Producers assess Alberta government-mandated oil production cuts

Jan. 21, 2019
Canadian oil companies reconsidered 2019 production guidance numbers in early January and reevaluated production strategies after Alberta’s government outlined a temporary production cut of heavy crude oil and crude bitumen.

Canadian oil companies reconsidered 2019 production guidance numbers in early January and reevaluated production strategies after Alberta’s government outlined a temporary production cut of heavy crude oil and crude bitumen.

The mandate, announced in December 2018, came after Heavy Western Canadian Select crude prices at Hardisty, Alta., dropped about $50/bbl lower than US light, sweet crude oil in New York. Effective Jan. 1, Alberta imposed an 8.7% production cut, or about 325,000 b/d.

Moody’s Investor Service said heavy crude prices rose after the curtailment announcement, but that Alberta crude prices will remain volatile and sell for a discount to oil futures on the New York Mercantile Exchange in 2019 and beyond. Moody’s said Alberta lacks enough long-term pipeline takeaway capacity.

Canada’s National Energy Board issued a report in late December saying Western Canada’s crude oil supply was 365,000 bbl above the amount of oil flowing into existing pipelines.

In addition, NEB is consulting with industry to prepare advice scheduled to be submitted in February to Alberta Minister of Natural Resources Amarjeet Sohi.

Available takeaway capacity on existing pipeline systems is estimated at 3.95 million b/d compared with 4.153 million b/d of available oil from the Western Canadian Sedimentary Basin for export. Only an estimated 3.788 million b/d flowed in the pipelines as of Dec. 27, NEB said.

Alberta Premier Rachel Notley on Dec. 2 announced the cuts, saying they would be phased out throughout 2019 to 95,000 b/d by Dec. 31.

In late 2018, Alberta officials revised the curtailment rules to adjust companies’ baseline production levels so new production still being ramping up would not be adversely affected.

Bloomberg reported Jan. 9 that an energy ministry spokesman said oil producers collectively will have to cut output by 325,000 b/d in February, the same as in January. The baseline for the production cuts is defined as the highest single month of production during a single-year period starting Nov. 1, 2017.

Companies respond

Canadian Natural Resources Ltd. said it has “the capability to adjust our 2019 capital spending budget,” as it monitors oil prices and the approval process for two export pipelines, Keystone XL and the TransMountain expansion.

Corey Bieber, Canadian Natural Resources chief financial officer, said the company has the flexibility in its 2019 budget to be “nimble in response to a volatile commodity market.”

Husky Energy Inc. said it reduced its capital spending plans to comply with Alberta government’s mandated oil production cuts. Husky plans to spend $3.4 billion in 2019.

“Husky continues to attain global pricing for the vast majority of our production,” said Rob Peabody, chief executive officer. “We are focused on curtailing production in the most efficient and cost-effective way possible.”

Husky is cutting spending in heavy oil and Western Canada plays. In the process of acquiring MEG Energy, Husky said it will provide a detailed 2019 production and capital guidance update in the first quarter. MEG shareholders had until Jan. 16 to tender their shares in the Husky offer.

Suncor Energy Inc. said it is working with the Alberta Energy Regulator “to manage and mitigate the unintended consequences of the curtailment orders on Suncor’s business.” Suncor had issued 2019 guidance numbers before the production-cut mandate.

“In the short term, the government of Alberta action has resulted in winners and losers in the market, shutting in valuable upgrading throughput and has made transporting crude oil out of the province by rail uneconomic,” Suncor said in a news release.

Cenovus Inc. also said the full-year impact of the mandated product cuts was not reflected in its 2019 guidance number published in December although it expects to achieve the production cuts in 2019.

Preliminary estimates indicate combined January crude bitumen and crude oil production to be 347,000 b/d, Cenovus said.

“Once Cenovus has additional details about the implementation and duration of the curtailment plan, the company will provide an update on its production outlook for the year,” Cenovus said. “Over the past year, Cenovus has demonstrated its ability to respond to low commodity prices by safely slowing production while continuing to inject steam and storing mobilized barrels of oil in its reservoirs.”