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Canadian oil prices surge as Alberta production cuts kick in

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Canadian oil prices surge as Alberta production cuts kick in

Canada's benchmark heavy crude blend jumped 14% in the first day of 2019 trading as government-enforced production cuts in Alberta took effect.

Western Canada Select, a blend of heavy and light oils, rose by C$4.13 per barrel to C$33.79/bbl, or about US$24.84/bbl, at the Hardisty hub in northeastern Alberta on Jan. 2, according to data compiled by the Petroleum Services Association of Canada. The price difference between the Canadian crude blend and benchmark West Texas Intermediate traded at Cushing, Okla., shrunk by C$3 to C$12.75/bbl.

The first trading day of 2019 was also the first under across-the-board production cuts of about 8.7% imposed by the government of Alberta, Canada's largest oil-producing province. The cuts, designed to ease pressure on Canada's swamped export pipeline network and reduce brimming storage, were expected to total about 325,000 barrels per day when Premier Rachel Notley announced them Dec. 2, 2018.

The cuts apply to the largest oil producers such as Suncor Energy Inc., while companies with output of less than 10,000 bbl/d are exempt. The program has been tweaked since its announcement to help allay concerns that lower throughput could threaten reliability at giant oil sands upgrading facilities, where tar-like bitumen is processed into refinery-ready crude.

Alberta's production cuts are set to expire by the end of this year. By then, an expansion of Enbridge Inc.'s Line 3 through Minnesota is expected to be completed, adding approximately 370,000 bbl/d to the network's existing restricted capacity.

The Enbridge expansion could be delayed after outgoing Minnesota Gov. Mark Dayton's administration filed an appeal of its own public utilities commission's approval of the line Dec. 21, according to an Associated Press report. Dayton, a member of a state party with a Democratic Party affiliation, will be succeeded by Democrat Tim Walz. Environmental and Native American groups have filed separate court challenges to the decision, which the regulator has stood behind.

SNL Image

Regulatory and court challenges continue to slow construction of pipelines out of Canada.

Source: Associated Press

"The Minnesota Public Utilities Commission stands by its decision to grant a certificate of need for the proposed Line 3 pipeline replacement project," the commission said in a Dec. 21, 2018, statement. "The commission based its decision in this proceeding on the applicable law and a full evidentiary record after vigorous input and participation by the litigants and the public."

Canadian oil producers may see some future pipeline congestion relief if the owners of the 1.2 million-bbl/d Capline crude system go ahead with a plan to reverse the conduit to carry oil from Patoka, Ill., to St. James, La. Patoka can be reached by a number of existing Canadian pipelines, including TransCanada Corp.'s Keystone network and the proposed Keystone XL line. The reversal would boost access to lower-cost heavy crude for Marathon Petroleum Corp., one of Capline's owners.

"Adding new U.S. inland and Canadian crude into the Eastern Gulf market will be especially helpful for [Marathon's] 556,000 bbl/d Garyville, La. refinery, which accounts for 18% of the company's total refining capacity and historically has had a tougher time procuring access to such discounted barrels than similar refineries on the Texas Gulf Coast," analysts at Tudor Pickering Holt & Co. said in a Jan. 3 note.