Suncor cites crude-by-rail woes as it calls for early end to Alberta oil cuts

Suncor Energy Inc. is calling on the Alberta government to make an earlier-than-planned exit from the oil curtailment program it enacted on Jan. 1 because of its "unintended consequences."

The program designed to draw down crude storage levels and free up space on export pipelines has worked too well, reducing local price discounts to the point that shipping crude by rail into the United States is no longer financially sustainable, said CEO Steve Williams on a conference call Wednesday morning.

"If you look at what's happened, the differential corrected — and over-corrected — very quickly and the unintended consequence of that is ... rail economics are severely damaged and a lot of the rail movements are stopping or have stopped," Williams said.

"That's going to have the opposite impact to what the government wants."

The same charge was levelled last week by Imperial Oil Ltd. CEO Rich Kruger, who said his firm would cut crude-by-rail shipments from its Edmonton-area terminal to near zero this month.

The move is seen as a major setback for oil egress as Imperial shipped 168,000 barrels per day in December, an amount it said accounted for about half of Canada's total rail exports.

On a conference call to discuss Suncor's fourth-quarter results, Williams said the production cuts are also having a longer-term negative affect on investor confidence in Canada.

The criticism came as Suncor reported a $280-million net loss in the fourth quarter of 2018, in part due to the very price discounts the curtailments are designed to reduce.

The Calgary-based company said its average realized price in Canadian dollars for raw bitumen in the quarter was just $7.96 per barrel, versus $42.80 in the fourth quarter of 2017. Its average realized price for upgraded synthetic crude was $46.07, compared with $70.55.

Last week, Alberta Premier Rachel Notley said the province would reduce the initial 325,000-bpd production curtailment by 75,000 bpd, citing levels of storage that have fallen faster than expected.

Its plan is to bring in further reductions to take the curtailments to 95,000 bpd through the end of 2019 once storage levels have fallen enough.

The difference in price between Western Canadian Select bitumen-blend oil and New York benchmark West Texas Intermediate widened to as much as US$52 per barrel in October, but shrunk to single digits in December and January.

In order to support the higher cost of rail over pipelines, the differentials need to be higher than US$15-$20 per barrel, Imperial says.

Suncor shares opened lower on the Toronto Stock Exchange on Wednesday but recovered by mid-morning as investors digested lower-than-expected earnings, offset by a 17 per cent increase in its quarterly dividend and a commitment to buy back another $2 billion worth of shares when the current $3-billion program is completed this month.

In a report, analyst Phil Skolnick of Eight Capital said the size of the impact of price discounts on Suncor would likely surprise some investors who believed that the company's contracted pipeline space and refining assets provided protection not available to other Alberta producers.