Varcoe: Oil could stay shut in after curtailment ends, Husky warns


Canadian oil refiners continued a frontal assault on Alberta’s program to restrict oil production, with Husky Energy brass warning thousands of barrels of its own curtailed output likely won’t come back on line once the plan ends.

Husky CEO Rob Peabody insists the province’s initiative is having other unintended consequences, such as driving away foreign interest from the Canadian oilpatch.

During a conference call Tuesday, Peabody repeated a familiar theme that integrated petroleum producers have pounded like a drum recently: Alberta’s oil curtailment strategy needs to be wound down quickly.

While his counterparts at Suncor Energy and Imperial Oil criticized the plan for temporarily disrupting the economics behind moving crude out of Alberta by rail, Peabody also focused on some longer-term consequences.

“I’ll point out the Alberta government is now shutting in perfectly economic production,” Husky’s CEO told analysts during a call to discuss the company’s fourth-quarter results.

“We will continue to urge the government to immediately ease these punitive production cuts and develop a clear plan to end the program.”

Premier Rachel Notley speaks at a news conference where she announced moves to restrict oilsands production in face of oil price crisis, at the Federal Building in Edmonton, December 2, 2018. Ed Kaiser/Postmedia

In December, faced with a large price discount for Canadian oil due to excess production and a lack of pipelines, the Notley government ordered the industry to temporarily limit output by 8.7 per cent — about 325,000 barrels per day (bpd) — in January.

The level was later reduced by 75,000 bpd for February and March. Husky points out its own curtailment cuts actually rose due to changes in the way the program is calculated.

Peabody said the company’s Alberta production is down about 20 per cent and some shut-in wells won’t be reactivated.

For example, Husky is reducing conventional output from its cold heavy oil production with sand (CHOPS) operations in the Lloydminster area by up to 8,000 barrels per day.

Up to half of that amount “may never come back on stream,” said company chief operating officer Rob Symonds.

“The mechanical reason that happens is because the well bores are unstable when you shut them down, they sometimes collapse and it’s not economic to go back and try to reopen them,” he said.

“So that’s why a portion of our 8,000 (bpd), we think up to half of that, will go.”

The oil-price discount, which averaged almost US$46 a barrel in November, has fallen sharply since the policy was unveiled, sitting around US$13.50 a barrel on Monday.

Imperial officials said the company needs a differential of $15 to $20 a barrel to justify the cost of moving its crude by rail from Alberta to the U.S. Gulf Coast. The country’s largest refiner has slashed crude shipments by rail to near zero this month.

Many petroleum producers, such as Canadian Natural Resources, Athabasca Oil and Cenovus Energy, back the province’s curtailment decision, but refiners that make money when crude feedstock costs fall have staunchly opposed it as government meddling.

For Husky, curtailment is “absolutely a net negative” on the company’s bottom line, Peabody said. In the fourth quarter, Husky’s net earnings dropped to $216 million from $672 million a year earlier.

The Husky Upgrader in Lloydminster.

Concerns about the potential impact of curtailment on oil reservoirs have been sounded before, although this is the first time a company said their production could be permanently lost due to the action.

The Canadian Association of Petroleum Producers noted oil reservoir integrity concerns were initially identified by industry as an issue when the policy was discussed last year.

“Depending on the nature of the operator and the reservoir, there will be reservoir challenges that effectively shut-in production permanently,” said CAPP vice-president Ben Brunnen.

“There is potentially some long-term impacts of the curtailment program that we won’t really fully appreciate until after the curtailment is lifted.”

Sparring over the policy comes as oilpatch investment continues to drop, and a lack of progress on pipelines casts a shadow over the sector.

According to new figures from CAPP, total industry capital spending is projected to drop by about 10 per cent this year from 2018 levels.

Oilsands spending is forecast to dip by five per cent to $12 billion, while conventional oil and gas spending will decline by 12 per cent, to $24.5 billion.

Peabody maintains government interference in a free market is impacting the broader industry view of Alberta — particularly among companies that have international boards — as a place to invest.

Analyst Jennifer Rowland of Edwards Jones noted the decision last week by Devon Energy to exit Canada is another example of foreign companies leaving the country. The Oklahoma-based producer is selling oilsands and heavy oil assets to focus on its core U.S. properties.

“If you are a large company with a portfolio of international assets … clearly the government intervention in Canada will cause those companies to rethink what their investment plans were,” Rowland said from St. Louis.

The decision to curtail production was never going to be universally welcomed.


The broader question is whether throttling back output benefits the overall sector and the owners of the resource — Albertans — through higher royalty payments, protecting jobs, and preventing a non-renewable resource from being unloaded at distressed prices.

A spokesperson for Energy Minister Marg McCuaig-Boyd stressed curtailment is a temporary plan — slated to end later this year — and it’s been applied fairly and equitably to producers.

While the Notley government adopted the strategy, the opposition United Conservative Party and Alberta Party also backed the idea, showing how much was at risk for the province by the huge price differentials.

“If we hadn’t done the curtailment at that point of time, probably we would have lost another 20,000 jobs,” said UCP energy critic Prasad Panda.

“We should move away from it as soon as possible, but at the same time, we can’t afford to give away our resource.”

Chris Varcoe is a Calgary Herald columnist

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