Any intervention by the government of Alberta to bolster crude prices by ordering an across-the-board production cut would jeopardize Canada’s newly minted free-trade agreement with the Americans and could derail the Keystone XL pipeline project, Imperial Oil Ltd.'s chief executive Rich Kruger said Monday.
In opposing government intervention, Mr. Kruger lined up with other oil companies that own refineries such as Suncor Energy Corp. and Husky Energy Inc. against producers such as Cenovus Energy Inc. and Canadian Natural Resources Ltd., which argue the province needs to step in to address failures in the market.
Alberta Premier Rachel Notley has appointed three experts to work with the energy industry to find ways to close an oil price gap that she says is costing the Canadian economy $80-million a day. But in a news conference in Edmonton on Monday, the Premier did not say whether her government would order companies to cut their production to reduce swollen inventories and boost depressed prices.
In a telephone interview, Mr. Kruger said government intervention would rattle investors, undermine Canada’s trading relations with the United States and jeopardize TransCanada Corp.'s Keystone XL project, which is undergoing a new review by the State Department as the result of a court ruling.
“Government intervention with the objective to manipulate market prices would send a negative message to investors about doing business in Alberta and Canada,” he said, adding the industry is already suffering from a lack of investor confidence. He said it would be unfair for government to take actions that would punish some shareholders and benefit others.
“Our view [is] that intervention would damage the trade relationship with our largest customer, the U.S. ... The industry is working hard to gain approval for a critical piece of infrastructure through the U.S., the Keystone XL pipeline, and anything that would jeopardize this would be ill-advised,” the Imperial Oil executive said.
Mr. Kruger said the new USMC accord contains the same assurances of continental energy trade that the existing North American free-trade agreement contains. An Alberta government action to drive up oil prices to its American customers would stir up hostility as Congress prepares to ratify the new deal, he said, adding it could also provoke a backlash from the Trump administration as it reviews Keystone XL.
In trading Monday, West Texas Intermediate – the key North American benchmark – settled at US$57.20 a barrel for December delivery. Canada’s heavy-oil benchmark, Western Canadian Select, traded at a discount of US$42.70 to WTI – or the equivalent of US$14.50 a barrel – according to Net Energy, a Calgary-based trading firm.
To find ways to close the price gap, Ms. Notley appointed Robert Skinner of the University of Calgary’s School of Public Policy, deputy Energy Minister Coleen Volk and Brian Topp, Ms. Notley’s former chief of staff and a policy consultant. The Premier gave them two to four weeks to report back to her, though she acknowledged that there must be a long-term solution to the problem.
“In the face of this punishing differential brought about by too few pipelines, we must do what we can to close this differential as much as we can,” she said. “Everything that we do short of building new pipelines and getting more value from our resources is not a long-term fix.”
However, Cenovus reiterated Monday its call for the government to intervene to require a broad-based cut in production, saying “immediate and decisive action” is required.
“While more pipelines and rail capacity are the long-term solution, we continue to believe that the only effective way to address wide differentials in the short term is through temporary industry-wide production cuts, which can only be mandated by government," the company said in a statement.
Last week, Cenovus chief executive Alex Pourbaix said companies such as Suncor and Imperial are benefiting from the depressed price because they are processing the low-cost crude in their refineries.
In the interview Monday, Mr. Kruger said Imperial took a strategy to maintain both production and refining operations to hedge against low crude price. At the same time, the company invested in crude-by-rail capacity as an “insurance policy” that is paying off. It expects to increase capacity at its Edmonton-area terminal from 80,000 barrels per day earlier this year to a 125,000 average in the fourth quarter of 2018, and eventually to 210,000 barrels per day.
Meanwhile, the market is working as companies cut back high-cost production and transportation capacity grows, he said.
“There is no question it is extremely challenging and it is extremely challenging for all producers, large and small ... But we didn’t get into this situation over night and we’re not going to get out of it overnight.”
With a report from The Canadian Press