Alberta works magic as oil production-cut plan staves off crisis

Alberta Premier Rachel Notley is ordering a mandatory cut in oil production to deal with a price crisis that she says is costing Canada an estimated $80 million a day.

Alberta’s oil-production curtailment plan has largely accomplished its mission, even before it has gone into effect. Notley says as of January there will be an 8.7 per cent reduction ordered in oil production.

Output of raw crude oil and bitumen will be reduced by 325,000 barrels per day. Oil producers are saying the 8-day-old plan will bring “significant relief” to the province’s pipeline congestion problem, and it’s even being credited with preventing layoffs for at least one major oil-sands company.

The grade’s discount to the U.S. benchmark has been chopped in half to around $13/bbl, the narrowest in more than a year. That figure is expected to shrink as a glut of oil in storage is reduced.

The plan announced by Alberta Premier Rachel Notley probably has encouraged producers to start dialing back output because they know they can do so without putting themselves at a disadvantage to rivals, Pickering said.

Capital spending among Canada’s explorers and producers may increase 5% in 2019, trailing the 10% growth in the U.S., according to a survey conducted by Evercore ISI.

Notley says the action is necessary to reverse the widening price differential that she said could cause further harm to Alberta’s economy if not addressed immediately.

Canadian Natural Resources last week pegged its 2019 plan at C$3.7 billion ($2.8 billion), or about C$1 billion less than normal. Alberta’s oil is selling at markedly lower rates compared with the North American benchmark, due in part to oil pipeline bottlenecks.

“In the last few weeks, this price gap has reached historic highs because we are producing considerably more product than there is transport capacity,” Notley said in a speech timed to run live on supper-hour newscasts in Alberta. There are worries about longer term effects as well.

“This is creating a huge backlog and forcing the price of our oil to ridiculously low levels. We are essentially giving our oil away for free.” Roughly speaking, Notley said, while the rest of the world sells its oil at about $50 per barrel, Alberta fetches only $10.

The announcement is expected to narrow the differential by at least $4 per barrel and add an estimated $1.1 billion to government revenues in 2019-2020. The Opposition United Conservatives and the centrist Alberta Party had already called for the production cut.

The S&P/TSX Energy Index has slid about 3% since the policy was introduced, a period coinciding with a global market meltdown that also includes a roughly 3.3% drop for the broader S&P/TSX index.

The premier has already said the province will buy as many as 80 locomotives and 7,000 rail tankers expected to cost hundreds of millions of dollars to move the province’s excess oil to markets, with the first shipments expected in late 2019.

But she has said that rail cars, along with eventually increasing domestic refining capacity and building new pipelines, won’t bring relief soon enough. “We must act immediately,” Notley said Sunday.

“The Alberta intervention works over the short term,” Sandy Fielden, an analyst at Morningstar, said in a note Monday. Notley thanked them both in her speech. Industry feelings prior to the announcement had been mixed. Cenovus Energy proposed the idea of a production cut last month.

However, Imperial and Husky said Friday they remain opposed to involuntary production cuts. The move is not unprecedented in 1980, Tory premier Peter Lougheed forced oil production cuts to protest the federal Liberals’ national energy program.

The mandated cut ends on Dec. 31, 2019 and will be spread among all producers in an effort to stave off massive job losses. The mixed sentiment is reflected in the muted response in Canadian energy shares since the curtailment announcement.

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