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Alberta to mandate 325,000 oil production cut starting Jan 1: Premier

New York — Alberta will mandate a 325,000 b/d oil production cut starting January 1, 2019 in order to tighten wide crude price discounts, the province's Premier, Rachel Notley, said Sunday.

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"This is a short-term measure," Notley said during a webcast press conference.

In the long term, Notley said she will focus on getting new pipelines built and purchasing rail cars to move more crude out of Alberta. Those new rail cars will start coming on line next year, she said.

Related story: Western Canadian, US Bakken crude prices spike after Alberta announces 2019 output cut

The 325,000 b/d, or 8.7%, crude production cut will be spread out to all producers, Notley said, and over the course of the year the amount of the cut will drop.

The volume of the cut will be reviewed every month to determine what is needed, she said.

The Canadian Association of Petroleum Producers' latest forecast shows Western Canadian production rising from an estimated 4.54 million b/d in 2018 to 5.2 million b/d in 2023, and 6.2 million b/d in 2035.

Notley said last week she submitted a proposal to Canada's Prime Minister Justin Trudeau asking the federal government to join Alberta in buying unit trains and up to 7,000 cars to move additional crude out of Alberta.

Notley said Alberta is already in negotiations with a third party to purchase the rail cars, and anticipates a deal to get done in weeks. The additional trains would be able to move 120,000 b/d of crude, she said.

A typical 100-car train would carry roughly 600,000 barrels of crude, and each train would likely only make two trips across the border every month.

Getting 120,000 b/d of extra capacity would require buying another 2,500 to 3,000 rail cars (or 25 to 30 100-car trains).

It is difficult to tell where those cars would come from. Roughly 1,500 DOT 117 newbuild and retrofitted combined cars entered the crude market during the third quarter of 2018 for the US and Canada, according to S&P Global Platts Analytics.

Western Canadian Select crude was assessed by S&P Global Platts at a $29/b discount to WTI Friday, tightening from a $45.25/b discount November 1. Still, that discount is out from an average of $15.38/b in November 2017.

Even with a tighter discount, lower WTI benchmark prices have helped to pull WCS outright prices down, assessed at $21.14/b Friday. That puts WCS well below breakeven costs, which are estimated by S&P Global Platts Analytics at roughly $57/b for new projects.

The new rail cars would add to already record high crude-by-rail shipments out of Canada.

Canada's crude-by-rail exports averaged a record 269,829 b/d in September, up 40,285 b/d from August, according to the latest figures from the country's National Energy Board.

Platts Analytics expects that crude-by-rail exports will need to average over 300,000 b/d during the winter for the market to clear.

Some Canadian producers earlier in November announced production reductions, including Canadian Natural Resources, MEG Energy and Cenovus Energy.

With Canadian oil production rising, new pipeline capacity will be needed in the long term to keep prices from sinking.

Enbridge's 370,000-b/d Line 3 expansion is expected to be in service by the second half of 2019.

The federal government agreed to buy the existing 300,000-b/d Trans Mountain pipeline and 590,000-b/d expansion project earlier this year. Trans Mountain ships Canadian crude to the Pacific Northwest, where it can be exported.

But a federal appeals court in August delayed the expansion by ruling that the government did not adequately consult First Nations or consider environmental impacts from increased marine traffic.

--Jeff Mower, jeff.mower@spglobal.com

--Edited by Wendy Wells, wendy.wells@spglobal.com