Alberta Loosens Oil Output Limits With Railroad Allowances

(Bloomberg) -- Alberta took a step toward easing the pain of its crude-production caps by allowing oil companies to exceed output limits if they ship the extra production by rail.

The special production allowances to be implemented in December will be based on each producers’ average rail shipments during the first quarter of this year, according to a release posted on the government’s website.

The move is a boon to explorers constrained by the curtailment program imposed this year to stave off a collapse in western Canadian heavy crude prices brought on by a lack of pipeline space. The program boosted prices so much that more-costly rail shipping became unprofitable, hurting the province’s ability to drain the supply glut.

“This is a very significant development for the industry and the province, and this sets the stage for the government to remove itself from the Alberta crude markets,” Suncor Energy Inc. Chief Executive Officer Mark Little said during a conference call with analysts after the allowances were announced. The oil sands producer sees between 200,000 and 300,000 barrels a day of additional rail capacity available.

Suncor and other drillers had lobbied for the rail allowances, saying they could ship more crude without exacerbating the pipeline shortage. The announcement comes as the government seeks to sell crude-by-rail contracts, set up by the previous government to stimulate oil exports to private companies. In a budget announcement last week, the government said a C$1.5 billion provision related to the divestiture of a crude-by-rail program would contribute to a bigger deficit totaling C$8.7 billion.

Crude-by-rail exports surged late last year after pipelines filled to capacity and local oil prices collapsed relative to U.S. benchmark West Texas Intermediate futures. After local oil prices strengthened relative to the benchmark, exports by rail became less economic and shipments plunged before gradually recovering.

Oil producers including Cenovus Energy Inc. and Imperial Oil Ltd. invested billions in crude-by-rail terminals in recent years to overcome pipeline constraints. Both companies are expected to gain from the government announcement, Credit Suisse said in a note Wednesday. Other companies such as Canadian Natural Resources Ltd., which has also signed rail contracts, as well as rail terminal operators such as Gibson Energy Inc. will also benefit.

Cenovus could raise diluted bitumen production by as much as 85,000 barrels a day based on the new program “which will fully allow us to ramp up our oil sands assets” including its Christina Lake phase G expansion, Keith Chiasson, executive vice president of downstream, said in a conference call Thursday.

READ: Alberta’s Kenney Sees ‘Likely’ Curtailment Exemptions for Rail

“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,” Energy Minister Sonya Savage said in the statement. “Pipeline delays ultimately have constrained market access and dampened investment in our oil sector. This program will lead to more production and increased investment, benefiting industry, our province’s bottom line, and, ultimately, Alberta taxpayers.”

To contact the reporters on this story: Kevin Orland in Calgary at korland@bloomberg.net;Kriti Gupta in New York at kgupta129@bloomberg.net;Robert Tuttle in Calgary at rtuttle@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Jessica Summers, Catherine Traywick

©2019 Bloomberg L.P.