Alberta’s Premier has mandated short-term reduction in oil production

Premier Rachel Notley is ordering a mandatory cut to oil production to deal with a price crisis she says threatens to gut Alberta’s bedrock industry. The price gap is caused by the federal government’s decades-long inability to build pipelines.

Notley announced the province will impose across-the-board cuts amounting to 8.7 per cent of output to reduce a growing glut of oil that is forcing Alberta oil to sell at steep discounts compared with the North American benchmark.

Ottawa’s failure in this area has left Alberta’s energy producers with few options to move their products, resulting in serious risks for the energy industry and Alberta jobs.

“In the last few weeks, this price gap has reached historic highs,” Notley said Sunday in a speech timed to run live on supper-hour newscasts in Alberta. 

“We are essentially giving our oil away for free.” “Every Albertan owns the energy resources in the ground, and we have a duty to defend those resources.

Under the action announced, production of raw crude oil and bitumen will be reduced by 325,000 bpd to address the storage glut, representing an 8.7% reduction. Roughly speaking, Notley said, while the rest of the world sells its oil at about $50 per barrel, Alberta fetches only $10.

But right now, they’re being sold for pennies on the dollar. Fire-sale prices have led to concerns the oilpatch will have to find savings elsewhere in the coming weeks and months by slashing capital spending or jobs.

Notley said the 8.7 per cent reduction begins in January, with the expectation that figure will gradually decrease until the cuts are scheduled to end on Dec. 31, 2019. The Alberta Energy Regulator will implement the reductions starting in January 2019.

“This is a short term measure,” she said. Output of raw crude oil and bitumen will be reduced initially by 325,000 barrels per day. As the excess storage clears, the reduction is expected to drop to 95,000 barrels a day.

Premier Notley’s fight to get top dollar for our energy resources includes a made-in-Alberta strategy to build new pipelines, invest in new rail capacity, and add value through more upgrading of oil and gas here at home.

The province estimates 25 producers will have to impose cuts. About 35 million barrels of oil are in storage about twice the normal levels. There will be a 10,000-barrel-per-day exemption to ensure small producers are not hurt disproportionately.

Alberta currently produces 190,000 bopd more than can be shipped using existing pipeline and rail capacity. 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 move is not unprecedented in 1980, Tory premier Peter Lougheed forced oil production cuts to protest the federal Liberals’ national energy program. The initial curtailment of 325,000 bopd (8.7%) is expected to drop over the course of 2019.

The current glut is due in part to pipeline bottlenecks. Using methodology from Scotiabank, revised based on the wider light and heavy differentials, it’s estimated that the discount on Canadian oil caused by pipeline bottlenecks now costs the Canadian economy more than $80 million/day.

The Trans-Mountain line to the B.C. coast is now in legal limbo despite being approved two years ago. The Enbridge Line 3 project, shipping more oil from Alberta to the U.S. Midwest is expected to come online late next year.

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.

The level of curtailment for each company will be based off its six months of highest level of production over the past 12 months. The Opposition United Conservatives and the centrist Alberta Party had already called for the production cut. Notley thanked them both in her speech.

The reduction reflects broad consensus in industry and input gathered by expert envoys appointed in November to work with oil companies on solutions to the oil price differential. Opposition United Conservative Leader Jason Kenney said Notley made the right decision.

But he said Notley’s government has played a role in creating the problem by not pushing back as the federal government cancelled the Northern Gateway pipeline to B.C. and introduced legislation that industry leaders say will make it more difficult to get oil megaprojects approved.

“Many of these policies (were) supported either by acquiescence or actively by the NDP government,” said Kenney. Additional oil takeaway capacity is expected to be available in late 2019, in part through Alberta’s major investment in crude-by-rail transport.

“That’s one of the reasons why in the past week we’ve been giving away our oil.” Alberta Party Leader Stephen Mandel said the government was warned in the spring that this crisis was coming, and should have acted sooner.

After excess storage is drawn down, the reduction will drop to an estimated average of 95,000 bpd until Dec. 31, 2019 when the rules supporting this action end. “They dragged their feet.

They had an opportunity early to do something and they didn’t,” said Mandel. “It’s frustrating to me to see so many people losing their jobs as a result of this incompetence.”

Industry feelings prior to the announcement had been mixed. The price differential for Western Canadian Select (WCS) versus West Texas Intermediate (WTI) has been around $30 to $50 recently, peaking at $52 in October.

Cenovus Energy proposed the idea of a production cut last month. However, Imperial and Husky said Friday they remain opposed to involuntary production cuts.

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