OIL CURTAILMENT EXTENDED AS EXEMPTIONS EXPANDED
The Alberta government continued Tuesday to fine-tune its program to curb oil production, while extending the province’s controversial curtailment plan so it can run throughout 2020.
The UCP government will also double the exemption given to companies so they can produce up to 20,000 barrels per day before the limit kicks in, reducing the number of operators affected by mandatory quotas almost in half.
It’s all part of the government’s ongoing efforts to match oil production with take-away capacity out of the province, which is currently out of step to the tune of about 150,000 barrels per day.
“I am the very last person who wants to see curtailment continue but ... under the current context it’s necessary,” Energy Minister Sonya Savage said in Calgary. “We have to do this in the short term because we have a lack of pipeline capacity.”
The decision, while not unexpected, was required after Enbridge’s Line 3 replacement project — the next major increase to pipeline capacity out of Western Canada — was delayed earlier this year until the second half of 2020. Curtailment has divided parts of the industry, and left the province grappling to strike the right balance on managing production with constrained pipelines and crude-by-rail shipments. It’s no easy feat, akin to trying to set the thermostat in your house in the middle of a daytime heat wave, while enduring a cold snap each night.
The province is restricting production to ensure the price discount on Western Canadian Select heavy crude remains relatively low after it spiked last fall.
However, it doesn’t want to clamp down on production by more than what’s necessary, nor shrink the price discount so low that companies stop shipping oil by rail to export markets, as happened earlier this year.
“It’s a tough one … an incredibly difficult decision,” said Kevin Birn, an oilsands analyst with consultancy IHS Markit in Calgary.
“They are trying to find that sweet spot on the pricing side. The other side of it is, what will happen to (oilpatch) investments?”
Those are key considerations for the Kenney government, which announced the most significant change to curtailment since the previous NDP regime first introduced the temporary policy, which was slated to expire at the end of December.
The province ordered oil production to be reduced by 325,000 bpd at the start of this year — curbing almost nine per cent of provincial output — to 3.56 million barrels per day.
The mandatory cuts affected 29 operators, as the first 10,000 barrels of daily production were exempted from the calculation, a move designed to protect junior producers.
The program was controversial in the industry, backed by many players but opposed by integrated producers Husky Energy, Suncor Energy and Imperial Oil, which viewed the action as interfering in an open energy market.
But there were plenty of reasons to act.
A full pipeline network and a glut of oil triggered a huge discount for Western Canadian crude prices last fall.
The price difference between benchmark West Texas Intermediate oil and WCS heavy crude averaged US$19.30 a barrel last August, but skyrocketed to average $45.93 a barrel in November.
The province estimated the loss of revenue, taxes and royalties was costing the country up to $80 million a day at the time.
After Alberta announced its curtailment plan, the differential tumbled sharply, and was hovering at US$13.30 barrel on Tuesday, according to Net Energy.
But the discount fell so deeply earlier this year that some companies scaled back on the amount of oil shipped by train.
Imperial Oil reduced its crudeby-rail shipments to almost zero in February, saying it required a price differential of $15 to $20 a barrel to justify the additional cost of shipping oil by train from Alberta to the U.S. Gulf Coast.
The prospect of crude-by-rail shipments falling led to several upward production adjustments by the province.
In August, companies are allowed to pump out 3.74 million barrels per day and add another 20,000 bpd next month. The sector can then increase output to 3.79 million bpd in October when the changes kick in.
Reaction to Tuesday’s announcement underscored the divisions within the oilpatch over the policy.
The president of the Explorers and Producers Association of Canada was pleased with the extension of curtailment, saying it provides certainty for companies while protecting the province’s interests.
“Practically, this is a positive move,” said Tristan Goodman.
“It’s a difficult balancing act and the government has tried the best they can to hit that in a positive way.”
Whitecap Resources CEO Grant Fagerheim noted the doubling of the base production exemption to 20,000 bpd means his company will no longer have to restrict output in Alberta and can potentially spend more to grow in the province next year.
“This is the right thing to do,” Fagerheim added. “At this particular time, they are reducing curtailment as aggressively as they can without overshooting.”
But Husky Energy said it still believes a market-based approach was a better option.
“We had hoped the government would outline a clear exit strategy ... the continuing uncertainty as to when and how quotas will end does not boost investor confidence in this province,” Husky’s Kim Guttormson said in a statement.
“We also believe the lack of an exit strategy will hinder the economics of oil by rail.”
Ben Brunnen of the Canadian Association of Petroleum Producers said extending curtailment will affect future capital spending in Alberta.
“It is absolutely limiting any growth investment plans that any companies would consider, simply because there’s no way to produce it,” he said.
But it appears curtailment is here to stay for a while longer, although Savage pointed out the one-year extension doesn’t necessarily mean it will be used for that length of time.
Some larger producers, including Cenovus Energy and Suncor Energy, want the province to let companies ratchet up production above their curtailment levels if they add incremental crude-byrail capacity. The issue is still under consideration by the province.
Jackie Forrest, senior director with the ARC Energy Research Institute, says the idea is worth considering.
“Creating a policy that would incent (more oil) on rail cars would be positive … so not only are we getting the highest price possible, we are getting the highest volumes possible,” she said.