The oil price meltdown earlier this year and demand destruction wrought by COVID-19 forced Canadian crude oil producers to throttle back output. At the height of the cutbacks in May, almost 1 MMb/d of oil supply had been curtailed due to uneconomic prices and/or lack of downstream demand. With oil prices and demand having staged a partial recovery in the past few months, production is rising off the lows and producers are talking about even higher supplies in the months ahead, with the prospect of returning to pre-pandemic levels. Today, we begin a short series that reviews the recent production pullback and discusses how producers are positioning themselves for a resurgence of their oil supplies.
Crude oil production in Western Canada never seems to be able to catch a break. Congested pipelines, government-imposed production curtailments in Alberta that started in 2019 (and still remain officially in place), and wild price swings in what routinely seem to be some of the cheapest heavy oil barrels around have dealt numerous crushing blows to an industry at the heart of one of the largest oil-producing regions in the world. Things came to a head (again) with the short-lived Saudi-Russia driven oil price crash in March of this year and subsequent COVID-led demand destruction as consumers followed shelter-in-place orders. The Canadian heavy oil price benchmark, Western Canadian Select (WCS), reached all-time lows in April, printing single digits for much of that month. The negative demand impacts from the sudden reduction in flying and driving arrived around the same time, and resulted in refineries rapidly cutting production runs. That meant less crude oil was needed from major producing regions like Western Canada.
The double whammy of lower prices and lower demand forced a rapid rationalization of costs and reductions in oil production levels across the region’s major producing regions. Alberta, being Canada’s largest producing region by far, took the brunt of the declines, with output falling 790 Mb/d from February, just before the downturn, to May, the month in which the cutbacks were at their peak (blue bar segments in left chart in Figure 1). We estimate that Saskatchewan’s oil output declined by about 140 Mb/d (red bar segments) and that of Manitoba’s fell by about 10 Mb/d (green bar segments). [British Columbia’s oil output is close to negligible and is not included.] That adds up to a total decline across the three provinces of 940 Mb/d between February and May (dashed black oval in left graph). [We’ll discuss the June production data in a moment.]
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