Canadian WCS up 50pc on curtailment mandate: Update

Includes closing prices.

Western Canadian Select (WCS) crude prices surged to over $30/bl today after the Alberta government said it will mandate production cuts.

The provincial government said on 2 December that it would cut oil output by 325,000 b/d, or 8.7pc, starting in January, under the authority of the Responsible Energy Development Act. The differential between January WCS at Hardisty, Alberta, and the Nymex WTI benchmark spiked by $9.50/bl to a $19.50/bl discount in early trading today, the strongest since 16 July. Later in the session, the differential widened back again to a $25/bl discount.

As the Nymex WTI market also made gains on the news, the upward move puts the outright price of the heavy sour benchmark north of $30/bl for the first time since 4 October. Less than one week ago the price was less than $20/bl. Based on today's session, Argusassessed the grade at a $22.25/bl discount to the basis, representing a day-over-day gain of $6.75/bl.

The province's government has directed the Alberta Energy Regulator (AER) to enact curtailments on its behalf.

Cenovus chief executive Alex Pourbaix, an advocate for industry-wide cuts, said the government's move is appropriate given the "pipeline policy failures" in Canada, and will help balance the market until more rail and pipeline capacity can help fill the void. The provincial government estimates that current production outstrips takeaway capacity by 190,000 b/d.

Other Canadian heavyweights, like Suncor and Imperial Oil, say they prefer for more market-based solutions.

The production cut "sends a negative message to investors about doing business in Alberta and Canada," said Rich Kruger, chief executive of Imperial Oil, in a statement today. The company recently committed to build the C$2.6bn ($2bn) Aspen bitumen project that is expected to produce 75,000 b/d by 2020.

Kruger has said his company has already taken out the necessary takeaway pipeline and rail capacity "to the benefit of all Albertans."

The cuts will be calculated based on a firm's highest six months of production in the previous 12 months. The first 10,000 b/d will be excluded in the calculation.

How the production cuts will unfold has left market participants with questions. Projects or companies that had an unusual amount of downtime, planned or unplanned, could be at a disadvantage when calculating their top six months. Also, clarity is still needed on how new projects that have spent most of the year ramping up will be considered, along with new wells that are on the verge of coming online early next year.

Details around how the cuts will be enforced are also limited.

The provincial government mandated a production curtailment once before, in 1981. Former Alberta premier Peter Lougheed limited crude output after the National Energy Program (NEP) sought to boost the federal government's share in resource revenues.

That policy was unveiled by then prime minister Pierre Trudeau, the father of current prime minister Justin Trudeau.