Heavy oil price rebound helps boost MEG Energy revenue, but steeper discounts in the pipeline


CALGARY — The government of Alberta likely overshot its target when it ordered oil producers in the province to scale back their output, but oilsands companies such as MEG Energy Corp. are enjoying the upside.

MEG Energy released its first quarter results Tuesday that showed the company received the highest prices for its bitumen in the past four years at $50.21 per barrel, compared with just $15.31 per barrel at the end of 2018 when Canadian heavy oil was selling for record low prices and the Alberta government issued its curtailment order.

“It goes without saying, one of the most significant impacts on our strong Q1 results was dramatic narrowing of the (Western Canada Select) differential from US$39 to US$12 per barrel,” MEG president and CEO Derek Evans said on an earnings call.

The higher commodity prices are the direct result of the Alberta government ordering major oil producers including MEG to scale back their production in a bid to lift Western Canada Select prices relative to the West Texas Intermediate benchmark.

However, a new report from IHS Markit suggests the province may have been overzealous in demanding producers to scale back production because the discount shrunk to an average of US$13 per barrel, which was below what should have been the government’s target of US$15 per barrel to US$20 per barrel.

The result has been a rapid drop off in oil-by-rail exports from Western Canada because the discount is too low to justify the additional cost of shipping oil on trains to markets such as the U.S. Gulf Coast.

“It was a full-blown crisis, we would have seen companies struggle to remain solvent. They stepped into the market to prevent a worst-case scenario and what they were trying to do was incredibly difficult,” said Kevin Birn, IHS Markit vice-president, North American crude oil markets, in an interview.

The data precision required to accurately achieve this balancing act on a 4 million barrels per day system may simply not be achievable

The report shows how the data available to the government as it tries to manage the curtailment order is difficult to extrapolate and, in some cases, weeks or months out of date. To further complicate matters, changes in one variable such as the discount between WCS and WTI affect other variables such as storage levels and oil moving on trains.

“The data precision required to accurately achieve this balancing act on a 4 million barrels per day system may simply not be achievable,” the report noted.

IHS Markit




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