Curtailments and Line 3 delays prompt MEG and CNRL to stall on new oil sands output

Curtailments and Line 3 delays prompt MEG and CNRL to stall on new oil sands output

Both Canadian Natural Resources (CNRL) and MEG Energy warned this week that their respective oil sands expansions will likely be delayed due to a lack of egress capacity, which isn't likely to be resolved anytime soon.

The problem stems from Enbridge's delay in completing its Line 3 Replacement Project (L3R). Late last week, the company warned L3R will be pushed back from the end of this year to sometime in the second half of 2020, due to permitting delays in the state of Minnesota. 

Replacement of the 50-year old line would see export capacity increase by 370,000 bbl/day, something the Alberta government had been banking on in order to keep a lid on Canadian crude differentials.

Alberta's mandatory curtailment program, which took effect in January, was set to expire at the end of 2019, when L3R was planned to be in service. Enbridge's delay has led many to predict the provincial government will extend its curtailment order well into next year.

TWO OPERATORS MULL DELAYING NEW OUTPUT

MEG Energy CEO Derek Evans warned that start-up of the Christina Lake Phase 2B expansion will likely be pushed back. MEG has already spent $165 million on this latest phase of expansion, but says there's no point completing the work if there isn't more pipeline capacity.

Phase 2B will require another $75 million to complete, and was originally forecasted to be up and running sometime in the first half of 2020. Once completed, the facility’s output would be boosted 13% to 113,000 bbl/day. 

Meanwhile over at CNRL, the company’s latest 40,000 bbl/day in-situ expansion, Kirby North, is expected to be completed before the end of this summer, about 6 months ahead of schedule. However, the company says it isn't in a hurry to start-up the SAGD facility. Bitumen production is expected to commence sometime in the fall, reaching nameplate capacity towards the end of next year.

CNRL may also delay the start of new wells at its Primrose operation near Cold Lake, which would see another 26,000 bbl/day of heavy oil brought online. CNRL president Tim McKay confirmed the company's curtailment order from the province currently amounts to 95,000 bbl/day of lost production.

CANADIAN LIGHT AND HEAVY DISCOUNTS NARROW CONSIDERABLY

The discounts on Canadian light and heavy oil widened to almost US$50 and US$40 a barrel, respectively, last October. The blow-out was attributed in record production out of Alberta, which collided with a heavy refinery maintenance season in the US Midwest. The region buys about two-thirds of Canada's total crude oil exports. 

Alberta's production cuts and a ramp-up in crude-by-rail exports have narrowed those discounts to about US$10 for heavy crude and just US$4 for light oil. Crude exports by rail jumped from just 200,000 bbl/day last summer to over 350,000 bbl/day in December, also helping take the pressure off the pipelines.

Last month, the province announced the leasing of another 4,400 rail cars at a cost of $3.7 billion. The move will add another 120,000 bbl/day of rail export capacity by next year.

CRUDE-BY-RAIL ENTHUSIASM STARTS TO WANE

While many producers, including MEG and Cenovus Energy, have signed binding contracts for crude-by-rail exports, other operators, such as Imperial Oil, have abandoned the practice completely.

Railing crude to the Gulf Coast, where heavy oil prices are near par with WTI, costs about $25 a barrel, about double the current spread. The narrow differential between WTI and Western Canadian Select has ironically forced crude off the rails and back onto pipelines.

STILL WAITING FOR MORE PIPELINE SPACE

According to the National Energy Board (NEB), Canada's total crude production is expected to dip 2% this year to 4.1 million bbl/day, its first drop since the 2008/2009 financial crisis. Excluding condensate, Canada averaged 4.18 million bbl/day in 2018, peaking at a record 4.4 million bbl/day in August 2018.

Western Canada, primarily Alberta, accounts for about 4 million bbl/day, well in excess of the country's pipeline capacity. Excluding NGLs and products, Canada's five major export pipelines have a total crude capacity of about 3.4 million bbl/day. Exports to the US hit a record high of 3.8 million bbl/day last November, suggesting about 400,000 bbl/day was forced onto trucks and rail cars.

Alberta's producers are still awaiting a final go-ahead from the federal government on the Trans Mountain Expansion, which was sent back to the NEB for reassessment last September. The federal regulator says it stands behind its original approval of the project, but the Trudeau Liberals have been silent so far on how it plans to move forward.

As for Enbridge's L3R, the company says it plans to release a more detailed construction schedule shortly, with a new in-service date. At best, the expansion would be ready by early fall 2020.

NEW PARTY, MORE UNCERTAINTIES

The province's upcoming election has added more uncertainty to the horizon. United Conservative Party (UCP) Leader Jason Kenney has vowed to scrap the province's rail agreements with CN and CP Rail, but says he supports the curtailment program. Kenney also promises to be much more confrontational with the federal government, and has even called for cutting off oil shipments to BC, something that would likely cause the differentials to spike again.

Barring a major turn of events in the next few months, the UCP is expected to win the next election by a landslide.

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