Alberta government’s decision to respond to the very low Canadian heavy oil prices with mandatory production cuts of 325,000 bpd has created a division among Canada’s oil industry.
The government of Alberta has achieved its primary goal with the cuts—to lift the price of Western Canadian Select (WCS) and to help narrow the huge differential between WCS and WTI from late 2018. In recent weeks, the discount of WCS to WTI has been below US$15 a barrel, compared to more than a US$40 differential in the fall of 2018.
The production cut in a free market like Canada, however, has drawn uneasy comparisons with the way OPEC intervenes on the global oil market to curtail production at times of glut or to ramp up oil supply when shortages are created or expected.
While some Canadian companies, such as Cenovus Energy, have argued for all-round cuts across the industry, others—including Imperial Oil, Suncor Energy, and Husky Energy—were against cuts across the board and they continue to hold the view that the Alberta government has been wrong in intervening on the free market. Some analysts have also chimed in against the cuts, noting that such OPEC-style market intervention would erode business and investor confidence in Canada’s oil industry.
Alberta’s Premier Rachel Notley also announced last month an investment of US$2.8 billion (C$3.7 billion) in moving up to additional 120,000 bpd crude by rail by 2020.
The plan by the NDP government drew harsh criticism from Jason Kenney, the leader of the United Conservative Party (UCP), ahead of the provincial elections this spring.
The UCP leader said that the plan is a “reckless waste of four billion tax dollars, moving the risk from the private sector oil companies onto the backs of taxpayers when we can least afford it.”
If elected, a UCP government will do everything within its power to cancel the NDP’s plan to have taxpayer dollars to interfere with the market, Kenney said.
“We believe that the private sector can and will increase rail shipment capacity for Alberta oil when the market conditions are right,” Kenny said, describing Notley’s plan as a “corporate welfare that is a risky venture.”
The private sector, for its part, has been divided since talk of production cuts first emerged.
Cenovus Energy’s President and CEO Alex Pourbaix was one of the first managers to call for cuts from all companies.
“I remain convinced that this curtailment is the right thing for our industry and for Albertans,” Pourbaix said on the Q4 earnings call in mid-February.
“Ultimately people need to keep in mind that this has been a short-term solution for an extreme situation that was many years in the making,” he said.
Other Canadian oil firms, however, do not support the OPEC-like market intervention. Those are mostly companies with investments in downstream operations that had benefited from the very low prices of refinery feedstocks.
“We believe that intervention to artificially manipulate markets introduce free trade risk, particularly in an integrated market such is North America,” Rich Kruger, CEO at Imperial Oil, said on the Q4 earnings call in early February.
“So in short, with a stroke of a pen, the government began picking winners and losers. We think this action is unfair, anticompetitive and not representative of free economy in a modern democracy,” Kruger noted.
“Recent actions by the Government of Alberta to intervene in the oil market have added further uncertainty and unpredictability into the business and investment climate,” Imperial Oil said in its earnings release.
Suncor Energy said as early as the curtailment was announced that “Suncor believes the market is the most effective means to balance supply and demand and normalize differentials.”
Husky Energy said in an earnings release last week:
“Husky believes that this abandonment of free market principles has impacted investor confidence and created several business challenges, including the Company’s ability to process and transport its production to markets unimpeded, and profitably. Curtailment rules disproportionately impact companies, like Husky, with significant Downstream and midstream investments relative to producers who have not made these investments.”
“We will continue to urge the government to immediately ease these punitive of production cuts and develop a clear plan to end the program and reestablish Alberta’s reputation as a market economy,” Husky CEO Robert Peabody said on the conference call.
Alberta eased some of the cuts last week, saying that April oil production would be up by 100,000 bpd compared to the initial limit set for January.
The provincial government has always said that production curtailment is a short-term solution to Canada’s constrained takeaway capacity. Alberta has been fighting for more oil pipelines amid fierce opposition from neighboring British Columbia and amid regulatory and court ruling setbacks. More pipeline capacity is the preferred option for all Canadian producers, including for those who support the short-term oil production cuts.
“Ultimately we still need new pipelines to improve market access and to address the problem of wide differentials,” said Cenovus Energy’s Pourbaix.