Small producers eye output boost with new exemptions
Small and mid-sized Alberta oil producers are looking to increase drilling as early as this autumn after the Canadian province exempted a dozen of them from government-mandated oil production cuts, boosting the struggling industry.
Alberta’s previous New Democratic Party government imposed production limits in January to drain an oil glut that built up due to congested pipelines.
On Tuesday, the new United Conservative Party government extended curtailments through 2020, citing a delay to Enbridge Inc’s Line 3 replacement that could swell inventories again unless the limits remained in place.
It also doubled an exemption threshold in the curtailment policy to 20,000 barrels per day (bpd), eliminating constraints on 13 companies whose output falls below that level. Alberta’s 16 biggest producers will be the only ones receiving curtailment orders starting in October.
“We were diverting capital into share buybacks and into Saskatchewan,” Tamarack Valley Energy Ltd Chief Executive Brian Schmidt told Reuters in an interview. “Now we’ll put capital back to work in Alberta.”
Tamarack will adjust 2020 capital spending plans because of the changes and could lift its Alberta production by another 2,000-3,000 bpd, Schmidt said. The Calgary-based company currently produces 11,000 bpd in Alberta, just under half its total output.
Other producers that benefit include Whitecap Resources Inc, Athabasca Oil Corp, Pengrowth Energy Corp, Baytex Energy Corp and Obsidian Energy Ltd, AltaCorp Capital Research said in a note.
Pengrowth deferred spending more than half of its $45 million capital budget earlier in 2019, but now looks to increase drilling as early as October, Chief Executive Pete Sametz said. That will also reduce the need to buy credits from other producers that allowed Pengrowth to produce over its quota, he said.
“We’re really happy about (the higher exemption). That’s good for our company.”
Whitecap, which shifted capital to neighboring province Saskatchewan this year because of curtailments, can now consider restoring Alberta production for 2020, said CEO Grant Fagerheim.
The company has capacity to produce 15,000-16,000 bpd in Alberta.
“This is a very wise move by the Alberta government,” Fagerheim said. “Now as we go into our budget cycle (for 2020), it changes the way we think for sure. We can look at our assets on a total basis to get the best returns.”
Tweaking the exemption will prop up Alberta’s struggling oilfield services companies by increasing drilling, said Gary Mar, CEO of the Petroleum Services Association of Canada, but he said the outlook is still challenging.
“Making small adjustments so small producers are exempt will help keep people in the service business around. It’s the best of a bad situation,” Mar said.
With curtailments lasting longer, differentials between Canadian heavy and U.S. light crude look more stable, giving investors reason for greater comfort in heavy oil producers Canadian Natural Resources Ltd, Cenovus Energy Inc, MEG Energy Corp and Athabasca, CIBC analyst Jon Morrison said in a note.
Toronto-listed shares of MEG and Cenovus led the way higher among producers on Wednesday, rising 4% and 3% respectively.
“The curtailment extension is a smart move by government,” said Cenovus executive Al Reid. “This announcement simply acknowledges that new pipeline capacity will not be available by the end of 2019, as originally expected when the curtailment regulation was first introduced.”
Extending curtailments is modestly negative for integrated producers Suncor Energy Inc, Imperial Oil Ltd and Husky Energy Inc, as their operations, which include refineries, are less vulnerable to discounted Canadian prices, CIBC’s Morrison said.