Varcoe: Curtailment supporter says it’s time to restart drilling

As government-mandated oil curtailment drags on into a second year, it’s time to lift provincial quotas on conventional crude output, says Canada’s largest petroleum producer.

And the provincial government agrees, moving Friday to remove curtailment limits on new conventional oil wells.

Such a step should encourage more drilling in Alberta, allow companies to spend more to increase output and create additional work in the oilpatch, Tim McKay, president of Canadian Natural Resources, said Thursday.

“If you look at the volumes produced on the conventional side in Alberta … production is down roughly about 50,000 barrels per day,” McKay said in an interview after the company released third-quarter results.

“From my perspective, it would be nice to see, potentially, curtailment come off the conventional side of the business, so that we could drill more wells across Alberta …

“It creates jobs in places like Taber, and Bonnyville and Drayton Valley.”

On Friday, the province announced petroleum producers can immediately drill new conventional oil wells without facing government-mandated production quotas. Existing wells, however, will still be subject to curtailment limits.

The government said the decision will “drive positive investment, lead to increased drilling activity, and support economic growth in communities across Alberta.”

The call from the country’s largest petroleum producers — one of the earliest and most vocal supporters of provincial curtailment — arrives as the oilpatch heads into the winter drilling season.

The rationale for the idea, which won’t change quotas on oilsands production, is based on several factors, including ramping up conventional oil output as 225,000 barrels per day (bpd) of incremental transportation capacity out of Western Canada “is targeted to be added over the near term,” according to the company.

McKay cites increased pipeline capacity on Enbridge’s Line 3 system on the Canadian side of the border, which is expected to be available next month, as well as the planned optimization of the Express and TC Energy’s Keystone pipelines next year.

Canadian Natural’s stake in the North West Sturgeon Refinery will boost oil conversion capacity by 40,000 bpd for the company, once the long-delayed facility begins processing diluted bitumen.

Meanwhile, the amount of oil being exported by rail is likely headed higher in the coming months.

Crude-by-rail shipment could significantly increase after the province announced last week it would let companies facing provincial output quotas receive special production allowances, beginning in December — if they add incremental rail volumes.

The Kenney government is negotiating with companies that would see them take over Alberta’s own crude-by-rail contracts (signed by the former NDP government ) that are capable of moving another 120,000 bpd.

Alberta Premier Jason Kenney has said he is ‘open’ to letting oil producers exceed quotas if they boost rail shipments.

David Paul Morris/Bloomberg

The central issue for the province is how to get more production, spending and employment going as curtailment continues into 2020, without triggering a steep price discount for Alberta oil because of too much output and not enough pipeline capacity.

The price differential between benchmark U.S. crude and Western Canadian Select heavy oil has widened recently, closing at US$22.24 a barrel on Wednesday, due to a leak on the Keystone pipeline in North Dakota last week.

Tristan Goodman of the Explorers and Producers Association of Canada said Thursday he’d support conversations about exempting conventional production from curtailment, so long as the oil price differential is preserved.

Recent news from the industry on the 2020 spending front hasn’t been encouraging.

McKay expects Canadian Natural’s capital spending in 2020 will likely be consistent with this year’s level of $3.8 billion.

“The way we see it today, it would be flattish because, with the uncertainty with the curtailments and pricing and such, I don’t see any real reason that we would change it up or down at this point,” he added.

According to provincial data, about 480,000 barrels of conventional oil per day were produced in September, with 90,000 bpd flowing from operators that have received curtailment orders.

“If you look at the conventional business, it’s a very good job creator in Alberta,” added McKay.

“I see there is an opportunity for the government to come off curtailment on the conventional side, stimulate the Alberta economy and create jobs.”

More drilling is critical for the oilfield services sector and there are already signs of smaller capital programs being deployed for 2020, which means less work and fewer jobs.

On Thursday, Seven Generations Energy said its capital program next year will be $1.1 billion, down $150 million — or 12 per cent — from 2019.

Tourmaline Oil Corp., which expects to spend $1.035 billion this year, approved a reduced capital budget of between $900 million and $925 million for next year. “That’s a function of continually improving capital efficiencies,” CEO Mike Rose said Thursday on a conference call.

Last month, the Petroleum Services Association of Canada forecast only 4,500 oil and gas wells would be drilled across the country next year, a 10 per cent drop from 2019 levels.

“Today’s release of results by companies … would lead us to believe there isn’t going to be much optimism for the drilling year in 2020,” PSAC chief executive Gary Mar said Thursday.

Mark Scholz, head of the Canadian Association of Oilwell Drilling Contractors, said his members are concerned about reduced activity during the traditionally busy winter drilling season, noting every active rig employs 145 to 200 people.

The sector has seen direct and indirect employment tumble from about 96,000 jobs five years ago to around 34,000 this year.

The association would support the idea of removing curtailment limits on conventional production if it doesn’t significantly impact domestic oil prices, but Scholz believes other measures are needed to get more people working this winter.

“We may need a combination of (things) to save the 2020 drilling season,” he said.

“We have just lost so many people from our industry. Losing a winter drilling season is just going to compound that challenge and we’re trying to find ways to keep people engaged and our rigs warm.”

Chris Varcoe is a Calgary Herald columnist.

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