Canadian Natural Resources Ltd. is suspending some oil sands production as heavy-crude prices in Western Canadian sink below bargain-basement levels seen in the 2014-16 global slump.
In a statement on Thursday, Canadian Natural Resources Ltd. said it cut its production by up to 15,000 barrels a day (b/d) in October and would curtail output by as much as 55,000 b/d in November and December in order to avoid selling into the deeply discounted market. However, the company executives said they expect the market to improve significantly over the coming year.
“Due to widening price differentials driven by market access restrictions, the company made the pro-active and strategic decision to shut in, curtail and reduce activity on heavy crude oil production,” it said in a release announcing its third-quarter earnings.
Western Canadian oil sands producers are forced to accept steep discounts for their crude as the lack of pipeline capacity and the maintenance shutdowns of U.S. refineries have resulted in bulging inventories in Alberta.
Typically in the range of US$15 a barrel to reflect quality and transportation issues, the difference between Western Canada Select (WCS) – the benchmark for diluted bitumen – and North America’s widely quoted West Texas Intermediate (WTI) rose to more than US$50 earlier this fall. That differential was a steep US$45.32 a barrel during Thursday trading. With WTI’s retreat from its October highs, WCS – at US$18.19 a barrel – is now trading at lows not seen during the devastating international price collapse a few years ago.
The most-traded December futures contract for WTI settled at US$63.69 on Thursday.
In an interview, Canadian Natural Resources president Tim McKay said he would not speculate how long the company would maintain the production cutback.
He said the prospects are good for a return to more normal markets by the end of 2019, with Enbridge Inc.'s planned completion of a 350,000 b/d expansion of its Line 3 pipeline to the U.S. Midwest and an anticipated 250,000 b/d increase in crude-by-rail capacity. As well, the North West refinery outside of Edmonton – in which Canadian Natural Resources is a half owner – is due to come on stream next year and will process 80,000 b/d of diluted bitumen into gasoline, diesel and other products.
“We see [the discount] shrinking to become more normalized” by the latter part of 2019, Mr. McKay said.
Canadian Natural Resources also blamed the steep price discount on the apportionment of pipeline space within Alberta when there is more supply than there is capacity on the system moving crude to markets in the United States. (Pipeline companies allocate space to companies on a complicated pro rata basis when there’s a shortage of capacity.) An industry committee tried to push through a reform to the apportionment system but it was narrowly defeated. Mr. McKay said the current system results in more supply being priced at a steeper spot-market discount than should be the case, and creates volatility in the WCS-WTI differential.
Canadian Natural Resources is not the only company that is responding in dramatic fashion to the widening price discounts.
MEG Energy Corp. said on Thursday it will move up a planned maintenance that will remove up to 6,000 b/d of crude from the market, while Cenovus Energy Inc. announced this week it is limiting output. Cenovus did not specify how much production it was restricting, but said it has slowed output at both its Foster Creek and Christina Lake sites in northeastern Alberta.
“All told, [the production cutbacks] should have an impact on prices,” said Phil Skolnick, analyst with Toronto-based Eight Capital Inc.
Tim McMillan, president of the Canadian Association of Petroleum producers, laid the current price slump at the feet of the Liberal government in Ottawa, saying its killing of the proposed Northern Gateway pipeline created the current shortage of pipeline capacity. In June, 2016, the federal court quashed the Northern Gateway approval by the former Conservative government over a failure to properly consult First Nations. Prime Minister Justin Trudeau sealed its fate when his government killed the proposed line through northern British Columbia later that year, while at the same time approving Enbridge’s Line 3 project and the Trans Mountain pipeline expansion.
“This shouldn’t be a surprise to anyone,” Mr. McMillan said in an interview.
Canadian Natural Resources had a strong third quarter as prices differentials shrank over the summer before ballooning again in October. Its net income rose to $1.8-billion, or $1.47 a share in the quarter compared with $684-million, or 56 cents, a year earlier. Its average realized price of oil rose to US$57.89 a barrel from US$46.33, a year earlier.
Editor’s note: An earlier version of this article wrongly reported Canadian Natural Resources complained about Enbridge Inc.’s system of apportionment for export pipeline space. CNRL management was referring to the Alberta gathering system in the discussion on apportionment to pipeline space.