Barclays Capital, Research Division

A set of quick question. First, Brian, that -- related RIN, what's new exposure at your refining joint venture? And do you have an estimate of what is your share of the RIN purchase cost for 2013?

Brian C. Ferguson

I'm going to ask Don Swystun to respond to that question on RINs.

Donald T. Swystun

RIN is a very topical issue these days. I guess, the Renewable Identification Numbers, the cost we put into our -- that was built into our guidance are -- certainly have escalated from what we initially put in. The challenge, I think, that we have in terms of setting sort of what that cost is, relates, of course, what the upside is for the refiner. And the fact that we see some of those costs being reflected in the price of transportation fuel. So, in fact, it's negative, kind of passed on to the consumer in terms of gasoline or diesel prices going forward. So we believe that, going forward, RIN is, to some degree, bit of an unworkable system for -- particularly for the refiner, and we expect that some changes will result, going forward, particularly in 2014. In the interim, like you said, I think it was, to some degree, was built into our guidance for this year. Overall, the impact, I think, could be in the range of 5%, maybe 4s at this point. But again, I think we reflect some of that in the go-forward guidance.

Paul Y. Cheng - Barclays Capital, Research Division

Don, can you tell us that -- based on your branding requirement, are you -- need to buy RIN for 50%, 40%, 30%? Any kind of rough number you can share?

Donald T. Swystun

I don't have that number as to what the percentages of RINs we're purchasing at this point. Yes, I don't have that number quite yet.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. And you're saying that you believe that part of them is being pushed through into the -- into your customer, the additional RIN cost. Any rough idea that you would be able to reconcile back and say, "Okay, I think I've been able to pass through 50% of the cost or 30%." Any kind of number that you can share?

Donald T. Swystun

No, I can't really say that. The one thing you could understand is that there's a bit of a lag here, because these prices are going up when the RINs cost is not truly reflected initially, right away, in the actual kind of crack spread or in the gasoline price, but it's coming more and more as we continue to see escalation in the RIN price.

Paul Y. Cheng - Barclays Capital, Research Division

Okay. Brian, you guys just did a full turnaround at Christina Lake, as you mentioned, that took it down for the whole time [ph], for 11 days. Looking at both Christina and Foster Creek, on a going forward basis, how should we view the occurrence of this full-time turnaround, how often that it may happen? Say, once in 5 year, once in 10 year? What kind of number that we should be using or assuming?

Brian C. Ferguson

I'll ask John Brannan to comment on that. We would basically schedule a maintenance on an annual basis.

John K. Brannan

Yes. Thanks for that call, Paul. Clearly, these facilities, both at Foster Creek and Christina Lake, our large facilities. And we have, generally, annual turnaround requirements, one, to meet regulatory requirements, some to clean up vessels, do maintenance and those type of things. You generally can plan for about a week of full-time outage on an annual basis and 2 or 3 days on either side of that to bring the field down and bring it back up.

Paul Y. Cheng - Barclays Capital, Research Division

So at a year we should assume about one wave of full-time downtime?

John K. Brannan

That would be correct.

Brian C. Ferguson

Let me just comment, Paul, that we do take into consideration plant turnarounds when we issue our guidance. So that's already taken into account in our guidance document.

Paul Y. Cheng - Barclays Capital, Research Division

Sure. And that for Foster Creek that you guys have just raised the steam-oil ratio for this year, the target. When we're looking out, should we assume that this is the new norm or that you think, ultimately, still coming back down into the 2, 2.1 level over the next couple of years?

Brian C. Ferguson

Harbir will comment on that.

