Imperial Oil Ltd. has turned up the heat on Alberta Premier Rachel Notley by delaying a $2.6-billion oil sands project in response to her government’s move to limit oil output as a way to rescue prices.
Imperial, the Canadian arm of oil major Exxon Mobil Corp., said on Friday it will slow spending on its Aspen project, pushing the startup date back by a year into 2023. It sanctioned the steam-driven oil sands project late last year, just before Ms. Notley announced the industrywide output cuts.
“This was a difficult choice in light of our final investment decision on Aspen announced last November,” Rich Kruger, Imperial Oil’s chief executive, said in a statement. “However, we cannot invest billions of dollars on behalf of our shareholders given the uncertainty in the current business environment.”
The company is among a handful of large oil producer/refiners that opposed the production curtailments, which took effect in January. Ms. Notley ordered oil output to be reduced by 8.7 per cent, or 325,000 barrels a day, as a way to lessen a massive discount on the price of Alberta crude due to insufficient pipeline capacity and a glut of supply within the province.
Imperial said the free market should be allowed to cure the business’s supply and transport ills rather than government intervention. Its refineries had benefited from the wide price differential – the company is a buyer as well as a producer of crude – but it also predicted, rightly, that the differential would narrow to a level that made moving oil by train to the U.S. Gulf Coast uneconomic.
Western Canada Select heavy crude currently sells for about US$10 a barrel less than U.S. benchmark West Texas Intermediate, according to Net Energy Exchange. That compares with more than US$40 a barrel less than WTI in late 2018. It can cost about US$18 a barrel to ship crude to the Gulf Coast by rail, so the tighter price spread does not cover the cost.
Imperial’s move highlights a deep rift in Alberta’s oil industry, just ahead of the province’s spring election campaign. Ms. Notley, who is expected to announce the vote as early as next week, has moved forward with several initiatives aimed at improving the flow and price of crude as major pipeline proposals, such as the Trans Mountain expansion, remain mired in regulatory and legal delays.
Imperial, along with Suncor Energy Inc. and Husky Energy Inc., has been vocal in its opposition to the market intervention. Indeed, Husky cited it for one of the reasons it abandoned a hostile takeover bid for MEG Energy Corp. in January.
Ms. Notley said her government has been in contact with Imperial Oil and is well aware of its position on curtailments. She described her decision as making the best of a bad situation while she tries to break the regulatory logjam preventing additional export pipeline capacity.
"Curtailment was not a decision that there was consensus on in the industry,” the Premier said at an event in Calgary on Friday. “A small group of companies, Imperial included, were actually making more money off the blowout in the differential.”
“We want to phase out of curtailment as soon as we can but we have an obligation to make the best decision we can,” she said.
MEG, Canadian Natural Resources Ltd. and Cenovus Energy Inc. – whose operations are among the most exposed to the fluctuations in heavy-oil price differentials – have been supportive of the government’s curbs.
As prices have improved, the government lifted the output ceiling in February and again in March. Industrywide output is now restricted by 225,000 barrels a day.
The government has also announced plans to lease 4,400 rail cars over the next three years at a cost of $3.7-billion in an effort to get more crude out of Alberta. Ms. Notley’s main competitor in the coming provincial election, United Conservative Party Leader Jason Kenney, has said he would cancel that contract.
Imperial Oil’s Aspen project is designed to produce 75,000 barrels a day, employing 700 people during construction and 200 when it starts operating.
With a report from Justin Giovannetti
Jeffrey Jones