Alberta’s intervention in the oil market accomplished its mission by boosting heavy oil prices, but in the longer term the move may do more harm than good, one of the industry’s best-known forecasters said as he stepped down from his longtime post.
In early December, Alberta Premier Rachel Notley mandated an 8.7-per-cent reduction in oil production – some 325,000 barrels a day – to narrow a gaping discount on heavy crude against U.S. benchmark light oil that forced big losses in operations. It takes effect in January.
But major producers had already begun to respond by cutting back output on their own, said Martin King, who left in December as oil and gas price analyst at GMP FirstEnergy after more than two decades in the chair.
“I was personally not in favour of government intervention on this. The market was already sending clear signals that we didn’t need all this production,” Mr. King said in a recent interview.
Before the government imposed cuts, energy companies had said they were on track to reduce production by as much as 160,000 barrels a day, with the price discount driving the decisions. Tight pipeline space was a factor in the glut, but so were short-term problems such as extensive maintenance at U.S. refineries, which slashed demand for Alberta crude.
The provincial government’s intervention provides more temptation to more meddle in the market and does not solve fundamental problems, such as the lack of pipeline capacity, Mr. King said.
“That is always the wrong thing to do, especially in an industry that is as unpredictable and fast as the oil industry, and I don’t just mean in Canada but globally,” he said. “Things can change very quickly. We’ve seen that with the U.S. over the last few years with shale oil – it’s now an exporter and certainly on a large scale.”
The spread between Western Canada Select heavy oil and U.S. benchmark West Texas intermediate had widened past US$40 a barrel in October and by November it pulled the price of the Canadian oil down below US$14. The price improved by as much as 50 per cent on the first day of trading after Ms. Notley’s announcement, and WCS has since climbed to more than US$30 a barrel as the discount narrowed to less than US$15.
The price differential will remain narrower in the coming months, Mr. King said. The wide price spread made it worthwhile to move as much crude by rail as possible and that business was starting to pick up, he said. A potential unintended consequence of the production cut is that the price spread falls below the cost of moving the crude to U.S. markets by rail, causing supplies to back up into Alberta again.
The supply cut had the backing of some producers, including MEG Energy Corp. and Cenovus Energy Inc., but integrated energy companies including Husky Energy Inc. and Suncor Energy Inc., whose refining operations benefited from low oil prices, urged the province to stay out of the market.
The government has also made other moves to deal the seemingly endless delays in building new pipeline capacity to the West Coast. Prior to the production cut, Ms. Notley announced plans to buy 7,000 railway tank cars to help the industry shuttle Alberta crude to refineries and ports around the continent. Mr. King sees this as a risky investment that should be borne by the railways as opposed to the government. The cars will likely not get delivered until the end of 2019.
“If they are going to move this stuff by rail, most of it will end up being sent to the south, to the Gulf Coast, and probably end up being exported anyway. And the market would have just done that for you, in terms of the surplus,” he said, referring to the increased demand from refiners due to the low cost of the crude. “And potentially, two or three years from now, those rail cars might not even be needed, so the government’s going to be stuck with this rusting asset.”
Mr. King, 52, is a self-described “data and research geek” and a fixture in the energy industry since joining FirstEnergy in 1997. His breakfast events at the Calgary Petroleum Club, where he has delivered oil and gas price forecasts with dry one-liners, regularly attracted audiences in the hundreds.
When Mr. King joined the brokerage, the industry’s small and mid-size companies were at the start of a major boom in investment and activity. That sector has been hit the hardest since the downturn began in 2014, but its ingenuity will help pull it out of the current crisis, he said.
“I’m optimistic in the power of markets and smart people. I just hope the government doesn’t get in the way too much,” he said.