Alberta to force oil output cuts to deal with price woes

VANCOUVER (Reuters) - Alberta Premier Rachel Notley said on Sunday that the Western Canadian province would mandate temporary oil production cuts to deal with a pipeline bottleneck that has led to a glut of crude in storage and driven down Canadian crude prices.

FILE PHOTO: Oil rig floorhands from Akita Drilling work on an oil rig at the Cenovus Energy Christina Lake Steam-Assisted Gravity Drainage (SAGD) project 120 km (74 miles) south of Fort McMurray, Alberta, August 15, 2013 REUTERS/Todd Korol

The left-leaning New Democratic Party government will force producers to cut output by 8.7 percent, or 325,000 barrels per day (bpd), until the excess crude in storage is drawn down. The cuts will then drop to 95,000 bpd until Dec. 31, 2019.

There are some 35 million barrels of oil in storage in Alberta, which is twice the normal level, the province said.

“When markets aren’t working, when companies are forced to sell our resources for pennies on the dollar, we must act,” Notley said in a live public address on Facebook.

Alberta estimates that current production outstrips pipeline and rail capacity by 190,000 bpd. The production cuts, to be applied by producer rather than per project, will be implemented starting in January.

The discount on Western Canada Select (WCS) heavy blend hit a record at $52.50 below the West Texas Intermediate (WTI) benchmark last month, which meant producers were getting about $14 a barrel compared with about $67 for WTI.

It has since narrowed slightly as the WTI benchmark price has fallen and crude by rail volumes has ramped up.

The province said the curtailment would narrow the differential by at least $4 a barrel. There will be penalties for non-compliance, but no specifics were given.

Notley said last week her government was moving ahead with plans to buy about 80 locomotives and 7,000 rail cars to boost crude by rail capacity by 120,000 bpd by mid-2020. [nL2N1Y316R]

The premier, who will face voters in an election that must be held by the end of May, noted that pipelines were preferred to all other options, but blamed successive federal governments for delays getting projects built.

Enbridge Inc’s Line 3 pipeline replacement, which runs from Alberta to U.S. markets, is expected to be online by late 2019. Two other planned export pipelines are facing regulatory delays.

Several heavy crude producers, including Canadian Natural Resources Ltd and Cenovus Energy Inc, have voluntarily curtailed production in recent weeks.

Mandated cuts are controversial as producers that have their own refineries, like Suncor Energy Inc and Husky Energy Inc, do not face the same impact from the low prices.

Notley’s political rivals have called for output caps. The province estimates some 25 producers will be affected by the measures, which will apply only to companies that produce more than 10,000 bpd.

Reporting by Julie Gordon in Vancouver; Editing by Peter Cooney