Heavy crude has reportedly become too expensive to ship by rail. Suncor Energy Inc.’s Chief Executive said the rail economy is being seriously damaged by the government’s decision.
In December of last year, Alberta Premier Rachel Notley announced that the province would temporarily cut the production of raw crude oil by 8.7 percent due to a glut, roughly equivalent to 325,000 barrels a day. The decision received mixed feedback from companies in the industry.
Notley defended the controversial decision by saying that "in Alberta we believe that markets are the best way to set prices, but when markets aren't working, when companies are forced to sell our resources for pennies on the dollar, then we have a responsibility to act."
Now, the Financial Post reports that the decision to intervene against market forces may have backfired. Canadian heavy crude has reportedly become too expensive to ship by rail now.
The amount of oil being shipped by rail has fallen 56 percent last week compared to three weeks ago. Genscape Inc., a company that monitors the amount of oil being shipped in Western Canada reported the data that has shown record lows in the past two months.
Steve Williams, Suncor Energy Inc.'s Chief Executive said that the rail transport economy is being seriously damaged by the decision. “The rail economics are seriously damaged, and a lot of the rail movements are stopping or have stopped,” he remarked. “That’s going to have the opposite impact to what the government wants.”
Some companies will begin to see rail as no longer being a viable option.
David Arno of Genscape said that "with the recent strength in Canadian crude differentials due to the production curtailment, it’s tough for many Western Canadian shippers to make crude-by-rail economic.”
Rich Kruger, Chief Executive of Imperial Oil said that for rail to be a feasible transportation option, heavy crude needs to trade at $15 to $20 US dollars per barrel. It currently continues to trade a discount rate of less than $10.
The Albertan government expects prices to rise soon. Michael McKinnon, a spokesman for the provincial government said this: "Our goal is and always has been to match production levels to what can be shipped using existing pipeline and rail capacity, while encouraging a reduction in storage level... While we’re not out of the woods yet, this temporary measure is working.”
Existing pipelines are working at full capacity at the moment, and oil producers are losing out over the fact that new pipeline projects have been blocked by federal courts.
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