Canada's oil cuts offer lifeline to producers but create new problems

Bonterra Energy

16/01/2019 17:34

By Rod Nickel
    WINNIPEG, Manitoba, Jan 16 (Reuters) - The Canadian province
of Alberta's OPEC-style decision to force production cuts is
benefiting oil companies with higher prices, but it is also
pushing capital elsewhere and threatens to undermine booming
crude-by-rail shipments.
    After Alberta cut 325,000 barrels per day (bpd) starting
this month, the discount on Canadian heavy oil compared to
benchmark U.S. crude oil shrank to less than $7 per barrel from
more than $40 in October, providing relief for producers.
    But drilling activity has dropped sharply in the last year,
hurting service providers, and the shrinking discount reduces
incentive for shippers to move crude by rail, which is costlier
than pipelines. Some producers have already decided to spend
more in other provinces.
    "As soon as we heard this curtailment was taking place, we
shifted our capital to Saskatchewan from Alberta," said Grant
Fagerheim, chief executive of light-oil producer Whitecap
Resources Inc  WCP.TO .
    Whitecap intends to spend about 80 percent of its C$450
million ($340 million) capex in Saskatchewan, up from its usual
spending there of around 60 percent, Fagerheim said.
   Canada is the world's fourth-largest crude producer, but
larger producers like the United States, Saudi Arabia and Russia
do not face Canada's obstacles in getting oil to market.
    Full pipelines and aggressive opposition to expanding the
industry meant that even as Canada's production hit record
levels last year, benefits of that boom were elusive. Alberta,
which produces most of Canada's oil, last month ordered
curtailments to drain bloated storage tanks and boost prices.
    Government intervention has provided a lifeline to producers
that were selling barrels at a loss late last year and avoided
an economic catastrophe for Canada.
    Bonterra Energy Corp  BNE.TO  produces less than 9,000 bpd,
making it exempt from requirements to curb output, but it still
benefits from higher prices, Chief Executive George Fink said.
    
    DRILLERS HIT
    Cenovus Energy Inc  CVE.TO , which announced plans last year
to increase shipments by rail, is seeing a "very positive
impact" on cash flow due to small price discounts, senior vice
president of downstream Keith Chiasson told Reuters.
    But with growth capital leaving Alberta and transportation
problems unresolved, producers are feeling their way along in
the early days of reckoning with almost unprecedented
challenges.
    Across Canada, 184 rigs were working as of Jan. 11, down 92
rigs from a year earlier, according to Baker Hughes data.
    Companies that provide contract services for producers, such
as drilling, are looking to the United States and Mexico, said
Gary Mar, chief executive of the Petroleum Services Association
of Canada. Government-ordered production cuts worsened an
already grim situation for service companies, Mar said.
    Asked about the curtailment program's unintended
consequences, an Alberta government spokesman noted that its
strategy was focused on getting top dollar for its oil.
    "There's too much at stake and we shouldn't be selling our
products on the cheap," said Mike McKinnon, spokesman for
Alberta's energy minister. 
    But prices have improved so dramatically that shipping by
rail - the backup plan for moving crude until new pipelines are
built - makes less economic sense. The cost of shipping crude by
rail to U.S. buyers is estimated around $15 to $20 per barrel,
well above the current differential. 
    Cenovus would not comment on whether the company is losing
money on near-term rail shipments, but said they are scheduled
to ramp up in the second quarter once new cars arrive.
    Devon Energy Corp  DVN.N  was planning to move 20 percent of
its Canadian heavy oil this year by rail, but the narrow
differentials now make that an unlikely target, said Rob Dutton,
Devon's senior vice president of Canadian operations. Devon
currently moves less than 10 percent by train.
    "It's more difficult now" to reach that level, Dutton said
in an interview. "Forty-five days ago, I would have said,
'absolutely, for sure.'" 
   ($1 = 1.3240 Canadian dollars)

 (Reporting by Rod Nickel in Winnipeg, Manitoba
Editing by Denny Thomas and Tom Brown)
 ((rod.nickel@tr.com; 1-204-230-6043; Reuters Messaging:
Twitter: @RodNickel_Rtrs))