As Canadian crude prices sank like a rock last fall, oilsands producer Cenovus Energy didn’t pay a penny of royalties to the Alberta government.In fact, it ended up with a $29-million royalty credit in the fourth quarter.With the province’s new program to restrict oil production in Alberta this year, the situation has quickly been reversed.As the price discount on Canadian crude narrowed during the first three months of the year — and global oil prices shot up by a third — the company paid out $191 million in royalty payments to the province.Cenovus CEO Alex Pourbaix isn’t complaining.He uses the situation as proof Alberta’s controversial curtailment plan is working.The province’s strategy to throttle back oil production in Alberta has proven to be a double-edged sword for Canada’s energy sector, but it’s clearly benefiting petroleum producers such as Cenovus — and the provincial government — at this time.“We had a situation . . . where heavy oil was selling in Alberta for zero. Basically, we were giving it away for free. And the overwhelming beneficiaries of that low-priced oil were U.S. refiners,” Pourbaix told reporters Wednesday after his company’s annual meeting.“In a normal world, we would solve this problem by simply building pipelines. Right now, we’ve not been able to build pipelines.“So why on earth, for the loss of 200,000 barrels a day (of provincial production), would we cause $30 or $40 or $50 billion of damage to our economy? That doesn’t make sense.”The Calgary-based company reported Wednesday strong first-quarter earnings of $110 million, a vast improvement from a miserable fourth quarter when it lost more than $1.3 billion.The steep loss last year came as the discount on Western Canadian Select (WCS) heavy oil compared to U.S. benchmark crude prices peaked above US$50 a barrel.Curtailment is bolstering the bottom line of oil producers, but it also means the industry is largely in a no-growth mode for 2019.Cenovus scaled back its forecast oilsands production levels by seven per cent for the year, compared with earlier guidance.Construction of the company’s Christina Lake phase G expansion project was completed in March, yet it’s uncertain when the new 50,000-barrel-a-day oilsands development will begin producing.However, Pourbaix said the benefits of curtailment easily outweigh the downside.“It is crystal clear that temporary mandatory curtailment has been a big win for our industry and for our province,” he told analysts on a conference call.
President and CEO of Cenovus Alex Pourbaix addresses shareholders at the company’s annual meeting in Calgary, Wednesday, April 24, 2019. THE CANADIAN PRESS/Todd Korol ORG XMIT: TAK109
It’s uncertain what will happen to the mandatory production limits for the rest of the year, but the issue is tied to crude-by-rail shipments leaving the province.The outgoing Notley government, backed by the Opposition United Conservative Party, introduced curtailment last January to reduce a glut of oil in storage and bolster sagging Canadian prices.While Cenovus supported the concept, integrated producers such as Imperial Oil opposed it as government meddling. Imperial pointed out recently that the price differential has fallen so sharply, it’s destroyed the economics to ship oil by trains from Alberta to the U.S. Gulf Coast, which requires a spread of around $15 to $20 a barrel.New data from the National Energy Board shows crude-by-rail shipments dropped by 60 per cent between January and February, backing Imperial’s assessment.According to Net Energy, the price discount for WCS heavy oil stood at US$12.25 a barrel on Wednesday, well down from the massive price differential of $43.55 a barrel in December.Curtailment has bolstered Canadian oil prices, but it’s also sidetracked much-needed rail shipments.Another concern centres around oil storage levels in Western Canada, which dropped earlier in the year but began growing in March, sitting just below record-high levels set in January, according to Mike Walls, a senior oil analyst with research firm Genscape Inc.“For prices, has it (curtailment) worked? Absolutely. For inventories, has it worked? Absolutely not,” Walls said.The province’s initial plan was to see the production limits wind down throughout 2019, but it’s unclear if that will happen now that Enbridge’s Line 3 pipeline project has been delayed until the second half of next year.With the new UCP government set to take power at the end of April, incoming premier Jason Kenney will have to determine just how quickly Alberta can end the mandated production limits.Given the productive capacity of Western Canada’s oil sector and expected rail movements, “you are still going to need to not be producing, by our math, something around 150,000 to 200,000 barrels per day by the end of year,” said CIBC analyst Jon Morrison.Another major energy issue facing the new premier will be whether he makes good on a campaign promise and cancels the Notley government’s plan to lease rail cars capable of carrying 120,000 barrels per day of oil out of the province.Cenovus would prefer to see rail shipments put in the hands of the private sector.“Make no mistake, our industry needs more oil moving by rail,” Pourbaix said in an interview.“Once the government is sworn in, I’d hope to think there is a scenario where government can sit down with industry and . . . find a way to get those rail contracts in the hands of industry.”One point is clear as a pipeline bottleneck continues to choke the province: Alberta needs to find more — not fewer — ways to move oil if it wants to phase out all production restrictions by the end of 2019.While the double-edged sword is paying dividends today, a comprehensive roadmap for curtailment and crude-by-rail shipments will soon be needed to restore growth in Canada’s oilpatch.Chris Varcoe is a Calgary Herald email@example.com