Fears of another Alberta oil price crisis ebbing due to curtailments, crude-by-rail rebound: CNR

The president of Calgary-based oilsands producer Canadian Natural Resources Ltd. says fears of another Alberta oil price crisis are waning thanks to the province's production curtailment program and improving crude-by-rail profitability.

Canadian Natural Resources benefited from higher prices due in part to Alberta's production curtailment

Murray Edwards, executive chairman, and Steve Laut, former company president, now executive vice-chairman, of Canadian Natural Resources, shown at a 2017 meeting. The company reported a first-quarter profit of $961 million Thursday. (The Canadian Press)

Fears of another Alberta oil price crisis are ebbing thanks to the province's production curtailment program and improving crude-by-rail profitability, says the president of Calgary-based oilsands producer Canadian Natural Resources Ltd.

But anxiety about a return to the steep price discounts of last fall won't disappear until new pipelines are built and flaws are fixed in the way barrels are nominated to be placed on the Mainline export pipeline system, Tim McKay said Thursday.

The former NDP provincial government imposed production cuts on Jan. 1 to free up pipeline space and draw down a glut of oil that had resulted in widening differentials between bitumen-blend Western Canadian Select oil prices and U.S. benchmark West Texas Intermediate.

The differentials came down so suddenly after the plan was announced in December that the advantage of sending crude by rail to the U.S. Gulf Coast refinery complex for better prices disappeared, leading to rail exports plunging to 131,000 barrels per day in February from an all-time high of 354,000 bpd in December.

Crude-by-rail's financial advantages are back, said McKay, adding Canadian Natural is now shipping 14,000 bpd of oil to the Gulf where it is receiving a US$2-per-barrel premium over WTI.

"It is very economic to ship more oil by rail and we expect that will happen over the year," McKay said, adding low levels of activity in the field in Alberta means production is in decline and spring maintenance shutdowns will further help balance the market.

"Directionally, there are a lot of positives headed here towards the summer."

Rail loadings up 

According to U.S. energy information company Genscape, which gathers data from terminals handling about 80 per cent of Canada's oil exports, rail loadings averaged 197,000 bpd in April, up 47,000 bpd from March.

Alberta's quotas are supported by oilsands producers like Cenovus Energy Inc., whose CEO pointed out two weeks ago the resulting higher prices have helped boost royalties to Alberta's treasury by billions of dollars.

But they are opposed by rivals such as Suncor Energy Inc. and Husky Energy Inc. as a Band-Aid solution that doesn't address the real problem of insufficient pipeline capacity.

McKay renewed Canadian Natural's criticism of the Mainline nomination process, arguing that shippers are signing up for more space than they need and filling the space with barrels bought on the spot market, a development he said is helping keep Alberta oil storage levels high.

"The curtailments will probably decrease over time but I can't emphasize enough, unless the nomination rules get changed, we're still going to have air in the system, and we're still as an industry, as Albertans, (going to) suffer from job losses and from a huge discount on our oil not getting world prices," he warned.

Mainline owner Enbridge Inc. is proposing to abandon its monthly allocation system and instead lock shippers into long-term contracts starting in 2021. McKay said Canadian Natural doesn't know all the details, but is opposed to any change that locks it into delivering its oil to only one destination.

Full output by 2020

Canadian Natural announced it started steaming horizontal wells at its 40,000-barrel-per-day Kirby North thermal oilsands project in northern Alberta this month, but said it would ramp up production slowly so that full output isn't reached until 2020, when curtailments are expected to be gone and market access may be better.

The company plans to boost its allowable production in the meantime by buying quota allotments from other producers undergoing maintenance interruptions, McKay said.

Repairs needed due to a fire in April at the Scotford Upgrader northeast of Edmonton will cost about $15 million and production interruptions will be minor until it is fully restored in June, Canadian Natural said.

It owns about 70 per cent of the facility, which is operated by Shell Canada.

Higher oil prices helped Canadian Natural report a first-quarter profit of $961 million on Thursday, up from $583 million in the same quarter last year, despite revenue falling to $5.25 billion from $5.47 billion.

Daily production averaged 1.04 million barrels of oil equivalent, down about four per cent from the fourth quarter of 2018 due to the Alberta curtailments. It produced 1.12 million boe/d in the first quarter of 2018.

Analysts said the results were "solid" or positive and contained no surprises.


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