Alberta’s plan to boost the price Canadian heavy crude by eliminating a glut via mandatory production curtailments has created an unintended consequence that has some fossils crying foul: It’s driven prices high enough to make it tougher for producers to ship oil by rail.
“Two months after the provincial government announced the cuts, crude-by-rail shipments are declining even as pipelines remain at or near capacity,” Bloomberg News reports. “Rail volumes fell 56% last week compared with three weeks earlier, after setting a record in December,” the news agency adds, citing data from Genscape Inc., which tracks crude-by-rail loadings at various Western Canada terminals.
Executives at both Suncor Energy and Imperial Oil say the plunge is a direct result of the production curtailment. For western Canadian producers, rail economics demand a Canadian crude differential against American crude of “between US$15 and US$20 a barrel,” asserted Imperial CEO Rich Kruger during an analyst call last week.
But with production curtailed, reports Bloomberg, “Western Canadian Select’s discount to the U.S. benchmark narrowed to less than US$7 a barrel last month, which isn’t enough to cover some pipeline shipments to the U.S. Gulf Coast, and far too little to cover the cost of rail.”
The Notley government has responded to industry concerns by easing curtailment by 75,000 barrels per day, but spokesperson Michael McKinnon said the basic strategy was still the right thing to do, adding that officials expect the price differential “to settle at a more sustainable level.”
The government’s objective “is and always has been to match production levels to what can be shipped using existing pipeline and rail capacity, while encouraging a reduction in storage levels,” he added. “While we’re not out of the woods yet, this temporary measure is working,” with crude oil inventories down five million barrels since curtailment began.
Citing data from Paris-based Kayrros SAS, Bloomberg reports that “stockpiles at the Canadian oil hub of Hardisty, Alberta fell 2.42 million barrels between January 16 and 28 to the lowest level since November 2017.”
And it isn’t as though Alberta fossils are presenting a united front on the curtailment plan: While Suncor and Imperial are furious at what they view as “government overreach that would harm investor confidence,” reports Bloomberg, Cenovus Energy Inc. and Canadian Natural Resources Ltd., among others, have lined up behind the policy.