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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Alberta Oil Cuts To End Sooner Than Planned

Canadian crude oil is already expensive enough for the production cuts to stop making sense: some producers have already started rolling them back far ahead of schedule. This is what the chief executive of one of Alberta’s largest oil players, Suncor, said during a conference call about the company’s latest financial results.

Suncor, unlike other Canadian oil producers, was against the cuts from the beginning. “Our position is that government intervention in the market would send the wrong signals to the investment community regarding doing business in Alberta and Canada. And we really do need to take a long-term view and allow the market to operate as it should,” a spokeswoman for the company said when the Alberta government began to consider the cuts as a remedy for the huge discount Western Canadian Select was trading at to West Texas Intermediate.

However this gap has closed faster than initially expected, CEO Steve Williams says, and now some negative unexpected consequences are making themselves visible.

“The differential corrected and overcorrected very quickly and the unintended consequence of that is the potential, the economics are seriously damaged and a lot of the rail movements are stopping or have stopped,” Williams said during the conference call.

A decline in railway shipments of crude would be indeed a problem for Canadian producers: it is generally considered costlier than pipelines, and with the oil itself becoming more expensive, the cost of shipping it to refiners has risen too much for comfort, it seems. As a result, producers have already started winding down the cuts. Related: Tesla Disputes Study That Icy Weather Leads To 41% Drop In EVs Range

At the moment, according to Williams, these amount to some 75,000 bpd, versus 325,000 bpd, announced in December by Alberta Premier Rachel Notley. These cuts were to be in place from the beginning of January until the overhang in crude oil inventories—accumulated because of the pipeline bottlenecks—cleared. After that, the cuts would be reduced to 95,000 bpd, to stay in effect until the end of 2019.

Yet the effect of Premier Notley’s announcement was immediate: the price of Western Canadian Select shot up even before the cuts entered into effect, and even at that early stage this sparked the concern of some industry insiders that the cuts would have a boomerang effect.

This seems to be the situation right now: one month into the cuts and WCS is already so expensive that railway shipments are declining. This could bring about a return of the inventory overhang and this would in turn pressure prices again, effectively sucking the industry into a vicious circle of price jumps and slumps.

Among those involved, Suncor is in an almost unique position: the company has a sizeable refining business as well as well as upstream operations, so it benefits equally from price rises and declines. In fact, despite the cuts, it had already announced its plan to boost its production this year to between 780,000 and 820,000 bpd of crude, which would be 10 percent more than what Suncor produced last year.

For other companies, the situation remains grave. The production cuts were from the start conceived of as a temporary measure. Temporary measures, however, cannot solve persistent problems such as the lack of enough pipelines to carry Albertan crude to refiners.

By Irina Slav for Oilprice.com

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