(Reuters) – Canada’s Imperial Oil Ltd is grinding its rail shipments to a near halt and reviewing a multi-billion-dollar oil sands project, due to uncertainty caused by government-ordered production cuts, its chief executive officer said on Friday.
The Canadian province of Alberta ordered mandatory production cuts starting in January to ease an oil glut, lifting Canadian prices sharply. Alberta this week said it would now ease those curtailments slightly.
Integrated producers like Imperial, majority-owned by Exxon Mobil Corp, were hurt by rebounding Canadian prices last month because they weaken their refining margins.
CEO Rich Kruger said Imperial reduced rail shipments in January nearly in half, to 90,000 barrels per day, and plans volumes “near zero” in February due to the curtailments’ impact.
“With the stroke of a pen, the government picked winners and losers,” he said on a quarterly conference call. “The incentive to move crude by rail has been erased. It’s negative, uneconomic.”
A discount of at least $15 per barrel on Canadian heavy oil compared with U.S. prices is needed to make rail economical, but the discount shrank last month to less than half that, Kruger said.
In December, Imperial dramatically increased rail shipments and intended to raise them further, he said.
The cuts were necessary for protecting jobs, said Mike McKinnon, spokesman for Alberta’s energy minister. The government expects the differential between Canadian and U.S. prices to eventually settle into a more sustainable level, he said.
Imperial is scaling back rail shipments as demand for heavy crude from U.S. Gulf Coast refiners climbs with U.S. sanctions against Venezuela taking hold. Imperial has pipeline contracts to ship crude there.
“It reminds me of an old movie, Planes, Trains and Automobiles – any way we can get it there in the right market conditions makes sense,” Kruger said.
Rail was an “insurance policy” against full pipelines for Imperial’s plans to build the 75,000 bpd Aspen oil sands project, but it is now re-evaluating its assumptions related to Aspen, Kruger said.
“The curtailment order, it’s introduced new risk and new uncertainty,” he said. “Is it short-term? I don’t know. We think it’s prudent to re-evaluate and look at the assumptions.”
Even so, Imperial’s 2019 capital budget released on Friday includes C$800 million associated with Aspen, which would cost C$2.6 billion.
Earlier, Imperial posted a quarterly profit that beat analysts’ estimates, as cheap crude enhanced margins at its refining division.
Imperial shares fell 4.4 percent in Toronto to C$35.65.
Reporting by Rod Nickel in Winnipeg, Manitoba; additional reporting by Shradha Singh in Bengaluru; Editing by James Emmanuel, Jeffrey Benkoe, Dan Grebler and David Gregorio