The unintended consequences of Alberta’s mandatory oil production cut

One of Canada’s largest oil companies is listing a series of potential pitfalls from the Alberta government’s decision to impose a mandatory cut to oil production in the province.

On Friday, as part of its announcement of 2019 capital spending, Suncor outlined how the production cut could negatively impact the company.

While the majority of the oilpatch is in favour of the move, three of Alberta’s larger oil and gas companies are opposed — Suncor, Husky Energy and Imperial Oil. The companies have significant refinery and retail businesses, so they are less impacted by the swings in oil prices.

The government expects to slash production by 325,000 barrels per day for the first three months of 2019, and by about 95,000 barrels for the remainder of the year, in an effort to clear the backlog and improve oil prices in the province.

In order of most importance, Suncor listed the potential unintended consequences of the government’s decision, which takes effect in January:

  • Impact on safe and reliable facility operating levels, especially during cold winter months when the company typically operates at high levels without planned maintenance. Suncor says it will not put the safety of its employees and contractors at risk.
  • Impact on crude oil upgraded and refined in Alberta, which has limited impact on Alberta export constraints.
  • Failure to take account of historic and recent performance at Syncrude following the unplanned shutdown earlier this year.
  • Partial consideration for Fort Hills production following the completion of start up at the end of the third quarter of 2018.
  • Impact on long-term take or pay pipeline commitments for access to the U.S. Gulf Coast.
  • Impact from the consumption of in-house diesel production used in mining operations.

Suncor’s oilsands facilities are “designed to run at minimum rates in order to run safely and reliably,” according to spokeswoman Sneh Seetal, in an emailed response to CBC News.

In addition, Seetal said the allotted cuts have “been applied disproportionately” to Suncor.

Suncor’s Fort Hills oilsands mine north of Fort McMurray ramped up production in 2018. (Kyle Bakx/CBC)

Some analysts say Suncor may have a point considering two of its facilities were not running at full capacity in 2018, the year on which the curtailment order will be based.

For instance, the Fort Hills oilsands mine ramped up production throughout the year, so the average oil output was much lower than if the plant would have been producing at full capacity all year, like it will in 2019.  

It’s a similar situation for Syncrude, which had a drop in production during the summer months because of a power disruption. The plant was down for a considerable amount of time, so its output was reduced. The Alberta government said it will use a baseline calculated on the best six months in part years to decide the curtailment of each company.

Suncor is the majority owner of both facilities.

“It’s fair to say they are in a particularly disadvantaged situation,” said Kevin Birn, an oilsands analyst with IHS Markit.

The policy could impact other industries, besides the oilpatch, including natural gas and condensate producers in the area, since the oilsands is a large consumer of both products. Condensate, or diluent – is a type of super light oil that is used to thin the thick bitumen produced in Alberta and help it flow through pipelines.

Birn said a disruption could occur in the condensate market. In addition, the natural gas sector was anticipating growth in the oilsands in 2019, but that likely won’t occur anymore.

“We don’t think the oilsands will consume less natural gas because of the curtailment, it just will not grow to the same extent,” he said.

Another possible consequence could be an inability for some oil companies to send the exact type and volume of oil expected to refineries across the continent. Certain contracts or commitments may not be met.

“They may be in the position of not being able to deliver what they promised to deliver to a refinery,” said Birn.



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Sherwood Park

Sherwood Park is a large hamlet in Alberta, Canada within Strathcona County that is recognized as an urban service area.[7] It is located adjacent to the City of Edmonton’s eastern boundary,[8] generally south of Highway 16 (Yellowhead Trail), west of Highway 21 and north of Highway 630 (Wye Road).[9] Other portions of Sherwood Park extend beyond Yellowhead Trail and Wye Road, while Anthony Henday Drive (Highway 216) separates Refinery Row to the west from the balance of the hamlet to the east.[9]

Sherwood Park was established in 1955 on farmland of the Smeltzer family, east of Edmonton. With a population of 70,618 in 2016,[6] Sherwood Park has enough people to be Alberta’s seventh largest city, but technically retains the status of a hamlet. The Government of Alberta recognizes the Sherwood Park Urban Service Area as equivalent to a city.

History

Sherwood Park, originally named Campbelltown, was founded by John Hook Campbell and John Mitchell in 1953 when the Municipal District of Strathcona No. 83 approved their proposed development of a bedroom community east of Edmonton. The first homes within the community were marketed to the public in 1955. Canada Post intervened on the name of Campbelltown due to the existence of several other communities in Canada within the same name, so the community’s name was changed to Sherwood Park in 1956.
Geography

The Sherwood Park Urban Service Area is located in the Edmonton Capital Region along the western edge of central Strathcona County adjacent to the City of Edmonton.[8] The majority of the community is bound by Highway 16 (Yellowhead Highway) to the north, Highway 21 to the east, Highway 630 (Wye Road) to the south, and Anthony Henday Drive (Highway 216) to the west. The Refinery Row portion of Sherwood Park is located across Anthony Henday Drive to the west, between Sherwood Park Freeway and Highway 16. Numerous developments fronting the south side of Wye Road, including Wye Gardens, Wye Crossing, Salisbury Village and the Estates of Sherwood Park, are also within the community. Lands north of Highway 16 and south of Township Road 534/Oldman Creek between Range Road 232 (Sherwood Drive) to the west and Highway 21 to the east are also within the Sherwood Park urban service area.

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