Alberta extends oil curtailment for another year

Alberta is increasing the oil curtailment limit from 10,000 to 20,000 barrels per producer per day, and extending the program to December 2020.

The policy, which was originally implemented by the previous NDP government in January to correct an oversupply of oil in the province, was initially supposed to end this December.

The new UCP government cited factors like the Line 3 pipeline delay as contributing to its decision.

"While curtailment is far from ideal, under the current context it is necessary," Energy Minister Sonya Savage said in Calgary on Tuesday. "But we have to do this in the short term because of a lack of pipeline capacity."

Savage said the extra time will offer greater market certainty, and the increased limit will aid smaller producers without having a significant impact on overall provincial output. 

It will reduce the number of producers affected from 29 to 16, out of a total of 300, Savage said. 

'A cautious move'

Kent Fellows, an economist with the University of Calgary's school of public policy, said the announcement doesn't come as a surprise.

"We haven't seen major movements on pipeline capacity expansion, which is the main driver. Also, I think a lot of the industry is still waiting to see how the whole rail issue is going to play out," Fellows said.

"I think this is probably a cautious move to keep  the curtailment plan in place so if they need it they can use it."

The new limits will take effect in October, with monthly raw crude and bitumen limits as follows:

• 3.74 million barrels per day in August.
• 3.76 million barrels per day in September.
• 3.79 million barrels per day in October.

Without curtailment, production is still expected to exceed takeaway capacity by 150,000 barrels per day.

"We're pleased that the province has taken steps to provide further market stability by extending the curtailment program until there is greater certainty regarding increased pipeline capacity," Al Reid, executive vice-president of stakeholder engagement at Cenovus, said in an emailed statement. "This is important not only for the oil and gas industry but for all of the people of Alberta since curtailment is helping them receive higher value for the resource they own."

Fellows said while some producers are likely welcoming this news, it's still a short-term solution.

"A lot of this is still playing a waiting game to see what happens with that takeaway capacity, because long term this is probably not an optimal — may not even be a desirable — policy intervention."

Last month, Gary Mar, with the Petroleum Services Association of Canada, said curtailment continues to be a factor against new investment. While he still feels that way, he says this update strikes the right balance.

"It recognizes that you can't increase production without an increase in takeaway capacity. So there is a recognition that there needs to be more takeaway capacity," Mar said.

"Having said that, there are small producers that face the risk of potentially going out of business altogether if they face curtailment restrictions, so with the smaller producers I think that they've made a good concession to allow them some exemption from, or limits on, their curtailment restrictions."

Province working to divest rail contracts

The government's $3.7-billion crude-by-rail contract, had it not been cancelled, would have added an estimated 120,000 barrels per day in takeaway capacity and generated $2.2 billion in revenue, according to the NDP.

Savage said the province is still in the process of divesting those contracts to the private sector.

The opposition criticized the decision to cancel those contracts, saying they would have brought about an end to curtailment this year, as originally promised.

"Jason Kenney promised Albertans he would get our resources to market — and he's broken that promise," NDP energy critic Irfan Sabir said, calling on the government to reinstate the leases on 4,400 rail cars.

In July, the province's oil storage fell to the lowest levels in nearly two years — down to 27.7 million barrels. In June, Western Canada Select averaged $41.74 US a barrel, and West Texas Intermediate averaged $54.71 US — a differential of $13 US, down from a gap as high as $52 US the previous year.

Mar said without a wide differential, there's no need for the government to hang onto those rail contracts. 

"I mean, whenever government interferes with the marketplace it's always a challenge," he said. "And still it seems to me that crude-by-rail only made commercial sense if the differential was high."

The minister said the extension doesn't mean curtailment will necessarily last another year, but that it will give the government space to weather any wild swings in the price differential.

Ben Brunner, vice president of oil sands with the Canadian Association of Petroleum Producers, said the group is optimistic the industry will turn a corner on market access in the next six to 12 months. 

"We're certainly encouraged to see the government continue to wind down the curtailment thresholds … however it is disappointing that they have to extend it," he said. "If we don't have sufficient market access capacity we simply can't see companies invest and grow production which is what's key is driving job creation."