Canada Braces For Oil Cuts As Storage Nears Limit

  • Mar 24, 2020
  • Investing

The Covid-19 virus and the ongoing oil price war have created such a large global supply surplus that Western Canada’s oil production will need to be cut from April by some 11%, or 440,000 barrels per day (bpd), Rystad Energy estimates, as the country is days away from running out of available storage capacity.

Western Canada’s storage infrastructure has a generally accepted maximum storage capacity of approximately 40 million barrels. Based on our calculations, more than 30 million barrels of crude oil and diluted bitumen is already held in storage, and the volume is likely to edge towards the high end of capacity by the end of March under current production assumptions.

As a result, Western Canada’s oil production, which Rystad Energy expected to reach some 4 million bpd in its pre-coronavirus estimate, will now probably have to be cut by a total of 440,000 barrels to balance local storage volumes around 35 million barrels. This incorporates at least a 75% reduction in crude-by-rail exports to 100,000 bpd.

In the second quarter last year, Western Canada’s oil production amounted to about 3.94 million bpd.

“Compounding the situation is the near-certainty of a steep reduction in crude-by-rail exports this year, as well as deferral of spring maintenance at several key oil sands mining projects,” says Thomas Liles, Rystad Energy’s Senior Analyst.

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On 11 March, Alberta Premier Jason Kenney raised the possibility of production curtailments, but reductions have not yet been officially announced by the provincial government.

If the cuts occur due to government policy they will likely apply to the biggest operators (as was the case for government-mandated curtailments in 2019), but some operators may cut production on their own as well due to coronavirus-related staffing issues and demand insufficiency.

So far, most operators have not been very vocal on the issue of near-term cuts, although some of the major players have revised their full-year production guidance downwards.

Canada also produces oil offshore Newfoundland and Labrador on its east coast, where on 22 March Husky Energy announced it was suspending construction activities at its West White Rose expansion to prevent the spread of Covid-19 among construction staff.