Province puts plan in place to curtail oil production and close price gap

Alberta Premier Rachel Notley announced on Sunday that the province will curb oil production by 325,000 barrels per day starting in January to deal with the oil price differential.

Notley says Alberta’s resources are being sold for ‘pennies on the dollar’ and she has ordered oil producers to slash production by 8.7 percent in an attempt to shore up prices.

The province says the price gap is costing Canada more than $80 million per day and is caused by the inability to build pipelines.

“Owing to decades of failure and inaction by successive federal governments, Albertans are unable to transport much of the oil that we produce to market through modern, well-regulated pipelines. As a result we must sell our oil at a discounted price,” said Notley.

Officials say 190,000 raw crude oil and bitumen barrels per day are being diverted to storage because it can’t be shipped and that storage is reaching capacity.

“In the last few weeks this price gap has reached historic highs because we are producing considerably more product than there is transport capacity. This is creating a huge backlog and forcing the price of our oil to ridiculously low levels,” said the Premier.

Under the plan, oil production will be cut by 325,000 barrels per day until the surplus is depleted and then the reduction will drop to 95,000 barrels a day.

"This intervention will provide the kind of predictability and stability to industry players to allow them to keep people on because they can see a light at the end of the tunnel and so we are hoping it will have a neutral to positive affect on jobs going forward,” said Notley.

“Yesterday’s announcement will protect our revenues and our path to balance is assured. I’ve let Albertans know many times that we are going to get reaction to get to balance and I’m confident we will,” said Minister of Finance Joe Ceci. “This action that will come in January 1st will shore up and protect our revenues going forward and that’s what we want.”

Deron Bilous is Alberta’s Minister of Economic Development and Trade and says they knew that industry was divided but action had to be taken

“We know that they were not in favour of curtailment but again what we’ve tried to do is reach a balance and so at the moment, Albertans are getting $10 a barrel, Canadians are getting $10 a barrel of oil, we are losing out of billions of dollars,” he said. “Our government has shown time and again that despite the fact that we’re trying to work with the federal government and we call on them for action, when the line on the other end is silent, we’re not about to wait for them.”

It is hoped that the cuts will narrow the differential by $4 a barrel and add $1.1 billion in government revenue.

“This is a time for unity and for resolve,” said Notley on Monday. “I especially want to stress this to Ottawa. We need them to toss the half-hearted statements away, we don’t actually need Ottawa’s sympathy, we need Ottawa’s full attention. We need them to step up and help us bring an end to this crisis.”

Bilous says the cut in oil production is a short-term solution and is about trying to reduce the backlog of oil that we currently have.

“That coupled with the rail cars that we’re moving forward in purchasing is our medium-term solution. The long-term solution, and we’ve said this from day one, is pipelines. They are the safest and best mode of transport to get our product to tidewater. We will continue fighting for the Trans Mountain pipeline, for Keystone XL and as well, line 3 is under construction,” he said.

The province says each month, the reduction amount will be reviewed and that a 10,000 barrel per day exemption will lessen the blow to smaller oil producers.

“If we see that the differential shrinks significantly and that imposing a curtailment is not necessary for the full twelve months then we’ll adapt,” said Bilous. “We are looking at this in the short, medium and long-term and are confident that our actions will help reduce that differential and ensure that we keep Canada working.”

Some in the industry say the move is a step in the right direction while others say it undermines investments already made to improve market access.

BMO and Imperial Oil released statements saying they are concerned about cuts and that it could put a huge dent in GDP next year. Cenovus is commending the premier for taking action to a growing crisis.

Both the UCP and Alberta Party say the cuts are in the best interest of Canada's economy.    

Lori Williams is a political scientist with Mount Royal University and she says the political consensus is uncommon but speaks to the seriousness of the situation.

“We’re facing, I think, something that qualifies as a crisis, or very nearly that, and there are no other tools available to the provincial government so given that the market or even coalition of players in the market can’t do this on their own without running afoul of price fixing laws, this is something that makes a lot of sense for all of the parties but I give full credit, not just to the fact that they are agreeing on this, but that they’re saying that they don’t want this to be about partisan politics and they want it to be about the interests of Alberta and I have no question that Albertans want to see more of that kind of collaboration,” she said.

The production reduction will start in January 2019 and will be in place until the end of the year.