Oil Sands Pipeline Shortage Takes Toll as Cenovus Cuts Output

(Bloomberg) -- Western Canada’s pipeline and rail constraints are starting to force the hands of oil sands companies, with Cenovus Energy Inc. announcing a slowdown in production because of difficulties shipping its crude.

The Calgary-based producer said its Christina Lake and Foster Creek complexes have operated at reduced levels since February, in a statement released Thursday. Cenovus shares slipped as much as 6.1 percent in Toronto and fellow oil sands leaders Suncor Energy Inc. and Canadian Natural Resources Ltd. fell as well.

Heavy Canadian crude prices have been trading near the biggest discount to U.S. benchmark oil futures in more than four years as new oil sands production has come on line and the Keystone pipeline has cut shipments after a spill in November. Other pipelines are full and exporters shipping crude via rail have faced bottlenecks amid a backlog of grain shipments.

“We’re taking steps to respond to a critical shortage of export pipeline capacity in Western Canada that is beyond our control and is having a negative impact on our industry and the broader Canadian economy,” Chief Executive Officer Alexander Pourbaix said in the statement. The bottlenecks “clearly demonstrate the urgent need for approved pipeline projects in Canada to proceed as soon as possible.”

Oil Sands Pipeline Shortage Takes Toll as Cenovus Cuts Output

Canadian Natural Resources said on March 1 that its Peace River oil sands site would go into maintenance this month because of the heavy discount between Canadian crude prices and futures. The company also said it would slow the ramp up and completion of some wells.

Western Canadian crude production exceeded the pipeline capacity to ship it to markets by 87,000 barrels a day in December, industry researcher Genscape Inc. said in a report last year. That’s set to rise to 338,000 barrels a day by the end of 2018.

Cenovus still expects its full-year oil sands production this year to be within the previously announced forecast of 364,000 to 382,000 barrels per day, the company said. But it expects first quarter output to be below that, around 350,000 and 360,000 barrels per day.

The company will seek to “optimize the scheduling of maintenance" at oil sands facilities to reduce the impact and is also in discussions with rail providers to solve a shortage of locomotive hauling capacity affecting its Bruderheim crude-by-rail facility near Edmonton.

In an interview earlier this month, Pourbaix told Bloomberg News that some relief could be on the way later this year.

“I expect the industry is going start seeing much more volumes by rail moving by middle of the year onward," the CEO said during the CERAWeek by IHS Markit oil-industry conference in Houston. While rail companies want the shipments, “it’s really been a function for them of capacity, and having the power and the locomotives to do it.”

Rail companies could offer a rail solution “in fairly short order,” he said.

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