Canadian oil firms lament output cuts as rail volumes slip

Some Canadian oil executives blame higher crude prices from mandated production curbs for hurting their refining margins and depressing shipments of Alberta crude to U.S. customers.The government of Alberta last year mandated output cuts of 325,000 barrels per day (bpd) to help alleviate a supply glut that had weighed on crude prices and earnings of Canadian producers. Many in the industry had praised the move as prices rose.

But other Canadian companies including Husky Energy Inc and Suncor Energy Inc that both produce and refine oil into fuel had benefited from cheap feedstock for their refineries.

Executives at an energy industry this week said falling rail shipments to the United States are one of the “unintended consequences” of the output cuts as rising Canadian prices make transporting by rail less attractive.

Canadian crude by rail shipments have fallen despite rising U.S. demand for Western Canadian crude. Mandated output cuts have lifted regional prices, making it less economic to ship by rail to the U.S. Gulf Coast, the executives said.

“The differentials need to be wide enough” to make it worthwhile to send the crude by rail, “and we’ve actually seen rail cut back this year,” said Steve Reynish, executive vice president at Suncor Energy Inc , at IHS Markit’s CERAWeek conference. “The first step would be to phase out the curtailment and let the market react to the signals we’re getting.”

The spread between Canadian heavy crude and the U.S. futures benchmark has narrowed to less than $10 a barrel from more than $50 a barrel last year. Adding rail costs to the Gulf Coast makes the oil less attractive to U.S. buyers.

Alberta in December ordered Canadian producers to cut output by 325,000 barrels per day (bpd) after local prices tumbled because of a lack of pipeline space to export markets. The province in July plans to make 4,400 leased rail cars available to help clear the bottleneck.

Canadian crude by rail shipments fell to about 6,100 car loads last week, down from 8,000 in December, data from rail operator Canadian National Railway showed.

The start of operations of Enbridge Inc’s Line 3 system extending from Alberta to the United States was recently delayed for a year until the second half of 2020, leaving producers no easy path to end production curtailments until then, during the conference.

“We’re lacking a clear line of sight” to the end of Alberta’s production curtailment, said Janet Annesley, an executive at Husky Energy Inc . “In a perfect world, we’d like to get out of it tomorrow.”

The output cuts have pushed up prices but weaker rail shipments to the United States have kept inventories high. Canadian crude stocks rose to 33.5 million barrels last month, compared with 30.8 million barrels in January, according to data provider Genscape.

The Canadian government is focused on building pipelines in order to “permanently deal with the challenges” the oil industry is facing, Amarjeet Sohi, Canada’s minister of natural resources, said in an interview.

(Reporting by Collin Eaton in Houston; Editing by David Gregorio)