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Alberta adjusts crude curtailment program

The provincial government has made major changes to timeframes and volumes

Alberta has extended the sunset clause of its crude curtailment program by a year to 31 December 2020 and has doubled the upper threshold for oil producers' exemption to 20,000bl/d.

The province is attempting to achieve multiple goals with these changes—keeping western Canadian crude prices at relatively high levels, supporting financially-strapped smaller producers, encouraging currently lacklustre capital spending and increasing the major producers to take over 120,000bl/d of crude-by-rail contracts signed by the previous government.

Programme extension

"Extending curtailment is far from ideal, but it remains necessary," says Alberta Energy Minister Sonya Savage. "Thanks to [federal prime minster Justin] Trudeau's anti-Alberta actions, we do not have a choice. The simple fact remains that we need more pipelines. Without sufficient access to markets for our oil, the ability to limit production remains necessary through 2020."

The government mandated cuts were supposed to run only for the 2019 calendar year. But Canadian midstream Enbridge Energy's Line 3 Replacement project, which is to add 370,000bl/d of incremental pipeline capacity to the US Midwest, is at least another year behind schedule because of ongoing permitting and legal issues in Minnesota.

In addition, less western Canadian oil is presently being moved to market by rail than anticipated. Since the Alberta government adopted curtailment, the discount held by Western Canadian Select (WCS) to the benchmark West Texas Intermediate (WTI) and has tended to be too narrow—less than $15/bl, compared to $43/bl prior to curtailment—to make it economic to ship oil to more distant markets, such as the US Gulf Coast. In an attempt to rectify this issue, the volume of curtailed crude has been cut roughly in half from 325,000bl/d in January to an estimated 150,000bl/d today—effectively trying to boost supply to push WCS prices lower again.

Base exemption

The Alberta government is trying to kill three birds with one stone by increasing the base exemption from 10,000bl/d to 20,000bl/d as of 1 October. The increased limit should support smaller producers, allow them to boost crude production and revenue.

"Extending curtailment is far from ideal, but it remains necessary," Alberta Energy Minister Sonya Savage

It also has the potential to boost capital spending in Alberta's oil industry. An additional 13 producers will have an opportunity to increase production as of the beginning of October, leaving just the 16 largest crude producers in the province under curtailment—out of more than 300 in total. Smaller producers, if curtailment is not constraining their oil sales, may be more likely to roll revenue into new drilling programmes.

In contrast, major Alberta oil producers have been restricting capital spending and either paying down debt or making further acquisitions since regional crude prices were boosted by government mandated cuts. None of the province's 16 largest crude producers were among the top 10 most active drillers in Western Canada as of late August.

The Kenney government is also considering using so-called crude curtailment 'credits' as a sweetener to get oil producers to provide better terms for taking over C$3.7bn ($2.8bn) of crude-by-rail contracts the previous Alberta government signed with rail firms Canadian National and Canadian Pacific shortly before losing power in April.

Confirmation that curtailments will last another year should increase the attractiveness for those firms pricing above the new threshold to sign up to rail capacity contracts that will allow them relief from being curtailed. And there is a definite logic to the plan—on receipt of these credits, producers can increase output, which should in turn put downward pressure on the WCS price at Hardisty, improving the economics of moving it by rail to premium markets further south.

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