Alberta spreads the pain
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Notley imposes first oil production cuts in Canadian history; companies unhappy
Gary Park for Petroleum News
Alberta Premier Rachel Notley, with the full backing of her political rivals, has gone where no previous provincial government has ventured, ordering a cut of 325,000 barrels per day of oil production in a desperate effort to shrink the crude price differential that is plaguing the industry.
“We must act immediately and we must do it together,” she said in a nationally televised speech on Dec. 2.
While conceding the decision was “very difficult,” she argued that “when markets aren’t working ... then we have a responsibility to act. This is a critically important matter for Canada’s economy, not just Alberta’s economy.”
The mandated reduction will start in January, lowering output by 8.7 percent, although the government estimates the number will drop to 95,000 bpd in the first quarter and continue at an unknown level until Dec. 31, 2019.
It will affect about 25 producers, but exempt companies that produce less than 10,000 bpd.
Initial objective An initial objective is to eliminate 35 million barrels of crude currently in storage and end the surplus of 190,000 bpd of raw crude oil and bitumen that Alberta is unable to send to United States and offshore markets because of bottlenecks in pipelines and continued delays in the Keystone XL and Trans Mountain expansion projects.
Notley is making the first use by any Alberta premier of 1947 legislation to counter what she calls “fiscal and economic insanity.”
Her action came only three days after she announced that Alberta will pay about C$350 million to buy 80 locomotives to raise crude-by-rail shipments by about 30 percent or 120,000 bpd, indicating a timetable should be known before year’s end.
“Alberta will buy the rail cars ourselves to move our oil,” she said. “And we’re not wasting any time.
“Should we be selling our most valuable commodity for pennies on the dollar? No, that is stupid.”
WCS prices in slump The rapidly gathering crisis has seen prices for Western Canada Select heavy crude slump to US$10 a barrel and is costing the Canadian economy an estimated C$80 million a day.
It has been compounded by new evidence that Canada has fallen out of favor with international investors and threats by some drilling and service companies to slash their 2019 capital spending plans by 80 percent, which could result in thousands of layoffs on top of the estimated 160,000 since 2014.
For the first time in a widely followed annual survey by the independent Fraser Institute, Canada has fallen out of the top 10 oil and gas jurisdictions as an attractive place to invest.
Tim McMillan, president of the Canadian Association of Petroleum Producers, said Notley’s decision “further underscores the need for Canada to increase exports of our oil and natural gas to existing and new markets, which will ultimately help meet global demand and expand our customer base.”
Integrated companies unhappy However, the output cut got a chilly reception from Suncor Energy, Imperial Oil and Husky Energy, the three integrated companies that produce, upgrade and refine crude bitumen and benefit from the low prices for feedstock from the oil sands.
Imperial Chief Executive Officer Rich Kruger said “intervention carries trade risks and sends a negative message to investors about doing business in Alberta and Canada.”
On the other side, Cenovus Energy CEO Alex Pourbaix said the strategy will “help balance the market in the short term until new rail and pipeline capacity comes on stream next year.”
GDP forecast lowered The situation is so dire that ATB Financial chief economist Todd Hirsch lowered his forecast for the Alberta economy twice before he released it on Nov. 28, pegging gross domestic product growth at 2.1 percent in 2019 and targeting an unemployment average for the year of 6.1 percent.
“We are in a dramatically different oil price environment than we were two months ago,” he said. “In Alberta’s economy, we feel like we’re in suspended animation, waiting for something to happen.”
Pressure on Alberta - in the absence of any commitment by the Canadian government to set a new target date to resume construction on the 690,000 bpd expansion of the Trans Mountain system to a Vancouver tanker port - to increase rail capacity has intensified with word from the National Energy Board that Canada’s oil output will average 4.59 million bpd this year, 22,000 bpd more than expected.
However, those otherwise encouraging signs are clouded over by the annual investment survey by the Fraser Institute.
“The takeaway for Canada is that we’re becoming increasingly less attractive for (oil and gas) investors than our neighbors (in the United States),” said Ken Green, co-author of the survey.
The result was that none of the top 10 jurisdictions, as rated by 250 industry insiders, were located in Canada. Nine out of 120 were located in the U.S., with Texas, Oklahoma and Kansas leading the way.
Within Canada, only Alberta was considered a “large reserve” holder, with the oil sands identified as the third largest oil and gas basin in the world, behind Texas and Russia, but the province slumped by 10 ranking places.
Green said the “concerns” expressed by investors were “regulatory” in nature, reflecting the time needed in Canada to “weave through the regulatory forest.”
“We’re hemmed in and virtually everything we have is a drainage system right into the U.S. (which accounts for 99 percent of Canada’s oil exports),” he said.
Incentives, credits possible SUBHED: Incentives, credits possible
In exploring other ways to throw a rescue line to Alberta producers, government sources told the Globe and Mail that royalty incentives and credits might be offered by the Notley administration to spur production, including the prospect of a royalty holiday.
Alberta Energy Minister Marg McCuaig-Boyd also lashed out at federal Finance Minister Bill Morneau who told the Calgary Chamber of Commerce in late November that the government of Prime Minister Justin Trudeau is not interested in “diverting our resources to ideas (such as increased rail capacity) that won’t actually have an early impact.”
McCuaig-Boyd said Morneau “doesn’t seem” to grasp the extent of Alberta’s crisis, describing him as “very tone deaf.”
Canada’s Natural Resources Minister Amarjeet Sohi reiterated his government’s refrain that the current situation is a crisis but offered no remedies.
“The status quo cannot continue,” he said, arguing the Trudeau administration has been working since it was elected more than three years ago to ensure pipeline projects “can move ahead by making the issue of market access a priority.”
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