Harbir S. Chhina

First of all, we believe Foster Creek is a great reservoir, and I think we got a -- it's one of the lowest steam-oil ratios, highest returns, 22% to 25% IRR. One of the lowest supply costs, $38 to $40, so it's a great reservoir. We think these reservoir metrics will stay for the next -- up to until we get to about 300,000 to 350,000 barrels a day. With respect to changing the guidance on the SOR, what we've said over the last 7 years, with respect to Foster Creek, is it's nameplated 120,000 barrels a day, but we also said that the instantaneous steam-oil ratio would be 2.5%, and that we'd get to 120,000 barrels a day at a steam-oil ratio of 2% when we have full blowdown, when our wells start to go into full blowdown mode. So what happened over the last 5 years is the Wedge Well technology dropped our steam-oil ratio from 2.5% to 2.35%. Last year, at this time, the reservoir pressure dropped below the initial reservoir pressure. And so we had a substantially higher production than our nameplate, but we still feel that we can deliver 120,000 barrels a day at a steam-oil ratio of 2% with blowdown, and that is going -- will be here to stay for the next 10 to 20 years, until Foster Creek gets to 300,000 to 350,000 barrels a day. So fundamentally, this is just a short-term blip in terms of the 2.2% to 2.4% SOR. And we expect, by the end of this year, Foster Creek to be running towards the high end of the range that we gave you, the 110,000 to 120,000 barrels a day range and the steam oil ratio, as we put more wells on blowdown, will get -- start to go down to the -- closer to the 2% level.

Operator

The next question comes from Phil Skolnick with Canaccord Genuity.

Philip R. Skolnick - Canaccord Genuity, Research Division

Two questions. One, how much of the OpEx increase, both in this last quarter and the increase in guidance, would you say is onetime in nature, percentagewise?

Brian C. Ferguson

Thanks. John Brannan will comment on that.

John K. Brannan

Yes. Phil, talk -- particularly like at Foster Creek. When you break it down, we almost had $2 of -- over our budget and, basically, that was associated -- about $0.40 was natural gas, about $0.60 was electricity associated with the cogen being down. We had to end up buying that additional electricity. And then as we've been talking about, we've got a higher-than-normal workover activity, so we're about $1 over our planned budget. So I would expect that you would see just, non re-occurring, about $2 on -- at Foster Creek. Christina Lake, similar to that, we had longer turnaround than expected, so there's volumes associated with that. We had about $1.10 over on our fluid and trucking costs, most of that was related to the turnaround. So some of those things are generally onetime pieces.

Philip R. Skolnick - Canaccord Genuity, Research Division

Okay. And a second one, do you have a downstream guidance, at all, for Q3?

Brian C. Ferguson

Yes. Phil, we continue to have our annual guidance, which we have not updated. Do expect that there's going to be a fair bit of volatility on pricing, particularly on the feedstock side here, as you see some new demand come on and also some new supply on the heavy side as we go forward. So some volatility in differentials here in the second half.

Operator

The next question comes from Mark Polak with Scotiabank.

Mark Polak - Scotiabank Global Banking and Markets, Research Division

Actually my questions have already been answered.

Operator

Next we have the line of David McColl with Morningstar.

David McColl - Morningstar Inc., Research Division

Just wondering if you can provide any indication, perhaps, as to whether Cenovus has any long-term capacity commitments on TransCanada's Gulf Coast connector or the COA pipeline?

Brian C. Ferguson

Don Swystun?

Donald T. Swystun

We have, I guess, a number of commitments on various pipelines. We've been pretty proactive in terms of moving those forward. I think, as far as -- like we like to say to the West Coast, we're moving -- we've got commitments, about 175,000 barrels a day. To the Gulf Coast, we're looking about a 150,000 barrels a day and, certainly, with the open season on TransCanada East, we were a participant in that and more information will be coming shortly, but we expect to be -- have a good commitment on that line as well. And generally, within most pipes, in a lot of those particular markets, we split between things, such as on the West Coast it would be between Gateway and Trans Mountain expansion, or the Gulf Coast it's, obviously, Keystone XL or Enbridge in the Gulf Coast line as well. So I think we try to have a real portfolio approach to our marketing of -- on pipelines.

Operator

Next is the line of Peter Ogden with Bank of America Merrill Lynch.

Peter K. Ogden - BofA Merrill Lynch, Research Division

I might have missed it, but on the $63 million pre-exploration expense, I was wondering if you could provide a little bit more color. I mean, to my recollection, I can't remember something like that being a cash expense and I understand it's part of pre-licensing or whatever it is. But, I mean, how do you prevent that from happening again? How was $60 million spent, to begin with? And, I mean, maybe you can share where or how that was incurred and how it, I guess, doesn't -- or controls on how it doesn't happen again?

Brian C. Ferguson

Thanks for the question, Peter. So we decided to take a conservative approach. We have fully written-off in the quarter the entire obligation related to a farm-in on our conventional oil operations. Due to the contractual nature of the farm-in, I am not at liberty to give any additional details on it. I can tell you, and you have my assurance, that there is nothing else to come on this.

