Suncor calls for early end to Alberta oil production cuts, cites crude-by-rail woes

Click to play video: 'Garneau announces amended timeline for phasing out dangerous rail tank cars'
Garneau announces amended timeline for phasing out dangerous rail tank cars
Sept. 19, 2018: Transport Minister Marc Garneau announced in Ottawa on Wednesday that timelines for phasing out some of the least crash-resistant rail cars carrying crude oil and other dangerous goods will be sped up – Sep 19, 2018

Suncor Energy Inc. is calling on the Alberta government to make an earlier-than-planned exit from the oil curtailment program it enacted on Jan. 1 because of its “unintended consequences.”

The program designed to draw down crude storage levels and free up space on export pipelines has worked too well, reducing local price discounts to the point that shipping crude by rail into the United States is no longer financially sustainable, said CEO Steve Williams on a conference call Wednesday morning.

READ MORE: Alberta eases oil production cap by 75K barrels per day

“If you look at what’s happened, the differential corrected — and over-corrected — very quickly and the unintended consequence of that is… rail economics are severely damaged and a lot of the rail movements are stopping or have stopped,” Williams said.

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The same charge was levelled last week by Imperial Oil Ltd. CEO Rich Kruger, who said his firm would cut crude-by-rail shipments from its Edmonton-area terminal to near zero this month.

READ MORE: Suncor assessing impact of Alberta’s move to cut oil production 8.7% next year

The move is seen as a major setback for oil egress as Imperial shipped 168,000 barrels per day in December, an amount it said accounted for about half of Canada’s total rail exports.

On a conference call to discuss Suncor’s fourth-quarter results, Williams said the production cuts are also having a longer-term negative affect on investor confidence in Canada.

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WATCH BELOW (Jan. 30): Speaking in Calgary Wednesday, Alberta Premier Rachel Notley discusses the future of her province’s curtailment on oil production.

Click to play video: '‘We don’t want to curtail for any length of time’: Notley'
‘We don’t want to curtail for any length of time’: Notley

The criticism came as Suncor reported a $280-million net loss in the fourth quarter of 2018, in part due to the very price discounts the curtailments are designed to reduce. It added, however, that lower-priced feedstock resulted in better profit margins at its refineries.

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The Calgary-based company said its average realized price in Canadian dollars for raw bitumen in the quarter was just $7.96 per barrel, versus $42.80 in the fourth quarter of 2017. Its average realized price for upgraded synthetic crude was $46.07, compared with $70.55.

READ MORE: Imperial Oil cancels crude by rail shipments blaming curtailment

Alberta Premier Rachel Notley said last week the province would reduce the initial 325,000-bpd production curtailment by 75,000 bpd, citing levels of storage that have fallen faster than expected.

“Our goal is and always has been to match production levels to what can be shipped using existing pipeline and rail capacity, while encouraging a reduction in storage levels,” said Mike McKinnon, spokesman for Energy Minister Marg McCuaig-Boyd, in an email.

“Last week we eased oil production limits ahead of schedule and we will continue to monitor this closely and adjust as necessary.

“We expect the differential to settle at a more sustainable level and we continue moving forward with long-term solutions like our investment in rail and our continued fight for pipelines.”

READ MORE: CNRL says oil curtailment adjustment will keep ECHO pipeline going and save Alberta jobs

The province plans to bring in further reductions to take the curtailments to 95,000 bpd through the end of 2019 once storage levels have fallen enough.

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The difference in price between Western Canadian Select bitumen-blend oil and New York benchmark West Texas Intermediate widened to as much as US$52 per barrel in October, but shrunk to single digits in December and January.

In order to support the higher cost of rail over pipelines, the differentials need to be higher than US$15-$20 per barrel, Imperial says.

READ MORE: Alberta energy firms split on call for government-imposed oil production cuts

Suncor shares opened lower on the Toronto Stock Exchange on Wednesday but posted a small gain by mid-afternoon as investors digested lower-than-expected earnings, offset by a 17 per cent increase in its quarterly dividend and a commitment to buy back another $2-billion worth of shares when the current $3-billion program is completed this month.

In a report, analyst Phil Skolnick of Eight Capital said the impact of price discounts on Suncor would likely surprise some investors who believed that the company’s contracted pipeline space and refining assets provided protection not available to other Alberta producers.

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