Alberta’s 'drastic, dramatic' oil curtailment has made crude-by-rail uneconomic

In December, Alberta Premier Rachel Notley announced large oil producers would need to scale back production by a total of 325,000 barrels of oil per day in a bid to lift Western Canada Select heavy oil prices, which at the time were subject to crippling USD $40-per-barrel discounts relative to U.S. benchmarks.

Canadian oil companies need a discount of between USD $15 per barrel and USD $20 per barrel to justify the cost of shipping oil by rail but the discount has been below that range since the order came into effect. Last Thursday, AltaCorp Capital data shows the discount between WCS and West Texas Intermediate is an average of USD $9.44 per barrel.

Imperial Oil, which has invested in refineries that can profit from the spread between heavy blends and gasoline or diesel prices, opposed the order, alongside integrated companies such as Suncor Energy Inc. and Husky Energy Inc. On Friday, Imperial criticized the Alberta government for forcing companies to curtail oil production in the province, calling the move a “drastic, dramatic manipulation in the market” that has made crude-by-rail shipments uneconomic.

With the stroke of a pen, the government began picking winners and losers,” CEO Rich Kruger said, adding curtailment affects 28 out of 421 producers in the province. Most significantly, he said the curtailment order would have the unintended consequence of keeping more oil in storage because companies such as Imperial would ship less on railway cars. Output cut has caused Imperial to reconsider the timing of its CAD $2.6-billion Aspen oilsands project.

We think investor confidence in Canada is damaged at a time when we already had confidence issues in Canada,” Mr. Kruger said, adding the curtailment order has caused Imperial to reconsider the timing of the $2.6-billion Aspen oilsands project it green-lighted last year.

Before the curtailment order came into effect, Imperial was shipping about half of the total volume of crude on railway cars out of Canada. It shipped 168,000 bpd on rails in December but has since “unwound” its crude-by-rail volumes. The company shipped an average of 90,000 bpd on rails in January and expects to ship “at or near” zero barrels on railways cars in February. “Crude by rail should be helping to alleviate this situation in the province but because of the drastic, dramatic manipulation in the market, takeaway capacity is now being idled,” Mr. Kruger said.

Spokesperson for Alberta Energy Minister Marg McQuaig-Boyd, Mike McKinnon, said Friday, “The decision to temporarily limit oil production was applied fairly and equitably, and has been instrumental in saving jobs across the energy sector. We expect the differential to settle at a more sustainable level and we continue moving forward with long-term solutions like our investment in rail and our continued fight to build pipelines.”

Many Calgary-based oil companies without downstream refineries supported the decision to curtail oil production in a bid to lift WCS prices, and therefore provincial government royalty revenues. On Wednesday, the province eased the curtailment order by 75,000 bpd, saying the order has had the effect of reducing the amount of crude in storage in the province by 5 million barrels to a total of 30 million barrels.

Mr. Kruger said the curtailment order has shaken his confidence in the market because there is no guarantee a similar order can’t be issued again. “We’re re-evaluating our assumptions,” Kruger said, adding that the timing for the company’s 75,000 bpd Aspen oilsands project could be reconsidered in light of the order.