Imperial Oil CEO offers faint praise for Alberta curtailment cuts for rail plan

Alberta is going in the “right direction” with its plan to ease production curtailments for oil producers who add crude-by-rail capacity, the CEO of Imperial Oil Ltd. said Friday, although he didn’t commit to transport more oil by rail.

Rich Kruger – one of the industry’s most outspoken critics of mandatory curtailments that began last January – said it’s necessary to review of the details of the province’s plan, which was announced Thursday.

“I would say, in the form of a compliment to the government, they’re trying to make the best of a bad situation. They’re playing the cards they were dealt,” he said on a webcast to discuss third-quarter results.

“The bad situation is that we’re in curtailment in the first place.”

Under the previous NDP government, Alberta put a cap on the amount of oil that the industry can produce as a way to narrow price discounts that grew as oil production exceeded the ability of pipelines to get the crude to market.

The measure was continued by the United Conservative government, when it was elected last spring, but the industry quota is rising to 3.81 million barrels per day in December, up 250,000 bpd from the original limit of 3.56 million bpd.

Imperial is more heavily invested in crude-by-rail than most producers because it co-owns a terminal in Edmonton with the capacity to load 210,000 bpd – about one third of the province’s estimated rail capacity of 500,000 to 600,000 bpd.

However, Kruger said the economic case for shipping oil by rail steadily worsened over the summer because there’s not enough difference in price between Alberta and the U.S. Gulf Coast end market to support shipping by rail, which is more expensive than pipelines.

Rail shipments by Imperial in the third quarter fell from 76,000 bpd in July to 35,000 bpd in September, he said, adding the volumes would be headed even lower in the current quarter if not for the government announcement and the possible impact of an outage on the Keystone pipeline following a large oil spill in North Dakota earlier this week.

He said rail shipping volumes are “to be determined at this point,” adding Imperial uses Keystone but declining to give volumes.

On Thursday, rival oilsands producer Cenovus Energy Inc. said it would quickly add as much as 20,000 bpd to oilsands output and proceed with bringing an oilsands expansion on stream, to add 50,000 bpd in the next six to 12 months following the Alberta decision on curtailments.

Suncor Energy Inc., meanwhile, said it would put up to 30,000 bpd on rail over the next month or so in view of the announcement.

Alberta’s lack of pipeline capacity has made oil-by-rail the next-best method of transport, but the switch comes with certain costs. In a 2016 study, researchers at the University of Alberta found that pipeline transportation of oil produced between 61 and 77 per cent fewer greenhouse gas emissions than rail, and numerous studies have found that pipelines are the safer transport method.

Imperial reported Friday that net income fell 43 per cent to $424 million in the three months ended Sept. 30, compared with $749 million or 94 cents per share in the same period of 2018.

It said cash generated from operating activities added up to $1.38 billion in the quarter, up from $1.21 billion in the third quarter of 2018.

The biggest drag on earnings came from Imperial’s downstream operations, where net income slipped to $221 million from $502 million due to lower refinery profit margins and planned maintenance outages.

On the upstream side, Imperial reported slightly lower income due to higher operating expenses and royalties – it noted lower volumes at its Kearl oilsands mine and Cold Lake bitumen works but higher volumes from the Syncrude mining facility, in which it holds a 25 per cent stake.

Total production rose to 407,000 barrels of oil equivalent per day from 393,000 boe/d in the same period of 2018.

Kruger is retiring at the end of the year and his role is to be assumed by Brad Corson.