In response to a glut in oil supply in the province, the government of Alberta is mandating a temporary production cut of 325,000 b/d. If the mandate is followed to the letter, it would eliminate close to 20 million barrels of inventories by March 2019, roughly the amount of stock build from the past twelve months. Further production curtailments of 95,000 b/d could last until the end of 2019 if stocks do not draw down significantly. We had forecast Canadian production to fall by 30,000 b/d in 2019. In light of these developments, we are accelerating the decline to 90,000 b/d.
Lack of Pipelines Created Negative Market Externalities for Alberta
The lack of export pipeline capacity and a heavy maintenance season from Midwest refineries has put Canadian crude at a discount of as much as $50 per barrel to WTI this fall. While refinery maintenance season is temporary, the longer-term prospect of delays in new export pipeline capacity has created a crisis for Alberta’s crude oil producers. Government intervention has become an option as the Province faces the risk of recession.
The level of curtailment for each producer will be based on six months of their highest output over the past twelve months. The first 10,000 barrels of output will be exempt in an effort to protect smaller producers. The mandate covers both conventional and oil sands production.
Alberta’s commercial crude inventories have grown by over 22 million barrels since an explosion at the Syncrude facility last spring shut operations and reduced overall output through the summer. But production from other Oil Sands facilities were growing as expansion projects came online, increasing Alberta’s total production by over 800,000 b/d from April 2017 to November 2018.
A production cut of 325,000 b/d would effectively eliminate about 20 million barrels from Alberta’s inventories over the first quarter of 2019. A further production cut of 95,000 b/d for the remainder of the year is possible, if stocks do not draw down significantly.
The government of Alberta is also stepping up measures to help the province get crude to markets with a plan to purchase rail cars to help ship an additional 120,000 barrels of crude a day. Crude by rail (CBR) has about doubled in the past year, reaching 270,000 b/d in September. Although the new rail cars will not arrive until mid-2020, we project Canadian CBR to average close to 400,000 b/d in 2019 as more producers commit volumes to rail until new pipeline capacity materializes.