Oil production cuts in Western Canada are imminent

March 24, 2020
Western Canada’s oil production will need to be cut by about 11% from April, or 440,000 b/d, due to the global oversupply created by the Covid-19 virus and ongoing oil price, said Rystad Energy.

Western Canada’s oil production will need to be cut by about 11% from April, or 440,000 b/d, due to the global oversupply created by the Covid-19 virus and ongoing oil price, said Rystad Energy. The country will run out of available storage capacity in days.

Western Canada’s storage infrastructure has a generally accepted maximum storage capacity of 40 million bbl. More than 30 million bbl of crude oil and diluted bitumen is already held in storage, by Rystad Energy calculations, 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 b/d in its pre-coronavirus estimate, will need to be cut by a total of 440,000 bbl to balance local storage volumes around 35 million bbl. This incorporates at least a 75% reduction in crude-by-rail exports to 100,000 b/d.

In the second quarter of 2019, Western Canada’s oil production amounted to about 3.94 million b/d.

“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,” said Thomas Liles, senior analyst at Rystad Energy.

On Mar. 11, Alberta Premier Jason Kenney raised the possibility of production curtailments, but reductions have not yet been officially announced by the provincial government. If government policy-directed cuts occur, 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 vocal on the issue of near-term cuts, although some of the major players have revised full-year production guidance downwards.

Canada also produces oil offshore Newfoundland and Labrador on its east coast, where on Mar. 22 Husky Energy reported the suspension of construction activities at its West White Rose expansion to prevent the spread of Covid-19.