Alberta boosts oil production quotas, and pins hopes on more crude-by-rail exports

Alberta boosts oil production quotas, and pins hopes on more crude-by-rail exports

The Government of Alberta raised its oil production quota by 10,000 bbl/day for the months of November and December. Factoring in the new "enhanced" plan, which excludes the first 20,000 bbl/day of output, the province's production cap will reach 3.81 million bbl/day in December, up 25,000 bbl/day from the beginning of the year.

ALBERTA OIL PRODUCTION LIMITS

To put that number into context, the province produced a record 3.73 million bbl/day last November, including condensate volumes.

No word yet on the end of curtailment

Speaking to investors in New York last week, Alberta Premier Jason Kenney hinted he may allow oil producers to exceed their output quotas, provided those extra barrels are shipped by rail. The premier says he is making progress on his promise to divest the province's crude-by-rail contracts, which were signed by the previous NDP government just before leaving office. Kenney says he has received 16 bids so far, but did not provide any further details.

According to the premier, Alberta has a crude loading capacity of 500,000 bbl/day, of which only 150,000 bbl/day is being used, due in part to the relatively narrow differential between heavy oil prices in Alberta and the US Gulf Coast (USGC). 

Crude-by-rail margins iffy at best

While the Western Canadian Select (WCS) discount to WTI has been hovering around US$13 a barrel for much of September, the spread in heavy oil prices between Alberta and the USGC has been averaging less than US$10, which likely doesn't cover the cost of railing crude all the way to the Gulf Coast.

After being stagnant for several months, Statistics Canada reported a 26,000 bbl/day increase in crude-by-rail exports to the US, rising to 313,000 bbl/day in July. StatsCan volumes include crude exported out of Saskatchewan, and copious volumes of diluent, which can account for as much as one-third of total volumes.

About two-thirds of those exports are destined for the Gulf Coast (PADD 3), which suffers from a serious shortage of heavy oil due to the banning of crude imports from Venezuela.

Crude export volumes by rail peaked at about 350,000 bbl/day late last year, just as the heavy oil discount blew-out to unprecedented levels. WCS prices in Alberta averaged just under US$23 in October and November 2018, while the same benchmark sold for almost US$63 a barrel in Houston. The US$40 spread made crude-by-rail very lucrative, considering an average shipping price of around $15 to $20 a barrel.

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