Alberta oil cuts may backfire as rail shipments collapse

Alberta oil cuts may backfire as rail shipments collapse
Alberta’s effort to alleviate a crude glut through mandatory production curtailments may be backfiring, as Canadian heavy crude has become too expensive to ship by rail.

Two months after the provincial government announced the cuts, crude-by-rail shipments are declining even as pipelines remain at or near capacity. Rail volumes fell 56 per cent last week compared with three weeks earlier, after setting a record in December, according to Genscape Inc., which monitors crude-by-rail loadings at some of the larger terminals in Western Canada.

“The rail economics are seriously damaged, and a lot of the rail movements are stopping or have stopped,” Suncor Energy Inc. Chief Executive Steve Williams said Wednesday on a conference call with analysts. “That’s going to have the opposite impact to what the government wants.”

Last week, Imperial Oil Ltd.’s Chief Executive Rich Kruger said that crude by rail shipments out of its own Edmonton terminal would ground to near zero this month from an already reduced 90,000 barrels a day in January.

“We absolutely have seen a drop in rail loadings recently,” said David Arno, oil analyst at Genscape. “With the recent strength in Canadian crude differentials due to the production curtailment, it’s tough for many Western Canadian shippers to make crude-by-rail economic.”

The production curtailments have helped Canadian heavy crude recover from record low prices caused by swelling output and too few pipelines, but new problems have emerged. Western Canadian Select’s discount to the U.S. benchmark narrowed to less than $7 (U.S.) a barrel last month, which isn’t enough to cover some pipeline shipments to the U.S. Gulf Coast, and far too little to cover the cost of rail.

Too Expensive

Last week, the government eased the mandate by 75,000 barrels a day after complaints by some oil producers. Still, heavy crude continues to trade at a discount of less than $10 a barrel. To make rail economic, it needs to be between $15 and $20 a barrel, Imperial Oil’s Kruger said.

Alberta’s government expects the price differential “to settle at a more sustainable level,” spokesman Michael McKinnon said by email. “Our goal is and always has been to match production levels to what can be shipped using existing pipeline and rail capacity, while encouraging a reduction in storage levels,” he said. “While we’re not out of the woods yet, this temporary measure is working.”

Since announcing the curtailment, crude inventories have fallen 5 million barrels to 30 million barrels, the provincial government said last week. Stockpiles at the Canadian oil hub of Hardisty, Alberta, fell 2.42 million barrels between Jan. 16 and Jan. 28 to the lowest level since November 2017, according to Kayrros SAS, an energy data provider based in Paris.

Alberta oil producers have struggled to get their crude to market as new pipelines are blocked by court decisions and opposition from environmental groups. While not unprecedented, Alberta’s oil curtailments were seen as an extraordinary step in a free-market economy. Suncor and Imperial both opposed the curtailment program as government overreach that would harm investor confidence. Other companies, including Cenovus Energy Inc. and Canadian Natural Resources Ltd. supported them as necessary.
Read more on Toronto Star
News Topics :
Similar Articles :
Albertans of a certain vintage will remember the finer moments of Stampede Wrestling when the Masters of Disaster or British Bulldogs would deliver a sudden one two blow to an opponent....
CALGARY—Maintenance at oil sands mines may achieve what Alberta’s mandatory production curtailments have so far failed to accomplish drain Western Canada’s storage tanks. Inventories in the region were 34 million barrels...
Alberta’s government maintained its mandated oil curtailment in February at the same level as January even as Canadian heavy oil prices surged. The province’s oil producers will collectively have to...
Alex Pourbaix, CEO of Cenovus, was photographed in the company s Calgary offices on Wednesday December 19, 2018. Gavin Young / CALwp The head of Cenovus Energy believes it’s far...
Alberta increased the amount of crude its letting producers pump for a second time after local oil prices surged and inventories continued to decline. The output cap was raised by...