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Will Canada's Extended Oil Cut Plan Boost the Energy Sector?

Zacks Equity Research

Although Canada boasts vast endowments of oil and gas reserves, the country’s energy sector has been bearing the brunt of inefficient regulations and pipeline crisis. The 2014-2016 oil industry downturn and U.S. shale revolution hit the sector hard.

Supply glut and pipeline pinch widened WTI-WCS differentials to record levels last year, prompting the Alberta government to impose production cut mandates in December to remove 325,000 barrels of oil production per day from the market, beginning in 2019. The policy to ease the oversupply situation was supposed to end this year.

However, with pipeline crisis not likely to resolve anytime soon, the oil curtailment program has been extended through 2020-end. Nonetheless, the province has been easing its limits since January 2019, wherein an initial production cap of 3.56 million barrels per day (MMbpd) was recorded. Notably, September and October levels are set at 3.76 and 3.79 MMbpd, respectively.

To sum up, there is inadequate pipeline takeaway capacity for Canada’s upstream sector. There is hardly any pipeline space to transport the barrels of Alberta heavy crude to U.S. refineries along the Gulf Coast region. As it is, Canadian heavy crude is inferior to the higher-quality oil extracted from shale formations in the United States and is also more expensive to transport and refine.

Pipeline Pinch & Inefficient Regulations to be Blamed

Lack of takeaway capacity has been a major headwind for the Canadian oil industry. Pipeline construction in Canada has failed to keep pace with rising domestic oil, in turn forcing producers to sell their products at a discounted rate. Canadian players like Suncor Energy SU and Cenovus Energy Inc. CVE, among a few others, bore the brunt of declining oil prices in the latest quarterly release. Both Suncor and Cenovus carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In fact, the oil curtailment program has been extended till the end of the year as pipeline delays persist, with no expansions around the corner that could ease the situation.

The industry has been bogged down by delay or derailment of various pipeline projects. The cancellation of major projects like TC Energy’s TRP Energy East pipeline and Enbridge’s ENB Northern Gateway project, along with uncertainties and oppositions related to the existing ones like Trans Mountain and Keystone XL pipelines raise concerns.

Although the Trans Mountain pipeline recently secured approval from the National Energy Board to begin partial construction, it still hasn’t settled the issues concerning the pipeline amid legal challenges from predominant indigenous people of Canada. This might defer the in-service date of the pipeline to at least 2021. Though several major pipeline projects have received nod from country-wide review agencies, Canadian industry observers feel that it’s not going to be a smooth ride amid environmental and political turmoil.

The Keystone XL pipeline has been facing regulatory obstacles and opposition from landowners, environmentalists and Native American tribes.

Enbridge’s Line 3 Replacement project, which is expected to add 370,000 barrels of daily of export capacity, was likely to commence operations from this year. However, permitting issues and legal protests in Minnesota are likely to push back the project by a year. In fact, this has been cited as the major factor behind the extension of the oil curtailment program.

Environmental protests are on the rise, further derailing construction. Crusaders believe that the rapidly growing movement of oil around the country is unsafe.

Final Thoughts

Pipelines are an integral part of the energy industry that are engaged in the transportation of oil, gas and petroleum products in an efficient manner, and help in creating additional job opportunities and a reliable fuel supply for the future. Lack of sound regulatory and environmental framework is also eroding the country’s investment climate. The country needs to introduce pipeline projects and more efficient regulatory policies to bring investment back to the sector.

While Canada owns the world’s third-largest crude reserves, streamlined regulatory system and energy infrastructure development are required to drive capital outlay, which would perk up the Canadian energy sector. However, pipeline delays and protests surrounding the same have subjected the Canadian oil industry to much ambiguity, at least in the near term.

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