Kenney aims to put end to oil curtailment

The engine of the Alberta economy has been throttled back for the past 12 months because of government-imposed limits on oil production, but Premier Jason Kenney expects that “bitter pill” will come to an end in 2020.

In an interview, Kenney said the province intends to get off of the program that sets monthly output limits for the largest oil producers in Alberta. He sees “no realistic scenario” that would extend curtailment into 2021, although the situation will be closely monitored.

“I absolutely believe that we can no longer rely on curtailment, but we will keep a close eye on it,” Kenney said in a recent year-end interview.

“It’s our intention at this time next year not to use curtailment. It’s a bitter pill.”

The temporary initiative began one year ago under the former NDP government after oil prices in Western Canada crashed in late 2018 due to pipeline bottlenecks and rising production levels.

The limits were initially expected to be phased out by the end of last year, but were later extended by the UCP government through 2020 because of ongoing pipeline delays.

While curtailment has kept western Canadian oil prices from plunging again, it has also pushed new oilpatch spending to the sidelines.

Many industry players see curtailment as a necessary evil to keep the sector from being pounded by heavily discounted oil prices caused by a lack of transportation capacity.

However, integrated producers with refining operations have vehemently opposed the government’s interference in energy markets and want the program stopped.

At one point in late 2018, the price differential between West Texas Intermediate crude and Western Canadian Select heavy oil topped more than US$50 a barrel, costing petroleum producers, the province and the county an estimated $80 million a day.

In November 2018, U.S. benchmark crude prices averaged almost $57 a barrel, while Western Canadian Select oil sat at just $11 — a steep discount of $46 a barrel, according to provincial government data.

However, with curtailment restricting output for the 16 largest oil producers in the province to 3.79 million barrels per day (bpd), the price differential shrank to an average of $12 a barrel in October 2019.

Hal Kvisle, former CEO of Transcanada Corp. and current chairman of ARC Resources, said there’s little doubt curtailment has worked.

“It has been terrifically successful for the province, for the producers,” said Kvisle, one of the earliest proponents of the concept.

“I wish there hadn’t been a slowdown in capital spending, but my sense is it’s better than the alternative.”

Tristan Goodman, head of the Explorers and Producers Association of Canada, credits the province for properly managing a complex program over the past 12 months.

“This could have been a giant fiasco and it hasn’t been,” Goodman said.

“It’s worked exceptionally well and been very well managed on the part of the government to the benefit, quite frankly, of not only producers but Albertans.”

While the government slowly increased allowable production levels last year, the key question is still when will curtailment be scrapped?

With the unexpected delay in Minnesota of Enbridge’s Line 3 replacement project last spring — the pipeline moves oil from Alberta to Wisconsin — the province extended curtailment to run through 2020.

In November, the province also announced changes to allow producers to pump more oil if they add incremental crude-byrail shipments.

There are signs progress is being made on the energy transportation front, allowing takeaway capacity to catch up with oil production.

The province estimates the amount of crude moving by rail can increase from about 300,000 barrels per day to a “maximum logistical capacity” of 550,000 bpd over the coming months, Kenney said.

As well, optimization efforts on existing pipelines increased oil transportation capacity by 100,000 barrels per day in the latter part of 2019, and another 200,000 bpd is being added this year.

“We are going to be up several hundred thousand barrels per day, even before we get to the full commissioning of the Line 3 replacement” in the U.S., the premier said.

“We need to see the (oil) inventories come back down, we need to see we have got the market in balance ... and if we’re there, we’re good.”

From a producer perspective, Goodman said while more transportation capacity is expected this year, curtailment must be monitored closely before it’s phased out.

Kvisle believes the province should remain cautious before ending output quotas, given the potential consequences for the sector.

Kenney noted “one outlying factor” to ending curtailment in 2020 is the challenge of managing additional oil production in Alberta as it comes on stream this year.

Several oilsands developments are ready to start producing, while other projects could increase output volumes.

Analyst Kevin Birn of energy consultancy IHS Markit sees the potential for western Canadian export supply to increase by well over 300,000 barrels per day from the beginning of 2020 until the end of the year, depending on producer operations, curtailment levels and the availability of additional crude-by-rail infrastructure.

The key for Alberta is balancing the timing of additional production with increased pipeline and rail capacity.

“There is reason to be cautiously optimistic that western Canadian take-away capacity is going to increase over the course of 2020, and with it, supply,” Birn said.

“It will come down to whether the Alberta government feels sufficiently comfortable, in that the market will not oversupply on a sustained basis.”