Alberta to cut oil production by 8.7 per cent to deal with low prices
Amanda Coletta, CTVNews.ca Staff
Published Sunday, December 2, 2018 12:26PM EST
Last Updated Sunday, December 2, 2018 11:07PM EST
Alberta’s premier announced on Sunday that the province will temporarily cut its oil production in an attempt to shore up prices and reverse a historic price gap that has seen Alberta crude sell for significantly less than the world price.
Premier Rachel Notley said the province will mandate a temporary oil production cut of 325,000 barrels of oil per day, or 8.7 per cent, starting in January 2019. She added that the reduction will be subject to a monthly evaluation and that the curtailment amount will decrease over the year.
“In Alberta, we believe that markets are the best way to set prices,” Notley said. “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, to defend our province and to defend our resources.”
Notley said that she expects the cuts to remain in place until the 35 million barrels of oil currently sitting in storage because of what she describes as “unsustainable” transportation bottlenecks are shipped to market.
She said the oil price crisis is costing Canada an estimated $80 million a day.
“We are essentially giving away our oil for free,” she said, adding later that the unprecedented price gap is not just an Alberta problem, but one that affects “the economic wellbeing of our country.”
Western Canada Select, Canadian crude, was trading at $15.45 a barrel at the end of the trading day on Friday, marking a sharp gap with the North American benchmark, West Texas Intermediate, which was trading at $52.86 a barrel.
The measure is expected to narrow the price gap by at least $4 per barrel and add an estimated $1.1 billion to government coffers in the fiscal year beginning April 2019.
Notley said the province would be monitoring the implementation of the cuts to ensure there were no “unintended consequences,” including for smaller oil companies, which are already being squeezed more than the larger ones.
To protect smaller producers, the first 10,000 barrels of a producer’s output will be exempted from the curtailment.
“I think when it is something this acute, everyone has to pitch in,” Joan Pinto, an energy specialist with CIBC, told CTV News Channel. “It’s short-term pain, but gain spread across the board.”
Notley’s announcement comes on the heels of a raft of other measures that the province has taken to address the crisis in its energy industry.
In recent weeks, the province appointed three envoys to study potential solutions and said it would be buying thousands of rail tankers and up to 80 locomotives to get its product flowing, but those measures are not expected to be in place until late 2019.
Notley said building new pipelines would be a long-term solution, but quicker action is needed – either by letting the market sort itself out or by the government stepping in and cutting production.
According to Notley, the industry is split on which option should be chosen.
The Suncor, Imperial and Husky companies have been vocal about their opposition to a government-mandated curtailment, while Cenovus Energy has been calling on Notley’s government to cap production levels.
“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,” Alex Pourbaix, the president and chief executive officers of Cenovus Energy, said in a statement following Notley’s announcement. “This is an extreme case.”
“It is one of the toughest decisions we will make as a province, but I promise you this: your jobs, your kids, and your futures will remain our absolute focus,” Notely wrote this weekend in an op-ed in a number of Albertan newspapers.
Canada has the world’s third-largest oil reserves, with the vast majority of Alberta’s oil exports going to the United States.
Federal Natural Resources Minister Amarjeet Sohi said in a statement Sunday that the Alberta government “made an important decision that they have determined to be in the best interest of Albertans.
“We share Alberta’s frustration at the ongoing and unacceptable discount and we have been clear, the status quo cannot continue.”
Jason Kenney, the leader of the Alberta United Conservative Party, said in a press conference on Sunday that while his party believes in “free markets,” he supports Notley’s cuts.
“Today’s decision was a necessary one,” he said, but added that he thought the announcement should have been made earlier.
Andrew Scheer, the leader of the federal Conservatives, said in a statement that Notley’s “drastic and extraordinary announcement this evening lies squarely at the feet of Justin Trudeau.”
He blamed the prime minister for implementing a carbon tax and failing to secure an extension of the Trans Mountain pipeline, which would move crude oil from Alberta to the Pacific Coast and then onto tankers bound for Asia.
In August, a federal appeals court blocked regulatory approval of the Trans Mountain project, arguing in its unanimous decision that the government failed to meaningfully consult with Indigenous peoples along the pipeline’s route and relied on a study that did not fully consider the impact of increased oil-tanker traffic on the environment.
Kinder Morgan, the company behind the Trans Mountain project, approved the $4.5 billion sale of the pipeline to the Canadian government shortly after the court decision.
Asked about the issue on CTV’s Question Period before Notley’s announcement, federal Innovation Minister Navdeep Bains said the government was attempting to help the oil industry by looking for ways to help diversify the market for Alberta oil and by purchasing the Trans Mountain pipeline.
“We’re taking every possible tool that we have in our toolbox to bring in more investments,” he said.