Canadian oil producers faced an “existential crisis” that required emergency intervention last fall, and Alberta Premier Jason Kenney now has a precedent to order companies to ratchet back output again should heavy oil prices crash, says Alex Pourbaix, chief executive of Cenovus Energy Inc.
Former premier Rachel Notley’s government imposed a reduction of 325,000 barrels of oil a day at the start of the year in response to a massive glut of supply that widened the price differential between benchmark U.S. crude and Western Canada Select (WCS) heavy oil to money-losing levels. Ms. Notley also signed contracts for 4,400 rail cars to move oil as pipeline projects languish – contracts Mr. Kenney has since promised to exit.
“I don’t think it overstates it to describe it as an existential crisis, because we were heading to a situation where almost the entire industry was going to be wiped out,” Mr. Pourbaix said in an interview with The Globe and Mail on Tuesday.
Along with massive corporate losses, Alberta government revenues were quickly drying up as a result of heavy oil prices tumbling well below US$10 in late 2018, he said.
The curtailments cut deep divisions within the industry. Cenovus, along with other oil sands producers such as Canadian Natural Resources Ltd. and MEG Energy Corp., supported the move. Producer-refiners including Husky Energy Inc. and Imperial Oil Ltd. opposed the edict, saying the market should be allowed to correct itself.
Initially, the curbs squeezed price differentials to levels that made most rail shipments to the U.S. Gulf Coast uneconomic when one factors in the cost of transport, but the Alberta government has since eased the restrictions. WCS has sold this week for US$16.40 a barrel less than West Texas Intermediate, according to Net Energy Exchange. That has made moving oil by train to the U.S. Gulf Coast a more profitable proposition.
Mr. Pourbaix pointed out his company – which accounts for about 10 per cent of Canada’s oil output – received a $30-million royalty credit in the fourth quarter of 2018 because it made no profit on production. In the first quarter, Cenovus paid $220-million in royalties because of the price recovery.
The long-term solution is additional rail and, eventually, pipeline capacity rather than government intervention in the market, he said. However, in this instance, the market “had clearly failed.”
The industry sold its oil at heavy losses to the benefit of U.S. refiners, which enjoyed huge profit margins. “That was an untenable situation and the government now has a tool that, if we ever have a crazy situation where we’re giving our product away for free, we can do something about that.”
Mr. Pourbaix said it is crucial that the federal Liberal government pass new legislation aimed at toughening environmental reviews for pipelines and other major projects with amendments that were agreed to by a Senate committee, including the package of changes that were demanded by the industry and the Alberta government.
The amended Bill C-69 was tabled in the Senate on Tuesday for final consideration before it goes back to the House of Commons, where the government will have to determine what changes it will accept.
The Senate amendments represented “a really good compromise,” Mr. Pourbaix said. “It’s putting in some specificity so that you are removing the opportunity for mischievous behaviour” from project opponents.
He said the legislation needs to limit public participation in reviews to ensure advocates do not drag out proceedings, clarify language to reduce the chance of lawsuits, and curb the ability of the regulator and government to extend timelines.
Peter Harder, leader of the government in the Senate, has criticized some of the Conservative amendments, saying they were written by industry for industry.
Mr. Pourbaix characterized the industry-proposed amendments as “thoughtful and reasonable and limited in scope.” Industry leaders realized they could not refashion the bill but tried to focus on “elements of the bills that would be completely untenable for our industry,” he said.
Caroline Thériault, spokeswoman for Environment Minister Catherine McKenna, said it will be up to the Liberal-dominated House of Commons to review any amendments once the Senate has finished. An expert in environmental assessment from the University of Waterloo said many of the proposed amendments would impair the credibility of future project reviews.
In a paper released last week, professor Robert Gibson said he considers only eight of the 187 proposed changes to be positive, while many would completely undermine the review process. “Some [of the amendments] are “especially destructive of prospects for effective and credible assessments and decision making in the lasting public interest,” he wrote.