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Alberta Alberta government pulls back oil production limits as CNRL warns of layoffs

Alberta Premier Rachel Notley, shown here in Edmonton on Dec. 2, 2018, says the government would continue monitoring the impact of the cuts and adjust them as needed.

JASON FRANSON/The Canadian Press

The Alberta government is pulling back on oil production limits it imposed earlier this year, after complaints from some of the province’s largest producers and a warning from one company that job cuts were imminent.

The province cut production in January by 325,000 barrels a day. On Wednesday, the government announced it was increasing production for February and March by 75,000 b/d, bringing the overall limit to 3.63 million b/d.

Premier Rachel Notley announced the production cuts in December as part of a plan to address a glut of oil that had far exceeded pipeline capacity and contributed to a significant discount on the price of Alberta oil. The Premier has said the differential was costing the Canadian economy $80-million a day, although prices for Alberta crude have increased substantially in the past month.

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Integrated producers that also own refineries and benefit from low oil prices, such as Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Corp., have objected to the curtailment policy and insisted the government should not be trying to manipulate the market. Canadian Natural Resources Ltd. and Cenovus Energy Inc. supported the production limits, but CNRL has recently said changes to how the limits are calculated unfairly targeted the company and would lead to job losses in February.

Ms. Notley defended the curtailment policy on Wednesday and stressed it’s not a permanent solution to the problems facing the province’s energy industry.

“When we made the decision to curtail, we knew at the very outset that it was a big decision, it was a bold decision and it was a difficult one, because not everyone agreed,” the Premier said at an unrelated event in Calgary before the curtailment changes were announced.

“We’ve seen the differential drop dramatically, but frankly it’s not our intention for it to stay this low for a long period of time.”

Ms. Notley said the government would continue monitoring the impact of the cuts and adjust them as needed.

The cut to oil production was one of a series of policies from the provincial government aimed at addressing persistently low crude prices that are largely blamed on an inability to increase pipeline access. In particular, the industry has suffered because of the price gap – known as the differential – between Alberta oil and West Texas Intermediate. Last fall, the differential topped US$50 a barrel, but it has narrowed in the past few weeks to less than US$10.

The curtailment policy affects 28 producers. The initial limits were calculated based on each company’s highest six-month average from November, 2017, to October, 2018. The province changed the formula for February, instead looking at producers' best single month over the same period.

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CNRL sent a letter to its suppliers last week saying the change in the formula significantly increased the amount the company was forced to cut. The letter said the company would not be operating its ECHO pipeline, located in the Bonnyville area in northern Alberta, in February and an unspecified number of jobs would be lost as a result.

“The revised methodology is flawed and clearly discriminatory to Canadian Natural and as a result directly impacts the heavy oil regions of Alberta,” the letter said.

The reeve of Bonnyville, Greg Sawchuk, estimated several hundred workers could be affected.

CNRL declined to say whether it would continue with its plans to shut down the ECHO pipeline in light of the changes announced Wednesday, instead releasing a statement that said the company was waiting for more details while it assessed the impact.

Alberta Energy Minister Margaret McCuaig-Boyd said CNRL’s warning of layoffs had no impact on the decision. Instead, she said the changes were based on the level of oil left in storage tanks across the province.

Husky Energy and Imperial Oil each released brief statements repeating the companies’ opposition to the curtailment policy.

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“It’s a step in the right direction, but we stand by our position that markets should be allowed to function without government intervention,” Husky spokesman Mel Duvall wrote in an e-mailed statement.

Cenovus and Suncor both declined to comment.

The United Conservative Party has been critical of the NDP government’s handling of the energy file and the changes to the curtailment formula. The Opposition party issued a statement on Wednesday repeating its critique and adding that the UCP is analyzing the increased production limits.

Ms. Notley has also promoted a plan to purchase rail cars to increase oil shipments by rail and has asked the federal government for financial help.

And last fall, she invited the industry to come forward with proposals to build a new refinery in the province. The government has not said what incentives it would be prepared to offer. The deadline for proposals is Feb. 8.

With a report from Justin Giovannetti

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