Alberta pipeline bottleneck pressure builds

The sting of a nasty discount on Alberta oilhit home twice Thursday, underscoring the energy sector's struggles with pipeline bottlenecks and the building pressure to improve shipping capacity.

First, Cenovus Energy saidit throttled back production at its oilsands facilities with the price of Canadian heavy oil lagging well behind the U.S. benchmark price, a problem exacerbated by a lack of pipeline space.

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• Cenovus cuts oilsands production due to price differential, pipeline constraints

Then the Alberta government released its annual budget, a document replete with reminders ofthe importance the province places onbuilding morepipeline capacityandthe consequences it sees of not doing so.

"Lack of market access is hurting heavy oil producers, government revenues and the Canadian economy," said Alberta's budget documents.

"Although WTI prices are forecast to improve gradually over the forecast period, Alberta producers will not be able to fully realize the gains. This is mainly due to ongoing pipeline bottlenecks."

One of the big issues facing both the industry and governmentis that while American energy producers have been enjoying a rebound in prices, which climbed over $60 US per barrel this year, Alberta heavy oil producers have been receiving farless. On Wednesday, the oil price "differential" was over $26 US per barrel.

The situation which is kickingAlberta and the oilpatchrightin the wallet has been a long time coming.

There has always been a gap between the North American benchmark, West Texas Intermediate (WTI), and Alberta's Western Canada Select (WCS), because of the lower quality of heavy oil and the cost of transporting it to markets.

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But theWTI-WCS differential began to spread furtherlast summer as Alberta production increased, filling up any spare capacity in export pipelines. A temporary shut down of TransCanada'sKeystone pipeline in November only added to the headaches.

For Cenovus, heavy oil price differentials and pipeline capacity constraints were behind the company's decision to reduce production rates.

"We're taking steps to respond to a critical shortage of export pipeline capacity in Western Canada that is beyond our control and is having a negative impact on our industry and the broader Canadian economy," said chief executive Alex Pourbaixin a statementThursday.

"These transportation challenges faced by our industry clearly demonstrate the urgent need for approved pipeline projects in Canada to proceed as soon as possible."

Pourbaix said the company has been operating its Christina Lake and Foster Creek facilities at a reduced production levels since February.It plans to sell the crude when pricing improves, he said.

Still, Cenovus noted that while its strategy may result in fluctuating production from month to month, it continues to expect full-year oilsands volumes for 2018 to be withinits guidance of 364,000 to 382,000 barrels per day.

Hours after Cenovus released its news, Finance Minister Joe Ceciwas also talking pipelines.

Speaking to reporters, he said he was confidentthat the controversial Trans Mountain pipeline expansion would get built a "critical" project that would provide access to "the lucractivePacific market."

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The government was also keen to stress the importance of improving market access through twoU.S.-bound pipelines now in the works: Enbridge'sLine 3 expansion and Keystone XL.

"The economic impacts of market access are significant," budget documents said.

Indeed, by the government's own forecast, additional pipeline capacity would allow Alberta producers to receive up to $7 US more per barrel. It expects that would lift capital investment by an estimated $10 billion between 2018 and 2023, compared to going without additional pipeline access.

Improved market access would also improve oil prices and production, boosting royalties by up to $10.5 billion over the next five years, according to the government.

This won't necessarily alleviate the WTI-WCS price differential, but the increased production volumes associated with improved market access should generate greaterrevenues.

"Perhaps the differentials will improve over time as things changein the North American market but the budget isn't expecting anything substantial; it's largely linked to increased volumes,"Ben Brunnen of the Canadian Association of Petroleum Producers saidin an interview.

Add it all up and the situationexplainsAlberta's apparent resolve to see more pipeline capacity built, and even Premier Rachel Notley'swillingness to get into a trade battle with B.C. over Trans Mountain.

But even with the Alberta government's backing, Trans Mountain still faces stiff opposition in B.C. and Line 3 must still get its final approval from Minnesota. Keystone XL continues to face legal hurdles putup by concernedNebraska landowners.

So while Thursday offered a clearerlook ofwhat's at stake for theoilpatch and the Alberta government in getting more pipeline capacity built, thepicture around exactly when or if all of theprojects get done maystill seema little cloudier than many Albertans might like.