The Alberta government's bid to tame runaway price discounts for Western Canadian Select (WCS) with output curtailments and rail infrastructure investments could have a limited upside given the historical price relationship with the WTI benchmark.
Alberta premier Rachel Notley's plans to mandate a 325,000 b/d production cut starting in January and purchase railcar capacity to haul 120,000 b/d of crude out of the province are aimed at boosting regional prices.
But the upside for Canadian crude prices is limited, judging from previous years' trading patterns.
Aside from a few months of tightness over the past five years, WCS at Hardisty, Alberta, tends to fall $15-$20/bl below the Nymex light sweet benchmark at Cushing, Oklahoma. With WTI dipping below $50/bl, there's only so much room for WCS to move.
But the battered Albertan crude industry will still take what it can get.
The WCS differential to WTI was projected by the province to narrow by $4/bl with the curtailment order. In the week following Notley's announcement on 2 December, it surged by about $15/bl relative to the Nymex basis, touching a $14/bl discount.
The production cuts will continue to the end of 2019, by which time more crude by rail will come on line from both the government and industry, helping to eradicate record inventory levels. A 370,000 b/d bump in Enbridge's Line 3 capacity will also have an impact, assuming line fill begins midyear as planned. Enbridge has been able to successfully deflect challenges to its Line 3 replacement project.
Crude by rail will play a role in 2019 but incremental capacity takes time, making the Line 3 replacement the best bet for achieving more favorable prices for producers. With heavy crude prices trading below $20/bl in November, it is a long wait until mid-2019 when line fill is expected to begin.
The prospect of a sustained lower price environment would have tested the balance sheets of many without the latest curtailment mandate by the provincial government.
Government intervention is rarely welcomed in crude markets, with Husky, Suncor and Imperial Oil saying they would prefer a markets-only solution to the low prices. Many in industry lay blame for the current problem of insufficient takeaway capacity at the federal government's feet.
The 590,000 b/d Trans Mountain expansion (TMX) received federal approval in 2016 following a 29-month review, but that turned out to be insufficient according to the Court of Appeal, which subsequently nullified that decision. Kinder Morgan sold its stake in the project to the federal government. The government restarted the process for TMX's consideration in September.
The National Energy Board (NEB) has until 22 February to reconsider the Trans Mountain expansion project and provide a recommendation to the federal government.
