Western Canada's oil prices have remained relatively strong after Alberta's oil production curtailments took effect on Tuesday to address a storage glut.

According to The Canadian Press, the price differential between Western Canadian Select (WCS) bitumen-blend heavy oil and New York-traded West Texas Intermediate (WTI) oil prices was about US$12.50 per barrel on Wednesday afternoon, compared with more than a US$17.52 per-barrel average for spot contracts for January delivery signed last month.

On December 2, Alberta Premier Rachel Notley called for an 8.7% reduction in production, amounting to 325,000 barrels per day (BBL/d), in the province beginning January 1. The curtailment will be reviewed monthly, and after excess storage is reduced, the curtailment will decline to an estimated average of 95,000 BBL/d until December 31, 2019, when the mandated reduction is scheduled to end. Following the announcement of the curtailment, the price for WCS contracted for delivery in January increased, and the differential with WTI narrowed. For more information, see December 4, 2018, article - Alberta to Curtail Oil Production Amid Low Prices, Pipeline Shortage.

However, the production cut prompted Canadian oil and gas producer Husky Energy Incorporated (TSX:HSE) (Calgary) to reduce its 2019 capital expenditure program by about 8%, or C$300 million ($222.6 million). Industrial Info is tracking nearly $15 billion in Husky Energy projects.

Also, Canada's largest oil and gas producer, Canadian Natural Resources (NYSE:CNQ) (Calgary, Alberta), said it would lower this year's capital spending C$1 billion ($753 million) from 2018 levels. Industrial Info is tracking $21.5 billion in active Canadian Natural Resources projects. For more information, see December 6, 2018, article - Canadian Natural Resources Lowers 2019 Capital Budget.

The low prices prompted the Canadian government to offer a $1.6 billion support package to oil and gas companies. For more information, see December 19, 2018, article - Western Canada's Oil & Gas Industry Cheers Federal $1.6 Billion Lifeline as Prices Falter.

According to a report released last week by Canada's National Energy Board (NEB), between 2015 and 2017, the differential between WCS and WTI averaged a discount of US$12.95 per barrel. But in 2018, the differential averaged a discount of US$27.09, with a discount of US$50 per barrel on some trading days in October.

"The primary factor behind these wide oil price differentials was a growing supply of western Canadian oil production to 4.3 million (BBL/d) in September 2018. Takeaway capacity on existing pipeline systems remained constant at around 3.95 million (BBL/d)," according to the NEB report. In addition, refinery maintenance in the U.S. Midwest, the largest export market for Canadian heavy crude oil, led to a significant reduction in demand for Canadian oil. For related information, see September 19, 2018, article - Chevron, Flint Hills, Others Plan Maintenance at Major U.S. Refineries in Fourth Quarter.

The NEB report, "Western Crude Oil Supply, Markets, and Pipeline Capacity," was requested by Canada Natural Resources Minister Amarjeet Sohi to provide background information on the situation.

And while prices have increased, "contracts for delivery in later months indicate that markets expect wider-than-normal differentials to remain in the longer term, until pipeline capacity is addressed," the NEB report said. In recent years, crude oil production has grown faster than pipeline capacity. Between 2013 and 2016, about 1 million BBL/d of nameplate pipeline capacity was added in Canada. No incremental nameplate capacity has been added since then.

The Alberta government has estimated that last year's oil price discount cost about C$80 million ($59 million) per day in lost value.

In a letter to the NEB, Sohi said he was seeking ways to optimize current pipeline capacity out of Western Canada.

"It is imperative that Canada's oil pipeline transportation system operate as efficiently as possible, and in a way that benefits the Canadian public interest," Sohi said. "This is particularly true in circumstances where pipeline capacity is constrained, as appears to be the case today based on apportionment levels and the growth of oil by rail."

He continued: "At the same time, in light of the Line 3 Replacement and Keystone XL pipelines approved by the Government of Canada, current transportation challenges are unlikely to be long-term in nature. This is a significant positive for Canada going forward, but may also serve as a deterrent for shorter-term actions or investments by the private sector that would otherwise alleviate the discount."

Industrial Info is tracking both Enbridge Incorporated's (NYSE:ENB) (Calgary) Line 3 Replacement project and TransCanada Corporation's (NYSE:TRP) Keystone XL project. See Industrial Info's project reports on the Alberta section of the Line 3 replacement pipeline and Keystone XL Crude Oil Pipeline Phase IV.

Sohi also has asked whether there are short-term steps to maximize crude-by-rail capacity to help alleviate the supply glut. In November, the Government of Alberta announced negotiations for the purchase of rail cars to transport 120,000 BBL/d of crude oil to higher-priced markets. The government expects the first 15,000 BBL/d of that capacity to start in December 2019, increasing to 120,000 BBL/d by August 2020, according to the NEB report.

Canada's crude oil exports by rail have steadily increased since March 2018, according to the NEB report, reaching a record of 327,229 BBL/d in October.

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