Alberta Premier Rachel Notley has announced a temporary 8.7 per cent oil production cut, or decrease of 325,000 barrels a day, in the production of raw crude oil and bitumen starting Jan. 1, 2019.
In an announcement Sunday evening, Notley said the daily cuts will remain in place until the 35 million barrels of processed oil currently in storage is shipped to market, likely by the spring.
The reduction will drop to an average of 95,000 barrels a day until curtailment ends at the end of 2019, when Enbridge’s new Line 3 pipeline starts operating.
The Alberta government also expects to acquire locomotives and rail cars by the end of next year to transport 120,000 barrels a day.
Notley said the decision to impose mandatory curtailments was difficult, but necessary.
“In Alberta we believe that markets are the best way to set prices, but when markets aren’t working, when companies are forced to sell our resources for pennies on the dollar, then we have a responsibility to act,” Notley said, adding the government has “a responsibility to defend our province and to defend our resources.”
Smaller companies not affected
The cuts will affect about 25 larger bitumen and conventional producers. Larger producers will see their first 10,000 barrels exempted each day. Companies that produce less than 10,000 barrels a day will not be affected by the daily cuts.
Notley’s announcement is aimed at addressing the difference in the price of Western Canadian Select oil relative to the benchmark West Texas Intermediate (WTI). That gap hit around $50 in late October due to a lack of pipeline capacity to get Alberta oil to market.
Watch as Premier Rachel Notley explains why she believes production cuts are necessary:
The government estimates Alberta is losing $80 million a day due to this discount. The measures are expected to narrow the gap by $4 US a barrel and contribute an additional $1.1 billion to the Alberta treasury by the fiscal year ending in 2020.
Alberta’s energy minister has power under existing legislation to set the curtailment amounts through a monthly ministerial order. Notley says the effect of the cuts will be measured each month to ensure production is not reduced any more than necessary.
The government said it believed industry would not voluntarily make the cuts after sending three envoys to talk to small and large producers.
The split in industry opinion was revealed in the reaction that immediately followed Notley’s announcement.
Cenovus Energy asked the Alberta government last month to make mandatory production cuts. Unsurprisingly, the company sent a news release Sunday night supporting Notley’s actions.
“At Cenovus, we advocated for this mandatory production cut because we continue to believe it is the only short-term solution to the extraordinary situation Alberta find itself in,” said Cenovus CEO and president Alex Pourbaix in a statement.
While support for temporary mandatory cuts is not unanimous among Alberta oil and gas companies, “acknowledgement of the severity of the crisis facing our industry was,” Pourbaix said.
Imperial Oil remained firmly against the curtailment measures. CEO Rich Kruger said in a statement the company “respectfully disagreed” with the government’s decision as it may carry unintended consequences.
“This intervention appears not to recognize the investment decisions companies have made to access higher value markets,” Kruger said in the statement. “Imperial has increased its take-away ability by securing contractual capacity in existing pipelines and by investing in extensive rail infrastructure that allows the company to reach higher value markets, to the benefit of all Albertans.”
Jason Kenney, leader of the United Conservative Party, Alberta’s official opposition, supported Notley’s announcement. but blamed the federal government for putting the province in the difficult position.
While Kenney initially supported cuts only if they were voluntary, he called last week for a mandatory cut of 10 per cent, or about 400,000 barrels a day, based on what he said he heard from stakeholders. Kenney said he is fine with the government’s numbers, as long as cuts reach the goal of reducing the differential. The price gap was $28.50 US a barrel when markets closed on Friday.
“If this does not adequately clear out the glut by the end of January, beginning of February 2019, then the government may have to go into deeper production cuts,” he said, adding he would support such action if it’s required.
Any change in the price of oil has profound effects on Alberta’s resource-dependent economy.