A vertical pumpjack works producing crude oil on an oilfield well, belonging to Crescent Point Energy, near Longview, Alberta on Dec. 7, 2017.Larry MacDougal/The Canadian Press
Alberta’s oil industry is sharply divided over a call for the provincial government to intervene in the market and order production cuts as a means of propping up depressed crude prices.
Companies such as Cenovus Energy Inc., Canadian Natural Resources Ltd. and MEG Energy Corp. are urging Premier Rachel Notley to take emergency action as the price for heavy crude hit its lowest levels in a decade. Cenovus chief executive Alex Pourbaix said this week the industry is facing massive market failure that is hurting not only companies but government revenues and the broader economy.
However, companies such as Suncor Energy Inc. and Husky Energy Inc. – whose refining operations benefit from low prices – oppose intervention, saying it would risk triggering retaliation from the United States, which is reaping the benefit of the low-cost oil.
“The market is working,” Husky spokeswoman Kim Guttormson said Thursday. “Pipelines and other transportation solutions are required to clear the market and eliminate bottlenecks, and we believe the best option is to advance pipeline solutions. Market intervention comes with an unacceptably high level of economic and trade risk.”
The shortage of pipeline capacity in the face of growing production in Western Canada has resulted in a growing backlog of crude inventory in Alberta and forced producers to accept steep discounts for their crude. In trading Thursday, West Texas Intermediate – the key North American benchmark – rose to about US$56.80 for December delivery. Canada’s heavy-oil benchmark, in contrast, continued its recent slide and hit a record low Thursday, trading at US$13.46 a barrel, according to Bloomberg.
Producers of light crude in Western Canadian oil have also been hit by steep discounts as a result of the full pipelines and huge inventories.
While Western Canadian Select – the benchmark for heavy crude – was trading at new lows Thursday, some analysts and producers argue the situation will improve over the coming months as individual producers cut their highest-cost production and as more rail cars become available to transport crude.
Citing the lack of consensus within the oil and gas industry on what Alberta’s government should do, Ms. Notley announced no action on Thursday to tackle the low price of oil. However, the Premier said her government has a “suite of options at our disposal that we are currently working with to help chip away at that differential.” She promised to announce a plan in the coming weeks.
“The critical argument I find most compelling is that the differential is obviously a very, very serious problem for the energy industry here in Alberta and quite frankly for the economy across this country,” she said. “This is a resource that belongs to all Albertans and so we can’t have it racing out of the ground at $10 a barrel for a really long period of time.”
Jason Kenney, the leader of Alberta’s opposition United Conservative Party, said in a statement that he would not be in favour of government intervention in oil production and called on Ms. Notley to focus on the construction of additional pipelines.
However, some producers are urging the province to act aggressively to rebalance the market, saying too much money is currently being lost. While estimates vary, the Alberta government has said a US$40 differential costs the province $40-million in lost revenue every day.
“These are unprecedented times and they call for urgent action,” said Julie Woo, spokeswoman for Canadian Natural Resources Ltd., in an e-mail on Thursday. “Canadians own the oil and natural gas resources and receive significant benefit from its development through revenues to governments and jobs. We need to protect the interests of all Canadians by managing the significant impact resulting from the lack of market access.”
The glut is also hitting smaller firms that produce light oil and other natural gas-related liquids, and are having trouble raising capital because of the Western Canadian industry’s widely publicized troubles.
“In the shortest of terms, it’s a given that somehow some production needs to be shut in,” Jonathan Wright, CEO at NuVista Energy Inc., said in an interview on Thursday.
“I would not be against the government [intervening] because this is a problem for all producers and just a very small tweak for a very short period of time would solve the problem in the short term,” he said. “But only if there is a longer-term plan in place to fix it permanently, and that means more pipeline space.”
But other executives warned of unintended consequences if the government stepped in. “Once you open the door, it’s open for things you do not like,” said Brian Schmidt, CEO at Tamarack Valley Energy Ltd.
Speaking to reporters in Toronto on Thursday, federal Finance Minister Bill Morneau said there is no “magic bullet to solve” the problem of steep discounts. He said the federal government is focused on completing the Trans Mountain pipeline expansion project, which would deliver crude to Pacific Rim markets through Vancouver. However, that expansion is not expected to be completed for at least three years.
With a report from Alexandra Posadzki in Toronto