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Canadian Oil Companies Can Boost Production... On One Condition

The government of Alberta said on Thursday it would allow energy firms to produce more oil despite the industry-wide production cuts, if those firms move the additional barrels by rail, as continued pipeline capacity shortage dampens the prospects of Alberta’s oil and gas sector.

The provincial government will be providing special allowances to oil companies to raise their oil production above the individual curtailment limit permits, on the condition that firms move the additional oil by rail.

The special allowances are set to come into effect as of December and the volumes will be based off an operator’s average rail shipments for Q1 2019. Volumes moved under an allowance by rail cannot be nominated onto pipelines, the Alberta government said.

“The special allowance program will protect the value of our oil by ensuring that operators are only producing what they are able to move to market. Pipeline delays ultimately have constrained market access and dampened investment in our oil sector,” Sonya Savage, Alberta’s Minister of Energy, said.

Canadian producers have had a tough couple of years with constrained market access that drove the price of Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands—to a discount of US$50 to WTI Crude in the fall of 2018. This blow-out in the differential between the Canadian benchmark and the U.S. benchmark prompted Alberta’s government to impose at the beginning of 2019 a mandatory production cut across all companies in the province to help ease congested takeaway routes and lift the abnormally low price of Canadian oil.

Related: A Warm Winter Would Be 'Catastrophic' For Natural Gas

This September, Alberta’s government eased the production cuts, saying that it would allow oil producers to pump 3.8 million bpd of crude in November and 3.81 million bpd in December. That’s up from 3.79 million bpd in October and 3.56 million bpd in January this year.

Canadian energy companies continue to believe that the long-term solution to Canada’s oil industry’s woes is the construction of major new pipelines to increase market access, and potentially, to tap new export markets outside the buyer of nearly all Canadian oil exports, the United States.

By Tsvetana Paraskova for Oilprice.com

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