Oilsands and refining giants Suncor Energy Inc. and Husky Energy Inc. are rejecting a call by rival Cenovus Energy Inc. for government-imposed production cuts to reduce an oversupply of oil in Alberta linked to steep price discounts.
“We’re probably producing about 200,000 or 300,000 barrels per day of oil in excess of our ability to get that oil out of the province, either by pipelines or by rail,” Cenovus CEO Alex Pourbaix told Global News.
“As soon as you have that supply imbalance, the price of all the barrels you sell gets discounted to exceedingly high levels.
“The implied value of the heavy oil that we’re selling today is zero,” Pourbaix said.
He says oil companies are in this situation due to “a regulatory and political failure” to get pipelines built.
“The solution is a temporary, government-mandated production cut.”
Suncor has no exposure to the “differential” between Western Canadian Select bitumen-blend crude and New York-traded West Texas Intermediate and therefore shouldn’t have to reduce its production, company spokeswoman Sneh Seetal said Thursday.
“We upgrade or refine over 70 per cent of the barrels we produce in Alberta,” she said.
“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.”
Suncor believes it should be allowed to benefit from the refineries and upgraders it has built and the pipeline space it has contracted that insulate it from local price discounts, she said.
Husky also believes in a “market-based solution,” spokeswoman Kim Guttormson wrote in an email.
“Market intervention comes with an unacceptably high level of economic and trade risk,” she said, adding the best option to reduce price discounts is to advance pipeline solutions.
Watch below – Feb. 21, 2018: A new report shows exactly how much the discount on Canadian oil is costing the country. As Tom Vernon explains, the fight over the Trans Mountain pipeline comes at a very high cost.
The province has called on Ottawa to help increase crude-by-rail shipments and unveiled Wednesday a “lost-revenue counter” to be displayed in Ottawa and track how much money Canadians are missing since the Trans Mountain pipeline expansion approval was overturned by the Federal Court of Appeal in August.
It hasn’t yet decided whether or not to restrict production.
“There’s a lack of consensus within the industry about the best way forward,” Premier Rachel Notley said Thursday.
“We have a suite of options at our disposal that we are currently working with to help chip away at that differential. We’re going to continue to do that and we’re going to have conversations and discussions with all the players.
“We are working furiously on that,” Notley said.
Alberta’s minister of economic development and trade said no options have been ruled out — or in.
“We’ll have more to say on this in the near future,” Deron Bilous said. “We’re considering all our options at the moment and appreciate that different voices are bringing forward different possible ways to try and correct the differential.”
Environment Minister Shannon Phillips was also asked if the province should cut back oil production to help reduce the discount.
“There are some producers for whom that would be a good thing and there are others it would not,” Phillips said.
“So the provincial government needs to look at the whole picture and the whole economy and in particular we need to make sure we are doing the right thing for the people who are working in the oil and gas industry,” she said.
“We need to take that 360 view of the whole industry and that is an extremely big stick… and would be an unprecedented move in a lot of ways. So it is not something we would take lightly.”
Watch below – Oct. 12, 2018: The record-low reached by the discount on Alberta oil could cost producers billions in lost revenue. As Tom Vernon explains, world prices are going up but that’s not the case here.
Jason Kenney, leader of the official Opposition, would rather see all of the industry players create a solution rather than have the government impose one.
“Take a number and cut their production by that number across the board until the current inventories are cleared out here in Alberta and they can get back to a decent price,” Kenney said on Wednesday.
“Optimally, they should do this voluntarily but I don’t think the government should completely rule out the possibility of taking action because at the end of the day the resource belongs to Albertans.”
The temporary cuts suggested by Cenovus and supported by some other producers of bitumen would work to clear clogged storage and quickly reduce price discounts on Alberta oil, to the benefit of the provincial treasury, Phil Skolnick, an analyst at Eight Capital Research, said in a report Thursday.
“Shut-in volumes would quickly alleviate the pain by freeing up export pipeline space and clearing out Alberta storage levels,” he said, adding the province appears to have the right to make the move.
But he added that he expects discounts to moderate over the next few months as companies voluntarily reduce output, crude-by-rail exports rise, U.S. refineries come back on line after fall maintenance shutdowns and the 80,000-barrel-per-day Sturgeon Refinery begins processing bitumen (likely by early next year) near Edmonton.
Skolnick estimates recent WCS-WTI heavy oil discounts, if held for a year, would equate to an Alberta royalty loss of about $4 billion, an oil industry-related Canadian federal income tax loss of about $13 billion and an annual U.S. federal income tax gain of about $12 billion from higher U.S. refining earnings (all figures in Canadian currency).
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According to Net Energy, the WCS-WTI differential was at US$42.95 on Thursday morning, a difference that means producers were getting about US$14 for each barrel of bitumen blend.
The discount versus WTI was also elevated for upgraded synthetic crude at US$31.55 per barrel and for Edmonton light oil at US$34.60.
Implied bitumen prices in Canada after subtracting the cost of the light oil diluent needed to allow it to flow in a pipeline are about 83 cents per barrel or about half the cost of a bottle of Diet Coke, RBC energy analyst Greg Pardy said in a note.
“By comparison, Mexican Maya (a comparable crude stream to WCS in terms of gravity and sulphur content) is capturing US$63 on the U.S. Gulf Coast,” he wrote. “This dynamic reflects the fact that Canada’s depressed oil prices are heavily related to egress constraints.”
The head of Cenovus says a government-imposed production cut has been done before.
“It was put in place by the Lougheed government in 1980 in response to pricing problems for Alberta’s fossil fuels by the National Energy Program,” Pourbaix said.
“This isn’t just the upstream industry that is suffering. The Alberta government, it counts on a very significant portion of its revenue requirement coming from royalties on heavy oil.”
This is the reason governments are elected and why they’re in place, Pourbaix says.
“To step up in situations where the private sector can’t solve a problem on its own.”
— With files from Global’s Tom Vernon