Edmonton Journal - - FRONT PAGE - CHRIS VARCOE Chris Varcoe is a Cal­gary Her­ald colum­nist. cvar­[email protected]­media.com

CNRL calls for eas­ing of cur­tail­ment

As gov­ern­ment-man­dated oil cur­tail­ment drags on into a sec­ond year, it’s time to con­sider lift­ing provin­cial quo­tas on con­ven­tional crude out­put, says Canada’s largest petroleum pro­ducer.

Such a step would en­cour­age more drilling in Al­berta, al­low com­pa­nies to spend more to in­crease out­put and cre­ate ad­di­tional work in the oil­patch, Tim Mckay, pres­i­dent of Cana­dian Nat­u­ral Re­sources, said Thurs­day.

“If you look at the vol­umes pro­duced on the con­ven­tional side in Al­berta … pro­duc­tion is down roughly about 50,000 bar­rels per day,” Mckay said in an in­ter­view after the com­pany re­leased third-quar­ter re­sults.

“From my per­spec­tive, it would be nice to see, po­ten­tially, cur­tail­ment come off the con­ven­tional side of the busi­ness, so that we could drill more wells across Al­berta ....

“It cre­ates jobs in places like Taber and Bon­nyville and Dray­ton Val­ley.”

The sugges­tion from the coun­try’s largest petroleum pro­duc­ers — one of the ear­li­est and most vo­cal sup­port­ers of provin­cial cur­tail­ment — is sure to draw at­ten­tion, both in­side gov­ern­ment and across the oil­patch as it heads into the win­ter drilling sea­son.

The ra­tio­nale for the idea is based on sev­eral fac­tors, in­clud­ing ramp­ing up out­put as 225,000 bar­rels per day ( bpd) of in­cre­men­tal trans­porta­tion ca­pac­ity out of West­ern Canada “is tar­geted to be added over the near term,” ac­cord­ing to the com­pany.

Mckay cites in­creased pipe­line ca­pac­ity on En­bridge’s Line 3 sys­tem on the Cana­dian side of the bor­der, which is ex­pected to be avail­able next month, as well as the planned op­ti­miza­tion of the Ex­press and TC En­ergy’s Key­stone pipe­lines next year.

Cana­dian Nat­u­ral’s stake in the North West Stur­geon Re­fin­ery will boost oil con­ver­sion ca­pac­ity by 40,000 bpd for the com­pany, once the long-de­layed fa­cil­ity be­gins pro­cess­ing di­luted bi­tu­men.

Mean­while, the amount of oil be­ing ex­ported by rail is likely headed higher in the com­ing months.

Crude-by-rail ship­ment could sig­nif­i­cantly in­crease after the prov­ince an­nounced last week it would let com­pa­nies fac­ing provin­cial out­put quo­tas re­ceive spe­cial pro­duc­tion al­lowances, be­gin­ning in De­cem­ber — if they add in­cre­men­tal rail vol­umes.

The Ken­ney gov­ern­ment is ne­go­ti­at­ing with com­pa­nies that would see them take over Al­berta’s own crude-by-rail con­tracts (signed by the for­mer NDP gov­ern­ment) that are ca­pa­ble of mov­ing another 120,000 bpd.

The cen­tral is­sue for the prov­ince is how to get more pro­duc­tion, spend­ing and em­ploy­ment go­ing as cur­tail­ment con­tin­ues into 2020, with­out trig­ger­ing a steep price dis­count for Al­berta oil be­cause of too much out­put and not enough pipe­line ca­pac­ity.

The price dif­fer­en­tial be­tween bench­mark U.S. crude and West­ern Cana­dian Se­lect heavy oil has widened re­cently, clos­ing at US$22.24 a bar­rel on Wed­nes­day, due to a leak on the Key­stone pipe­line in North Dakota last week.

Tris­tan Good­man of the Ex­plor­ers and Pro­duc­ers As­so­ci­a­tion of Canada said he’d sup­port fur­ther con­ver­sa­tions about ex­empt­ing con­ven­tional pro­duc­tion from cur­tail­ment, so long as the price dif­fer­en­tial is pre­served.

Re­cent news from the in­dus­try on the 2020 spend­ing front hasn’t been en­cour­ag­ing.

Mckay ex­pects Cana­dian Nat­u­ral’s cap­i­tal spend­ing in 2020 will likely be con­sis­tent with this year’s level of $3.8 bil­lion.

“The way we see it to­day, it would be flat­tish be­cause, with the un­cer­tainty with the cur­tail­ments and pric­ing and such, I don’t see any real rea­son that we would change it up or down at this point,” he added.

Ac­cord­ing to provin­cial data, about 480,000 bar­rels of con­ven­tional oil per day were pro­duced in Septem­ber, with 90,000 bpd flow­ing from op­er­a­tors that have re­ceived cur­tail­ment or­ders.

“If you look at the con­ven­tional busi­ness, it’s a very good job cre­ator in Al­berta,” added Mckay.

“I see there is an op­por­tu­nity for the gov­ern­ment to come off cur­tail­ment on the con­ven­tional side, stim­u­late the Al­berta econ­omy and cre­ate jobs.”

A gov­ern­ment source said the prov­ince is con­sid­er­ing sev­eral op­tions to en­cour­age con­ven­tional oil drilling. An an­nounce­ment could oc­cur soon.

More drilling is crit­i­cal for the oil­field ser­vices sec­tor and there are al­ready signs of smaller cap­i­tal pro­grams be­ing de­ployed for 2020, which means less work and fewer jobs.

On Thurs­day, Seven Gen­er­a­tions En­ergy said its cap­i­tal pro­gram next year will be

$1.1 bil­lion, down $150 mil­lion — or 12 per cent — from 2019.

Tour­ma­line Oil Corp., which ex­pects to spend $1.035 bil­lion this year, ap­proved a re­duced cap­i­tal bud­get of be­tween $900 mil­lion and $925 mil­lion for next year. “That’s a func­tion of con­tin­u­ally im­prov­ing cap­i­tal ef­fi­cien­cies,” CEO Mike Rose said Thurs­day on a con­fer­ence call.

Last month, the Petroleum Ser­vices As­so­ci­a­tion of Canada fore­cast only 4,500 oil and gas wells would be drilled across the coun­try next year, a 10 per cent drop from 2019 lev­els.

Mark Scholz, head of the Cana­dian As­so­ci­a­tion of Oil­well Drilling Con­trac­tors, said his mem­bers are con­cerned about re­duced ac­tiv­ity dur­ing the tra­di­tion­ally busy win­ter drilling sea­son, not­ing every ac­tive rig em­ploys 145 to 200 peo­ple.

The sec­tor has seen di­rect and in­di­rect em­ploy­ment tum­ble from about 96,000 jobs five years ago to around 34,000 this year.

The as­so­ci­a­tion would sup­port the idea of re­mov­ing cur­tail­ment lim­its on con­ven­tional pro­duc­tion if it doesn’t sig­nif­i­cantly im­pact do­mes­tic oil prices, but Scholz be­lieves other mea­sures are needed to get more peo­ple work­ing this win­ter.

“We may need a com­bi­na­tion of (things) to save the 2020 drilling sea­son,” he said.

“Los­ing a win­ter drilling sea­son is just go­ing to com­pound that chal­lenge and we’re try­ing to find ways to keep peo­ple en­gaged and our rigs warm.”

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