Factoring curtailment into energy asset evaluations

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Factoring curtailment into energy asset evaluations

On December 3, 2018, the Government of Alberta issued an Order In Council to enact a temporary curtailment of crude oil and bitumen production, effective January 1, 2019, as a short term measure to combat the high oil price differentials being experienced in our province since early October, 2018.  In aggregate, the government plans to curtail 325,000 bopd or 8.7 percent of Alberta’s oil and bitumen production in January.  It is expected that the curtailment target will remain at this level until the 35 million barrels of oil currently in storage is shipped to market at which point aggregate curtailment will be reduced to an average of 95,000 bopd for the balance of 2019.          

How It Works

In its most basic form, the curtailment, which will be implemented and enforced by the Alberta Energy Regulator (AER), is being applied on an operator basis with the baseline for curtailment established by the government based on the operator’s highest 6 individual months of oil and bitumen production over the 12 months leading up to November 1, 2018.  Companies with production at or below 10,000 bopd in their highest 6 individual months over the 12 months leading up to November will be exempt from the upcoming curtailment. On account of the recent high price differentials, some companies have already chosen to shut-in production or delay drilling and project investment; it is therefore anticipated that certain companies may already be producing below their baseline and, accordingly, little to no incremental shut-in production may be required for them to achieve their production limit for January.  In direct relation to their share of the province’s production, the mining and in situ oil sands operators and a few significant conventional oil producers are expected to absorb the bulk of the curtailment.  Information Letter 2018-40 and the Curtailment Rules can be found HERE.

In response to industry the government has issued a follow-up Information Letter 2018-41 making a temporary adjustment to the January production limit for operators facing the highest proportional curtailment; namely, operators that have demonstrated significant production growth through to the end of October relative to their baseline.  The temporary adjustment specifically applies to operators facing more than 16 percent curtailment relative to their recent production in October; it is intended to mitigate possible technical issues that may impact safety or result in long term damage to the resources.   

In acknowledgement of the sudden nature of the temporary production curtailment and in order to address unintended consequences, the AER and Government of Alberta have established a Production Curtailment Issues Panel, chaired by Stacey Schorr, Executive Vice President of Stakeholder and Government Engagement at the AER.  The panel will consider written submissions on unintended consequences and concerns from potentially impacted operators and advise the government before the February production limits are set. 

GLJ Approach

For oil sands operators and significant conventional oil producers GLJ strongly recommends the incorporation of the production curtailment in the December 31, 2018 year end reserves evaluations currently underway.  We note that the industry has already witnessed noteworthy benefit with Canadian heavy differentials falling from roughly 40+ US$/bbl in November to about 16 US$/bbl and Canadian light oil differentials falling from roughly 30+ US$/bbl in November to about 8 US$/bbl recently.  In GLJ’s view, when considering the high-profile nature of the curtailment and the commodity pricing benefit realized subsequent to its announcement, it may be misleading to exclude the curtailment from year end disclosure. 

In order to model the impact, GLJ has been and will be requesting the relevant AER curtailment correspondence from clients, along with direction for allocating the curtailment within the operator’s portfolio.  Assuming aggregate curtailment of 325,000 bopd, GLJ approximates that storage should be cleared by the end of April 2019; thereafter, GLJ will model reduced curtailment for the balance of 2019, in line with the average 95,000 bopd described in the Government of Alberta announcement. 

Should you wish to discuss or investigate the potential impact of curtailment on your assets including the uncertainties in its estimation, please contact Caralyn Bennett at 403 266 9552 or cbennett@gljpc.com.

 

January 3, 2019 Update:

Since posting our blog prior to Christmas, the Government of Alberta has published two subsequent information letters relating to the curtailment.

The first, IL-2018-43,  provides the process for curtailment allocations to be consolidated or transferred per Section 7(1) of the Curtailment Rules. 

The second, IL-2018-46, announces amendment to the Curtailment Rules as adopted on December 3, 2018.  The amendment stems from consideration of submissions made to the Production Curtailment Issues Panel and affects the operator baseline production determination, which starting in February 2019 will be based upon the highest production month between November 1, 2017 and October 31, 2018 as opposed to an average of the highest six individual months during the same period.  This change provides greater recognition for increasing production and associated investment, with a view to mitigating reservoir damage and operational challenges leading to less safe operating conditions.  In addition, the Curtailment Rules will now include a provision to adjust the allowable production in cases where an operator can demonstrate a safety issue related to oil sands facility turndown in January through March. 

Everything else being equal, which is not entirely certain pending the official publication of the new Curtailment Rules, the amendment effectively raises the baseline from which an operator is curtailed, implying less curtailment for each operator since the highest single month of production is most likely to be greater than the average of the six highest individual months of production.  Furthermore, it is expected that the amendment will shift some curtailment volumes from the producers with recent increases in production (or high differences between the highest single month and the average of the highest individual six months) to producers with relatively flat production in the prior year. 

 

March 8, 2019 Update:

For completeness and for reference, we are adding links to the follow-up curtailment related information letters and Curtailment Rules amendments below:

These follow-up information letters have been issued to provide guidance on the transfer and consolidation of curtailment and in response to certain highly specified unintended consequences where long term reservoir impairment may result and where there is a high percentage of freehold production.