Alberta crude cut details emerge but clarity needed

With trading for January oil production in full swing, some details on how the Alberta government will allocate 325,000 b/d of planned production cuts among companies have emerged.

Operators will be able to consolidate and transfer allocations between one another with the minister of energy's blessing, according to curtailment rules filed by the provincial government on 3 December. This will allow some flexibility as operators with planned maintenance could work with those with imminent new production to comply with the broad mandatory cuts with less disruption.

In the initial announcement made 2 December by premier Rachel Notley, the cuts will be calculated based on a firm's highest six months of production in the previous 12 months, starting with November 2017. So an operator who achieved first oil between 30 April and 1 September, for example, will take its average production from the time it started to produce until 31 October. This will be the operator's baseline value. The first 10,000 b/d of production will then be subtracted from the baseline, to arrive at the adjusted baseline production amount. Producers will be asked to cut 8.7pc of that figure to reach an industry-wide total of 325,000 b/d.

The Alberta Energy Regulator (AER) has been tasked with rolling out the system, and will be hosting a webinar on 6 December to help educate the market.

Pending more details from regulators, uncertainty remains. Heavy crude traders have started to derisk their trades as volumes are being sold with the caveat they cannot be returned if pipeline apportionment hits the market. Sellers are willing to absorb a further discount for trades with this feature. More than 15,000 b/d of Western Canadian Select (WCS) has traded at least $1/bl below the WCS index this week since the curtailment was announced.

WCS for January delivery was trading near a $23/bl discount to the Nymex WTI CMA benchmark this morning.

The provincial government is cutting production in an effort to clear the glut of crude at Albertan hubs and give support to local prices, which a major component in determining government royalties and a major source of revenue. The government owns 81pc of the province's mineral rights. The cuts are being made under the authority of the Responsible Energy Development Act.

Major producers have been split on the issue but continue to digest the new rule. MEG, Cenovus and Canadian Natural Resources (CNRL) had been advocates for the mandated cuts while the more integrated firms, like Husky and Imperial, have not.

CNRL said that with the higher prices that will ensue it can expect its rig count to eventually rise to 50 from just two, representing about 1,000 jobs. MEG told Argus today that the curtailment brings more certainty to the investment landscape, while Husky said the market was already working, but will comply.

Today CNRL announced a C$1bn ($750mn) reduction in its 2019 capital spend, but cited a lack of market access and a "dysfunctional pipeline nomination process."