Premier Rachel Notley speaking at Sunday media conference. 

“…we have asked the federal government to consider supporting our investment in [120,000 b/d of] rail and we will keep pushing that.” – Premier Rachel Notley

Premier Rachel Notley took the unusual step of holding a press conference on a Sunday to announce her government is mandating an 8.75 per cent reduction in the output of the Alberta oil sector effective January 1. Curtailment is necessary because the province is producing 190,000 b/d of crude oil more than the Canadian pipeline system can transport to market.

Too much supply and not enough shipping capacity has widened the discount between Western Canadian Select (Canada’s heavy crude benchmark) and West Texas Intermediate (the US light crude benchmark) from the historic $10 to $15 a barrel to over $50 in the past month or two, effectively driving down Canadian oil prices below the cost of production for many companies.

Source: ARC Financial Institute.

“We are essentially giving away our oil for free. Roughly speaking, while everyone else around the world is able to sell their oil for $50 a barrel, we in Alberta are selling for $10 a barrel. This is not sustainable,” Notley said. 

The cash flow crunch for many operators is so severe that many jobs are in danger, both in Alberta and across Canada, she added: “Over the last two years, Alberta has climbed out of a deep recession. Our economy is growing again and jobs are returning, but this price gap threatens this recovery and it must be addressed. Let me be clear to those Canadians listening from outside Alberta tonight, this is not just about its impact on Alberta’s recovery. It is about the economic well-being of the entire country.”

How did Alberta get in this precarious position?

The province produces about 3.5 million b/d of crude oil, about 3 million of that from the oil sands in the form of raw bitumen, upgraded synthetic crude, and heavy crude oil. Oil sands projects cost billions of dollars and take years to plan and build. Companies invested in projects assuming that pipeline projects approved by the Canadian government, like Northern Gateway and Trans Mountain Expansion, would come on stream in time to accommodate the growing crude oil output.

Cancellation of Northern Gateway in 2016 by the Trudeau government, delays to Trans Mountain Expansion caused by the BC government and a recent court decision, and withdrawal of the Energy East application by TransCanada after the National Energy Board added downstream emissions to the project review at the last minute, have combined to throw Alberta oil producers’ plans into disarray.

Source: ARC Financial Institute.

“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, a responsibility to defend our province and to defend our resources,” Notley told reporters, choosing not to criticize Prime Minister Justin Trudeau for his handling of pipeline issues over the past three years. 

Alberta currently produces 190,000 barrels a day more than can be shipped using existing pipeline and rail capacity, according to the Notley government, and 35 million barrels – about twice the normal levels – are in storage, which is precariously close to full.

The Alberta government estimates the WCS/WTI differential will narrow by at least $4/b “relative to where it otherwise would have been and will add an estimated $1.1 billion of Alberta government royalties in fiscal year 2019-20,” according to a press release.

Each producer will be exempted 10,000 b/d, which will be especially helpful for smaller producers that are suffering cash flow problems already. The baseline for the curtailment will be calculated as the best six months in the past 12 months.

The Alberta Energy Regulator will administer the reduction under the existing Responsible Energy Development Act. The initial curtailment of 325,000 b/d is expected to drop over the course of 2019. The government will review the amount every month and adjust as needed, so as not to impose a steeper drop than is necessary, according to the press release.

Additional oil takeaway capacity should be available in late 2019 as Enbridge’s 375,000 b/d Line 3 comes on stream and the first locomotives and tank cars from the Notley government’s investment in 120,000 b/d of crude-by-rail transport become operable.

Several weeks ago, the Premier appointed three “envoys” – economist Robert Skinner, energy deputy minister Coleen Volk, and her former chief of staff Brian Topp – who reported that industry is divided on the curtailment issue. The lack of agreement among producers complicated her decision, she told the media.

“It’s difficult because obviously as you know, there’s not consensus within the industry so that makes it a challenge and as well, one never wants to begin by reaching into the market and telling people that they have to produce less,” she said.

Notley also praised the Alberta Party and United Conservative Party for contributing “helpful suggestions” and not making the issue partisan.

“We support this as an extraordinary, temporary measure and sincerely hope that it does not need to be used long,” UCP leader Jason Kenney said in a press release.