Alberta’s government is ordering the province’s oil sector to cut production starting in the new year in a bid to deflate the supply glut that has sent prices plummeting, sparking an economic crisis that threatens thousands of jobs.
Premier Rachel Notley announced Sunday that Alberta’s oil patch will need to cut production by 8.7 per cent next year, about 325,000 barrels daily, to clear a large surplus of oil as production has soared beyond pipeline capacity. The plan marks a hard turn away from the province’s traditional free market outlook and comes at a time when Ms. Notley deals with energy titans at odds over how to fix the crisis.
The announcement comes in addition to a plan to purchase thousands of new rail cars to move oil, a proposal that has yet to get Ottawa’s support. Ms. Notley said the current situation is “fiscal and economic insanity” and is creating a cash-flow crisis at energy companies. She placed the blame squarely on the federal government’s inability to get a new pipeline built.
“In Alberta we believe that markets are the best way to set prices, but when markets aren’t working, when companies are forced to sell our resources for pennies on the dollar, then we have a responsibility to act, a responsibility to defend our province,” said Ms. Notley. She added that Alberta’s current oil price woes threaten Canada’s economic well-being.
The government expects it will be able to roll back the production cut to only 95,000 barrels a day in the spring after storage tanks begin to empty out.
The curtailment rules, which are expected to narrow the discount on Alberta’s oil by US$4 a barrel, will be presented to Ms. Notley’s cabinet on Monday and will not require new legislation. Only the largest 25 producers in the province, out of about 335 operators in total, will need to cut production under the plan.
Calling out anti-pipeline Canadians, Ms. Notley said that their actions will only lead to a move toward more trains and trucks carrying oil – both are more expensive and risky. “You might want to think about that the next time you’re held up at a railway crossing,” she said.
United Conservative Party Leader Jason Kenney said Sunday night that “today’s decision was a necessary one.”
Ms. Notley has faced an energy industry divided over the prospect of mandatory production cuts. While some producers such as Cenovus Energy Inc. have called for the provincial government to manage the supply of oil, others such as Imperial Oil Ltd. and Husky Energy Inc. have said the free market should deal with the supply imbalance.
Cenovus chief executive Alex Pourbaix was a major proponent of the production cut and applauded the Premier for taking action. “While curtailments have been used before by previous governments, we believe they should only be used for a short period of time, and only in extreme cases. This is an extreme case,” Mr. Pourbaix said in a statement Sunday evening.
Imperial Oil CEO Rich Kruger said the government intervention in the market could do long-term damage to the market, but that his company would comply with the order. “Our view remains that free markets work and intervention carries trade risks and sends a negative message to investors about doing business in Alberta and Canada,” he said in a release.
Suncor Energy said Monday morning that it is assessing the impact of the announcement. The company agreed with Imperial’s position.
“Suncor believes the market is the most effective means to balance supply and demand and normalize differentials. Less economic production was being curtailed and differentials were narrowing as a result of market forces,” the company said in a statement.
The price of a barrel of oil from Alberta has hovered around a near record low of US$10 in recent weeks, US$40 less than the benchmark West Texas Intermediate price paid to most U.S. producers. The price gap, which Ms. Notley says costs the national economy about $80-million daily, has been blamed on the many roadblocks to building new pipelines in Canada.
A number of pipeline projects to the U.S., as well as to the Pacific and Atlantic coasts, have been cancelled or delayed over the past decade as energy production in Canada’s oil patch has continued to grow.
One of the few viable remaining pipeline projects, the Trans Mountain pipeline, was purchased by the federal government earlier this year for $4.5-billion in a bid to push through a long-planned expansion of the conduit. However, a Federal Court of Appeals halted the expansion and ordered the National Energy Board to review the project, which would have tripled the flow of oil from Edmonton to Vancouver.
More than 35 million barrels of Alberta oil are now sitting in storage, waiting for space on overburdened pipelines, according to the Premier. One of the few remaining methods of transporting landlocked energy has been on Canada’s railways, which are now carrying a record volume of oil.
To help move even more oil on the rails, Ms. Notley pledged last week to purchase as many as 80 locomotives and 7,000 tanker cars. The new trains are expected to begin shipping oil in late 2019 and could carry about 120,000 barrels of oil daily.
Ms. Notley warned last week that new rail cars, pipelines and increased domestic refining will not bring relief soon enough to her province. A number of energy experts have cautioned over recent weeks that unless more immediate action is taken to deal with the price gap new investment in the oil patch will drop off. A lost season of drilling could mean the loss of thousands of jobs across Alberta. The province’s oil industry has only regained a quarter of the 40,000 jobs lost after its previous crash, which began in late 2014.
Federal Natural Resources Minister Amarjeet Sohi said the federal government supports Alberta's effort to get the best value for its crude.
“We share Alberta’s frustration at the ongoing and unacceptable discount and we have been clear, the status quo cannot continue,” Mr. Sohi said in a release.
“The fact is, our government inherited a flawed system that led to projects going before the courts rather than getting shovels in the ground. Our government has been taking steps since day one to ensure that good projects can move ahead by making the issue of market access a priority.”
With a report from Molly Hayes