The unintended consequences of Alberta's mandatory oil production cut

One of Canada's largest oil companies is listing a series of potential pitfalls from the Alberta government's decision to impose a mandatory cut to oil production in the province.

On Friday, as part of its announcement to investors of2019 capital spending, Suncoroutlined how the production cut could negatively affect the company.

While the majority of the oilpatch is in favour of the move, three of Alberta's larger oil and gas companies are opposed Suncor, Husky Energy and Imperial Oil. The companies have significant refinery and retail businesses, so they are less hurtby the swings in oil prices.

The government expects to slashproduction by 325,000 barrels per day for the first three months of2019, and by about 95,000 barrels for the remainder of the year, in an effort to clear the backlogand improve oil prices in the province.

Suncorpoints out it must have a certain output to keep its refinery operating safely and that its refined oil is less likely to be caught in the pipeline bottleneck that has led to low prices for Alberta crude.

In order of most importance, Suncorlisted the potential unintended consequences of the government's decision, which takes effect in January:

• Impact on safe and reliable facility operating levels, especially during cold winter months when the company typically operates at high levels without planned maintenance. Suncor says it will not put the safety of its employees and contractors at risk.
• Impact on crude oil upgraded and refined in Alberta, which does not contribute greatly toexport constraints.
• Failure to take account of historic and recent performance at Syncrude following the unplanned shutdown earlier this year.
• Partial consideration for Fort Hills production following the completion of startup at the end of the third quarter of 2018.
• Impact on long-term take-or-pay pipeline commitments for access to the U.S. Gulf Coast.
• Impact from the consumption of in-house diesel production used in mining operations.

Suncor'soilsands facilities are"designed to run at minimum rates in order to run safely and reliably," according to spokeswoman Sneh Seetal, in an emailed response to CBC News.

In addition, Seetalsaid the allotted cutshave "been applied disproportionately" to Suncor.

Some analysts say Suncormay have a point considering two of its facilities were not running at full capacity in 2018, the year on which the curtailment order will be based.

For instance, theFort Hills oilsandsmine ramped up production throughout the year, so the average oil output was much lower than if the plant would have been producing at full capacity all year, like it will in 2019.

It's a similar situation forSyncrude, which had a drop in production during the summer months because of a power disruption. The plant was down for a considerable time, so its output was reduced.The Alberta government said it will use a baseline calculated on the best six months in past years to decide the curtailment of each company.

Suncor is the majority owner of both facilities.

"It's fair to say they are in a particularly disadvantaged situation," said Kevin Birn, an oilsands analyst with IHS Markit.

The policy could affect other industries, besides the oilpatch, including natural gas and condensate producers in the area, since the oilsands is a large consumer of both products. Condensate, or diluent,is a type of super-light oil that is used to thin the thickbitumen produced in Albertaand help itflow through pipelines.

Birnsaid a disruption could occur in the condensate market. In addition, the natural gas sector was anticipating growth in the oilsands in 2019, but that likely won't occur anymore.

"We don't think the oilsands will consume less natural gas because of the curtailment, it just will not grow to the same extent," he said.

Another possible consequence could be an inability for some oil companies to sendthe exact type and volume of oil expected to refineries across the continent. Certain contracts or commitments may not be met.

"They may be in the position of not being able to deliver what they promised to deliver to a refinery," said Birn.