Oil curtailment could last to late 2020 unless rail ramps up significantly: Peters & Co.

Image: Deborah Jaremko/JWN

With export pipelines running full, the only way out of Alberta’s oil curtailment is by running more crude on rail, analysts with Peters & Co. said on Friday.

Former Premier Rachel Notley had entered into $3.7 billion in rail contracts, with plans to start shipping 20,000 bbls/d this summer and ramp that up to 120,000 bbls/d by 2020.

New Premier Jason Kenney has stated his intention not to proceed with this action, and there is speculation the contracts will be offloaded to industry.

It’s “almost a point of indifference,” as long as the contracts aren’t cancelled outright without a backstop like an agreement with industry to trade curtailment volumes with higher rail, Peters & Co. said in a research note.

Analysts estimate that at least 400,000 bbls/d of rail and/or curtailments is currently required to balance the market.

The curtailment order started at 325,000 bbls/d in January, but was subsequently eased to 250,000 bbls/d for February and March, 225,000 bbls/d for April, 200,000 bbls/d for May and 175,000 bbls/d for June.

Initially under the order the light-heavy oil differential narrowed too far to provide crude by rail economics, but the increases to the production allowance have enabled the differential to widen sufficiently to cover the extra cost.

“Rail volumes have improved from the February/March lows of ~180,000 bbls/d to ~200,000 to 250,000 bbls/d currently, and the most recent data suggests a quicker ramp up to date in Q2 versus our previous forecasts,” Peters & Co. said.

“There is sufficient industry capacity to take rail above 400,000 bbls/d, and if heavy differentials remain >US$15/bbl this would set the stage for rail to exceed 400,000 bbls/d and allow for a full easing of curtailments.

“We have high confidence that rail volumes will successfully ramp up over the next several months, eventually leading to the end of curtailments. That said, the end of curtailments will likely be a 2020 event (and possibly last 2020 until the Line 3 Replacement is completed) unless rail can sustainably ramp above 400,000 bbls/d before then.”

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