Premier Rachel Notley should strap on a political flak jacket, given the amount of oilpatch artillery unloaded this week toward the province’s plan to cut crude production.
From the program’s biggest supporter to one of its largest opponents, the decision has become for a target for criticism.
On Friday, Imperial Oil hammered the strategy to restrict oil output, saying it has disrupted the economics of shipping crude by rail — and suggesting the policy might force the company to re-evaluate its proposed $2.6-billion Aspen oilsands project.
This comes just a few days after Canadian Natural Resources, one of the staunchest advocates of the government’s intervention, fired off its own volley.
The country’s largest petroleum producer said it was facing “unreasonable and discriminatory” cuts after being told to throttle back output by more than 100,000 barrels per day (bpd) in February.
No one said acting like OPEC and trying to manage production levels would be simple.
But the past week has shown just how tricky it is to strike the right balance between supporting oil prices and interrupting market signals.
It’s like trying to stand on a teeter-totter while wearing rollerblades.
And when you start meddling in a free energy market, it’s awful easy to fall off the rails.
On Imperial Oil’s fourth-quarter earnings call, CEO Rich Kruger reiterated his company’s opposition to the province’s strategy.
The price differential between Alberta heavy oil and benchmark U.S. crude prices has dropped significantly since curtailment was announced in December, sitting below US$10 a barrel this week from a high of $50 last fall.
But the incentive for companies like Imperial Oil to export more oil by train has disappeared with the sudden collapse in the price discount, as it costs nearly double that to send crude by rail to U.S. Gulf Coast refiners.
“It’s uneconomic to move crude by rail at this point in time … because of the drastic, dramatic manipulation and impact on differentials, take-away capacity is being idled,” Kruger told analysts on the call.
“That is a sad state, a very tangible example of what we believe is ill-advised, ill-informed, negative consequences of this curtailment order.”
Moving oil by rail is critical because Canada lacks enough pipeline capacity to export all of its product.
Imperial ramped up its oil-by-rail shipments to 168,000 bpd in December, about half of all industry levels.
It had expected that figure would approach 175,000 bpd in the first quarter. Instead, as the differential declined, Imperial’s rail movements nearly fell in half in January.
Imperial’s CEO expects it will drop to near zero this month.
Kruger said the decline should demonstrate that “intervening in free markets is not as easy and as definite as we thought.”
Indeed, Alberta’s plan to reduce industry production was always going to be a high-stakes proposition.
Not only was it intended to shrink the price discount and protect cash flow levels for producers, it was also designed to stop a collapse in provincial energy royalties.
The idea was backed by the NDP government, the United Conservative Party and the Alberta Party, but faced opposition from refiners such as Husky Energy and Imperial.
Earlier this week, the province said it was going to ease the amount of production curtailed this month by 75,000 bpd from January’s levels, because the amount of oil in storage has fallen faster than anticipated.
Just in case the province didn’t get the message of how unhappy Imperial is, Kruger’s discussion about the planned Aspen project should have sounded like a thunderclap overhead.
In November, Imperial approved the 75,000-barrel-a-day project and construction began in the fourth quarter.
The company plans to spend about $800 million on it this year. Production is expected to start in 2022.
Given the ongoing uncertainty of building new pipelines, Kruger pointed out the “ace in the hole” for Aspen was Imperial’s ability to move the extra production out of Alberta by rail.
“We think it’s prudent on an investment like that to re-evaluate and look at the assumptions,” he said.
“The project quality is high. I don’t think the question is if, the question is what’s the right or optimum timing for Aspen … and that is what we’re taking a look at right now.”
You don’t have to read between the lines to understand that message: Imperial isn’t happy.
It’d be easy to dismiss the dissatisfaction of one player, even the largest refiner in Canada, but it’s not only curtailment critics that are troubled.
Canadian Natural Resources sent letters to suppliers in the Bonnyville-Cold Lake area last week, warning it might have to shut down its heavy oil pipeline in the region.
It pointed out the company’s production cut for February would be one-third higher than last month, because of changes in the way the calculations were being made.
Mayors and municipal politicians in the region warned the shut-in would imperil jobs in the oilfield service sector.
On Wednesday, Notley told reporters in Calgary that temporary curtailment was a bold, but difficult decision.
“We’ve seen the differential drop dramatically, but frankly, it’s not our intention for it to stay this low for a long period of time because we expect it to be at rail economics — and that’s where we should try to get it to,” she said.
News emerged later that day the province would pull back on February’s production cuts.
On Friday, Canadian Natural said the shift means the company won’t have to reduce as much oil production, keeping the pipeline open and “protecting up to 2,400 jobs for contractors and service providers in the region.”
This week’s turmoil illustrates just how difficult it is to manage production levels to influence price.
Last December, the province decided it couldn’t afford to let a steep price differential continue without taking action. It decided to reduce output throughout 2019.
But the government also can’t afford to lose any capacity to move oil by rail in the coming months, particularly if new pipelines don’t get built on time.
Otherwise, the extreme price discounts will return and the sorry cycle will start all over again.
If that happens, flak will fly from every corner of the Canadian curtailment divide.
Chris Varcoe is a Calgary Herald columnist.
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