Alberta lifts curtailment cap for new conventional oil wells

Alberta is opening a loophole for oil well operators to circumvent its oil curtailment caps.

Effective immediately, all producers can drill new conventional oil wells without being restricted by production limits, the province announced in a news release Friday. Existing wells, however, will remain subject to current curtailment limits.

The change is seen as a way to drive drilling activity in a sector bogged down by capacity issues, depressed prices and political uncertainty. Wells drilled over the winter won't come online until late 2020 and early 2021 when the province expects the Enbridge Line 3 replacement pipeline to be fully operating. 

Energy Minister Sonya Savage said easing provincially-imposed quotas on conventional crude output will lead to increased drilling activity, drive investment in the oil sector and keep industry jobs in Alberta. 

"As companies are in the process right now of making their future investment decisions, we want those investment dollars and jobs to be in Alberta," Savage said during a news conference at the Alberta legislature.

She said producers have told her the exemption could allow hundreds of new wells to come online. Savage said it's hard to provide possible job numbers because companies are now finalizing their investment plans.

The extra production won't "blow out the differentials" in oil prices, she said.

Mark Scholz, president of the Canadian Association of Oilwell Drilling Contractors, welcomed the news. Although curtailment was a "necessary evil" to deal with a gap in oil prices last year, he said the initiative brought drilling to a stop, hurting people in drilling and well servicing companies.

A start-up in drilling will send a positive signal to investors and help rural communities as well as medium-sized centres like Red Deer, Medicine Hat and Grande Prairie, he said.

Scholz said Friday's announcement is timely enough for companies to factor it in to their capital plans. 

"It will have a material difference in activity, to what degree I think we'll have to see in the weeks ahead," he said. "Certainly, I think we're moving in the right direction from the policy side of things."

Rail contracts 

In September 2019, Alberta produced approximately 480,000 barrels per day of conventional oil, the province said. The province estimates an additional 90,000 barrels could have been produced if no production caps were in place. 

Alberta introduced a curtailment policy last year as a supply glut, created by transportation constraints, depressed Canadian oil prices.

The policy was implemented by the previous NDP government as the price gap between western Canadian heavy crude and U.S. light oil ballooned to more than $40 US a barrel in late 2018, ravaging companies' bottom lines and provincial revenues.

Friday's announcement follows a series of incremental changes in the curtailment program. Last month, the UCP announced that oil producers will be allowed to exceed their provincially-imposed output caps if they can ship those extra barrels by rail.

• Alberta eases oil curtailment for operators who ship extra barrels by rail
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The UCP government is also working to cancel the previous NDP government's $3.7-billion crude-by-rail contract and divesting those contracts to the private sector. The NDP had touted the policy as a way increase export capacity and eventually end curtailment. 

The NDP signed deals to lease 4,400 rail cars that would transport Alberta crude to market, before being ousted in the April election.

Savage said the private sector has shown considerable interest in taking over those rail contracts, making the process very competitive. The government is getting close to finalizing some deals, she said. 

• After 'very disappointing' 2019, Canada's oil and gas drilling forecast sinks even lower

Curtailment was supposed to be in place until the end of this year. But the province decided to extend it by a year, in large part because Enbridge's Line 3 Replacement project to the U.S. Midwest, which would add 370,000 barrels of daily export capacity, is being held up by permitting issues and legal wrangling in Minnesota.

The province has been gradually easing its limits since, imposing an initial 3.56 million barrel a day cap in January. In November, production increased to a total of 3.8 million barrels per day, the province said.

Ongoing capacity issues and continued uncertainty around government regulation continues to drag down drilling activity. According to a yearly forecast released by the Petroleum Services Association of Canada (PSAC) last month, the industry is in for another tough year. 

The association predicts 2,155 wells will be drilled in Alberta in 2020, 235 fewer than PSAC's final revised forecast for 2019.

PSAC president Gary Mar said exploration and production companies across the country are choosing to buy back their own under-valued shares, pay dividends and pay down debt rather than reinvest in Canada. 

"It's hard to justify spending or attract new capital investment when market access constraints remain and policy uncertainty persists," Mar said in a statement.