December 5, 2018
Alberta’s mandated crude-production cuts have prevented layoffs from at least one Canadian oil producer.
MEG Energy Corp. Chief Executive Officer Derek Evans said his company was considering laying off workers and slashing production at its Christina Lake project by 30 percent until Alberta’s mandated oil-production cuts lifted Canadian heavy crude prices.
“As of last Friday, we were trying to figure out how we could minimize, absolutely minimize, our capital expenditure,” Evans said in an interview with BNN Bloomberg Television. “We were looking at laying people off. We were looking at how we were going to make it through the first quarter and the first half of 2019.”
The cuts announced Sunday have “taken away the belief that we’re going to have to lay off people before Christmas,” he said.
However, those same production cuts starting next month will make moving crude on trains less attractive just as the government buys rail cars.
The two steps of the plan, part of Alberta’s goal to ease historically low prices, appear at odds with each other. On one hand, buying rail cars should ease selling pressure because of new infrastructure taking oil to market. However, mandatory cuts would boost prices to near the level where crude-by-rail becomes uneconomical.
Western Canadian Select for January traded as much as $19.75 a barrel below U.S. crude futures early Monday, a $9.25 leap from Friday, before slipping back to a $23 discount.
The key may be timing. Alberta asked in recent months for the federal government to buy as many as 7,000 rail cars to boost shipping capacity by 120,000 barrels a day to stop record low prices and a supply glut. Those rail cars won’t come into effect at least until mid-2019. Meanwhile, the production cuts are effective starting next month. Prices could get back to the level where it pays to move the marginal barrel on rail, according to analysts.
“We expect that with the forcibly shut-in production, that differentials will narrow back towards rail-based economics,” Canaccord Genuity said in a note Monday, which is about $20 to $25 a barrel below West Texas Intermediate futures.
“We continue to believe that relief from additional pipeline capacity is the most viable (and sustaining) method of getting Albertan (Canadian) production to market, but that this will help in the near term,” it added, citing the rail deal.