The Alberta government is creating a loophole for oil producers to circumvent oil curtailment limits which were designed to reduce transport bottlenecks.
Operators will be allowed to exceed their provincially-imposed output caps if they can ship those extra barrels by rail, Energy Minister Sonya Savage announced in a news release Thursday.
Many oil producers are capable of producing more than their curtailment limits allow and the exemption will help them cope with ongoing pipeline capacity constraints, Savage said.
Savage described the policy as a “short-term approach.” The special production allowance takes effect in December.
“The special allowance program will protect the value of our oil by ensuring that operators are only producing what they are able to move to market,” Savage said in the news release.
“Pipeline delays ultimately have constrained market access and dampened investment in our oil sector,” she said.
“This program will lead to more production and increased investment, benefiting industry, our province’s bottom line, and, ultimately, Alberta taxpayers.”
Industry approached government officials with the proposal to ship more crude by rail in exchange for curtailment relief, the province said.
Savage said the province will work with operators to set the special production allowance baseline for individual companies. The baseline will be based off the operator’s average rail shipment in the first quarter of 2019, the province said.
The allowance will be provided through an application process.
The announcement comes as the province works to cancel the previous NDP government’s s $3.7-billion crude-by-rail contract and divest those contracts to the private sector.
The opposition criticized the decision to cancel those contracts, saying they would have brought about an end to curtailment this year, as originally promised.
The crude-by-rail contract, had it not been cancelled, would have added an estimated 120,000 barrels per day in takeaway capacity and generated $2.2 billion in revenue, according to the NDP.
Alberta introduced a curtailment policy last year as a supply glut, created by transportation constraints and depressed Canadian oil prices.
The policy was originally implemented by the previous NDP government as the price gap between western Canadian heavy crude and U.S. light oil ballooned to more than US$40 a barrel in late 2018, ravaging companies’ bottom lines and provincial revenues.
The province and industry players have said the root of the problem is an inability to export Canadian oil as regulatory and legal challenges bog down new pipeline projects.
Curtailment was supposed to be in place until the end of this year. But the province decided to extend it by a year in large part because Enbridge’s Line 3 Replacement project to the U.S. Midwest, which would add 370,000 barrels of daily export capacity, is being held up by permitting issues and legal wrangling in Minnesota.
The province has been gradually easing its limits since imposing an initial 3.56 million barrel a day cap in January. September’s levels were set at 3.76 million barrels a day, with October’s set to rise to 3.79 million barrels.
In August, the newly-elected UCP government increased the oil curtailment limit from 10,000 to 20,000 barrels per producer per day, and extended the program to December 2020 and reduced the number of impacted companies from 29 to 16.
Before curtailment, companies in the province could produce more than four million barrels a day during the strongest months.
Savage has said that without the production limits there would be 150,000 more barrels produced daily than could be exported.