Operator

Next question comes from the line of Fai Lee with Odlum Brown.

Fai Lee - Odlum Brown Limited, Research Division

Just wanted to clarify something. There seems to be a general outlook for operating costs to decline for the remainder of the year, for most -- for Christina Lake, Foster Creek, Pelican Lake. Is that largely related to reduced workover activity? Or is there something else driving that?

Brian C. Ferguson

Yes, I think, particularly at Christina Lake, we will be ramping up volumes and we do not have any additional turnarounds planned. At Foster Creek, we do have a 1 week turnaround in September, and we are continuing to work off the backlog of these workovers and re-completions and things that we're doing. So I expect you'll still see some of that into the third quarter and then as we get our volumes up on a per-barrel basis then the cost should start coming down in the fourth quarter.

Fai Lee - Odlum Brown Limited, Research Division

Okay. And the electricity in Alberta seems to be pretty volatile. How -- I know you mentioned Foster Creek, but how sensitive are the -- is the impact on Christina Lake and Pelican Lake?

Brian C. Ferguson

Yes. So on a per-barrel basis, generally, our electricity runs -- let me just look here real quick, $0.88 to $1.50, somewhere in those kind of ranges, depending on volatility associated with the price. When we are able to run our own cogens at Foster Creek, we take that variability out of it and can keep that below $1-type numbers on a BOE basis. We are -- also at Foster Creek, as we do these additional expansions in F and G, we will be putting in cogens there so that should stabilize electricity prices for that facility on -- at Christina Lake on the way forward.

Operator

Next question comes from the line of Menno Hulshof with TD Securities.

Menno Hulshof - TD Securities Equity Research

I've just got a quick follow-up question on the RIN issue. You mentioned 5% impact, and I was just wondering if you could give us some more clarity on what that's in relation to?

Donald T. Swystun

Yes. Sorry, yes, this is Don. Yes, that would have been -- overall operating cash flow is the way I'd characterize that in terms of what that impact has began. It's hard to take that, if you want to take RINs as a higher cost, you have to also reflect, potentially, the higher value you would get on some of your products in terms of how that's going to be priced out in the marketplace in terms of refiners trying to recover some of that cost. So, as I said, there's a lag created in there where you may not see it quite coming back in the short-term, but we expect some of that, certainly, will get passed through to the consumer.

Menno Hulshof - TD Securities Equity Research

And that was in relation to 2013?

Donald T. Swystun

Yes.

Operator

[Operator Instructions] The next question comes from Paul McRae [ph] with Tower Bird [ph] Advisors.

Unknown Analyst

Yes, my question, actually, was partly answered. It had to do with the $63 million pre-exploration expense. That was a bit of a surprise to me and I'm wondering, for example, will we hear more about this with more clarity in the future? And maybe what kind of expense this was? Would it be G&G, for example?

Brian C. Ferguson

The -- this relates -- it is onetime, there is no further expense to come on this. We took a conservative approach and have fully expensed this quarter all of the costs associated with this particular farm-in opportunity. So with regard to that, don't want to get into specifics, I'm not allowed due to the contractual nature of the farm-in.

Operator

The next question comes from Dan Healing with Calgary Herald.

Dan Healing

I just had a couple of questions about tight oil plays. I believe John mentioned that $35 million more would be spent at the tight oil play in Southern Alberta. I was wondering where that is? And then also the $46 million exploration expense, I wonder if you can tell me where that is? And give me a little more color on that one.

John K. Brannan

So then -- the $35 million increase in investment here is in our existing lands in Southeast Alberta. And a lot of that is on fee lands that we have. And with regard to the $46 million, as we indicated in the news release, it has to do with a tight oil opportunity in Saskatchewan, but we're not going to get more specific than that because we do have other lands in Saskatchewan.

Dan Healing

Okay. And then on the Alberta part of it, can you say what formation or what specific area?

John K. Brannan

No. I prefer not to get into that detail due to the competitive situation.

Operator

There are no further questions in queue at this time. I'll turn the call back over to Mr. Brian Ferguson, President and CEO.

Brian C. Ferguson

Thank you for joining us today on this call, and the call is now complete.

Operator

This concludes today's conference call. You may now disconnect.

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