Cenovus chief executive Alex Pourbaix shown here addressing the company's annual meeting in Calgary, on April 25, 2018.Jeff McIntosh/The Canadian Press
Cenovus Energy Inc. says it remains committed to expanding its capacity to export crude by rail, predicting that the current strength in Canadian oil prices will prove short-lived.
The Calgary-based oil company said Wednesday it expects a widening in the differentials between Alberta heavy oil and North America’s benchmark West Texas Intermediate (WTI), restoring the incentive to ship oil by the more costly method of rail.
Despite concerns raised by some of his competitors, Cenovus chief executive Alex Pourbaix defended the provincial government’s decision to order an across-the-board curtailment in production in order to reduce swollen inventories and defend prices. After a 350,000-barrel-a-day production cut was announced in early December, prices in Western Canada rebounded, with the steep discount between Alberta crude and WTI shrinking dramatically.
Cenovus offered “continued support for the difficult decision the government made on Dec. 2,” Mr. Pourbaix said on a call with analysts Wednesday. “I remain convinced that this curtailment is the right thing for our industry and for Albertans, and I’m pleased that our government had the courage to quickly tackle such a serious issue facing our province."
Cenovus is one of Canada’s biggest oil sands producers, but has some refining capacity in the United States.
In recent days, Suncor Energy Inc. and Imperial Oil Ltd. urged Alberta’s NDP government to quickly abandon its curtailment policy, arguing it had narrowed the price differential to such a degree that it is no longer economically attractive to export crude by rail. On Wednesday, Western Canada Select (WCS) for March delivery traded at a differential of US$10.45 a barrel compared with WTI, while crude for April delivery sold at a discount of US$14.85 according to Net Energy, a brokerage firm in Calgary. In order to justify investments in rail capacity, the differential needs to be in the mid- to high teens, Cenovus said in a release.
In the conference call, Mr. Pourbaix said he expects the spread between WCS and WTI prices to widen and crude-by-rail volumes to recover. “It’s really nice to see $10 differentials but I believe it is highly highly unlikely we’ll be enjoying those differentials for very long into the future," he said. "So I expect that the rail component is going to be very active later in the year.”
Cenovus is expanding its own rail capacity from the current 20,000 barrels a day to 100,000 b/d and expects to begin taking delivery of some 4,000 rail cars in the second quarter.
Mr. Pourbaix also expressed optimism that both Enbridge Inc.'s Line 3 project and TransCanada Corp.'s Keystone XL pipeline will clear legal hurdles and proceed to completion. Cenovus said Wednesday it has secured additional commitments for the Keystone XL line, bringing it to a total of 150,000 b/d. Enbridge has approval for the reconstruction of its main export line, but the state of Minnesota is appealing the ruling by its Public Utilities Commission. Enbridge is still projecting to have the rebuilt line in service in the fourth quarter.
TransCanada had its federal approval quashed by a court in Montana but expects the Trump administration to renew it, even as it awaits a key ruling on its state permit in Nebraska.
The differential between WCS and WTI surged to a record US$52 a barrel in October, as several factors combined to create a supply glut in Alberta. Pipeline and rail export capacity had failed to keep pace with rapidly expanding production in Western Canada, while a major refining customer for Canadian crude in the U.S. Midwest had a lengthy maintenance shutdown. Alberta Premier Rachel Notley responded by ordering an across-the-board production cut and announced the province would buy enough rail cars to move 120,000 b/d of crude.
Ms. Notley’s spokeswoman Cheryl Oates said Wednesday the government hopes to announce a rail deal “very soon.”
As a result of the weak prices last year, Cenovus lost $2.9-billion in net income from continuing operations for 2018, with a $1.35-billion loss in the fourth quarter alone.