Pipeline delays force Premier Kenney to extend curtailment into 2020

Pipeline delays force Premier Kenney to extend curtailment into 2020

Due to ongoing pipeline delays, the Alberta government confirmed plans to extend its curtailment program through the end of 2020. The program will be updated to provide more flexibility, including more advance notice and doubling of the base limit.

Under the old program, the first 10,000 bbl/day of oil are excluded from monthly quotas. That limit has now been doubled to 20,000 bbl/day. Under the new formula, production limits for the month of October will rise by about 25,000 bbl/day.

There are over 300 oil producers in Alberta. Under the new program, only 16 companies are affected, down from 29 producers under the previous limits. Producers will now be given 60 days notice of changes to production quotas. 

ADDING UP TAKEAWAY CAPACITY

Alberta produces about 3.5 million bbl/day of oil, more than half in the form of heavy bitumen, which requires significant volumes of diluent for pipeline transportation. Almost 600,000 bbl/day of crude is refined within the province.

Over 3 million bbl/day of Alberta’s production is destined for US customers, while an estimated 500,000 bbl/day is sold to refineries in Saskatchewan, Ontario, Quebec and BC. Takeaway capacity out of Western Canada by pipeline is currently just over 4 million bbl/day.

Takeaway by rail has risen to 300,000 bbl/day, and could potentially rise further. Rail volumes are primarily destined for the US Gulf Coast (USGC), where spot prices for heavy oil are the most favourable.

The government says without curtailment quotas, the province's production would exceed takeaway capacity by 150,000 bbl/day, which would translate into a much higher heavy oil discount.

THE DOWN SIDE TO CURTAILMENT

Ironically, the economics of crude-by-rail become less attractive as Alberta's oil prices get closer to the US benchmark. The heavy oil discount, which represents the price difference between Western Canadian Select (WCS) in Hardisty and West Texas Intermediate (WTI) in Cushing, currently sits at about US$13/bbl. 

However, WCS prices in the USGC are currently only US$11/bbl higher than Hardisty, making crude-by-rail economics marginal at best. Although many large producers, including Imperial and Cenovus, had committed to shipping more by rail, volumes were reduced dramatically when the USGC premium disappeared this past January.

Alberta's energy ministry says the program has been extended to the end of 2020 for now, but could be terminated earlier "as required."

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