By Peter Kennedy
Facing a historically large discount, the Alberta government is moving ahead with a mandated reduction in its oil production in a bid to stabilize prices and protect jobs in the province.
Beginning on January 1, 2019, Alberta will mandate an across the board reduction of 325,000 barrels per day, or roughly 8.7%.
In announcing the measures on a nationwide television broadcast, Alberta Premier Rachel Notley said they will be spread among all producers in the province. “Industry and investors can be assured that the curtailment is short term and will gradually decrease while the price per barrel slowly recovers,” she said.
While some oil producers in Alberta expressed concern about the government’s intervention, Notley said she has been left with no choice but to act.
Owing to decades of inaction and failure by successive Federal governments, Notley said Albertans are unable to transport much of the oil that they produce to market through modern, well-regulated pipelines.
“As a result, we must sell our oil at a discounted price,” she said.
In the last few weeks, this price gap has reached historic highs because the industry is producing considerably more product than there is transport capacity. This is creating an enormous backlog and forcing the price of Alberta oil to ridiculously low levels.
“While everyone else around the world is able to sell their oil for US$50 a barrel, we in Alberta are selling ours for US$10 a barrel. This is not sustainable,” she said.
Notley said mandated production cuts are needed not only to protect the value of the province’s resource endowment, but also to bolster an economic recovery in Alberta that is threatened by the discount between U.S. and Canadian oil benchmarks.
But these production cuts are not just about Alberta’s economic recovery, Notley said. “This is about the economic well-being of the entire country.”
Canada is among the world’s leading oil producers, supplying more than four million barrels a day. However, the differential between West Texas Intermediate (WTI) and the Canadian Crude Index (CCI), often referred to as Western Canadian Select, has recently hit discount levels that are at an all-time high.
Analysts say the discount has deepened due to growing production from the Alberta oilsands and a reduction in demand due to U.S. refinery maintenance slowdowns. Oil industry analysts and officials say the lack of available pipeline infrastructure is also a contributing factor.
In spite of the planned cuts, Notley vowed that she is not giving up the fight to get more pipelines built in Canada.
“Billions of dollars that should be going to create jobs and support schools and hospitals are being lost. Most fair minded Canadians understand that this is fiscal and economic insanity,” she said. “I can promise you that our fight will not end until it is won.”
Meanwhile, the Alberta government is proceeding with a plan to acquire is up to 7,000 new rail tanker cars to transport its oil to market.
“This new capacity will start coming on line next year,” Notley said. “When it does, we will get a higher price for our product.”