Impact of Alberta temporarily curtailing oil production

Alberta Premier Rachel Notley announced in late 2018 that an 8.7% cut in oil production in 2019, some 325,000 b/d, would be needed to bolster sagging Canadian crude prices caused by rising oil sands production that had outstripped pipeline capacity and led to a storage glut. Cuts were to be reduced to 95,000 b/d once storage volumes returned to more ‘normal’ levels.

According to a new IHS Markit report, since the curtailment was announced in December, western Canadian crude price differentials have narrowed to a level much tighter than averaged in 2018. The heavy oil differential between Western Canadian Select (WCS) in Hardisty, Alberta, and West Texas Intermediate (WTI) at Cushing has averaged about $12/b. Mixed Sweet Blend (conventional light oil) has averaged less than $5/b beneath WTI, while Synthetic Crude Oil has averaged just over $1/b beneath WTI. This compares with $27/b, $12/b and $7/b beneath WTI in 2018, respectively.

IHS Markit expects 2019 Alberta production to average 3.4mn b/d, about 300,000 b/d less than its pre-curtailment outlook. ‘With a few exceptions, western Canadian supply available for export is generally exceeding pipeline takeaway capacity even with the completion of Enbridge Line 3 until additional pipeline can be brought online – the latter likely sometime in 2022,’ it reports. ‘The delay of the Enbridge Line 3 pipeline increases the importance and the call on rail. The estimated call on rail is highly sensitive to the productivity of oil production facilities and the state of provincial curtailment policy. Due to the delay of Line 3 – from late 2019 to late 2020 – the call on rail could crest over the winter of 2019/2020 between 400,000 b/d and 500,000 b/d, which is typically the high point of western Canadian output.’

The market analyst also notes that crude-by-rail remains critical for ensuring western Canadian crude market access and avoiding the extreme upstream price discounts experienced in late 2018. It estimates that crude-by-rail capacity should exceed 500,000 b/d late in 2019 – roughly capable of meeting anticipated demand. However, this estimate includes some rail capacity that was idled early in 2019 because of narrower price differentials. ‘There is risk that should some of this capacity face delays in ramp-up, there may be little room in the market to absorb any takeaway upsets,’ the report concludes.