CNRL calls on Alberta to implement production quotas, OPEC style

CNRL calls on Alberta to implement production quotas, OPEC style

Canadian Natural Resources (CNRL) Executive Vice-Chairman Steve Laut is asking the Alberta government to consider putting a cap on production, in light of sky-high price differentials for Canadian crude. Laut says former Alberta Premier Peter Lougheed curtailed volumes in the 1970s and 1980s in order to manage pipeline space and "ensure Albertans got a fair price" for their oil.

The discounts on Canadian Light and Edmonton Condensate blew out to record highs this week, sending prices plunging back to the lows of early 2016, when West Texas (WTI) and Brent were trading closer to US$30 a barrel. An abnormally-wide discount on Canadian heavy crude sent Western Canadian Select to a low of just US$18 a barrel this week, a whopping 70% discount to WTI.

Alberta's energy ministry says a quota system would be far too complicated to implement. RBC Capital Markets has called on the province to consider a royalty holiday, which would take almost 200,000 bbl/day of crude off Canadian oil markets and drain over 7 million barrels from storage. That request was also rejected by the province.

The wide discounts have yet to dent output from Alberta. The province produced a record 3.7 million bbl/day in August (the latest available figures), up over 500,000 bbl/day from the fall of 2017, with many of those incremental barrels headed for the storage tanks as all export pipeline are operating at full capacity.

There are a few exemptions, however. CNRL says it drilled fewer wells in the third quarter, and plans to shut in about 50,000 bbl/day of heavy oil in November and December. Earlier this week, Cenovus also announced plans to slow production at its Foster Creek and Christina Lake in-situ operations. The company says both facilities are operating at reduced rates, but promises to adjust production if prices recover. CEO Alex Pourbaix calls the current pricing environment a “massive destruction of value.”

The Petroleum Services Association of Canada (PSAC) is also warning that low oil ands gas prices in Canada will reduce drilling demand by about 5% in 2019, translating into a $1.8 billion reduction in capital spending. 

Looking ahead, analysts at Scotiabank say things will get better in 2019, as Midwest refineries return to normal rates, crude-by-rail capacity increases and Enbridge's Line 3 expansion gets completed, which should bring the heavy oil discount from the current US$45 a barrel to less than US$25. Although crude-by-rail volumes are increasing, refineries in the US Midwest are still running at just 75% of capacity due to an unusually heavy maintenance turnaround season, reducing demand for Canadian crude. 

Western Canadian Select and Canadian Light averaged just US$27 and US$44 a barrel for the month of October, versus Brent and WTI averages of US$80 and US$70, respectively.

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