10/3 podcast: Alberta NDP gambles on oil production cuts

Canadian Heavy Crude Surges After Alberta Imposes Oil Cuts

Suncor Energy Inc., a Canadian oil producer that also has refineries in the country, said in a statement Monday that price differentials were already narrowing.

"The price gap is caused by the federal government's decades-long inability to build pipelines".

The first stone has been cast in what is expected to be a tense First Ministers' Meeting on Friday, with Alberta Premier Rachel Notley and Saskatchewan Premier Scott Moe expressing frustration that energy industry issues have been left off the agenda.

"Our country is losing $80 million dollars a day because we can not get tide water access and world prices for Alberta's oil and gas". The surplus is filling storage up quickly.

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. Companies that produce less than 10,000 barrels a day will not be affected by the daily cuts.

Moe said any cut in Saskatchewan will hurt conventional oil production and would have little impact on the price of oil. After three months, production will be cut by 95k bpd through 2019.

The provincial government went to lengths to describe the measure as temporary, and one that will be a benefit to government finances.

"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.

The production curbs will provide some cushion for producers, but will not eliminate the discount on heavy Canadian oil that has persisted for many years, said Jihad Traya, manager at energy consultancy firm Solomon Associates LLC in Calgary.

The initial curtailment of 325,000 barrels per day is expected to drop over the course of 2019, with an estimated average of 95,000 barrels a day once excess storage is cleared.

"It should always be kept in mind that oil is a global industry, and moves in the benchmark WTI price can outweigh changes in the spread, leaving Canadian producers in the lurch", said Brian DePratto, a senior economist at TD Bank Group.

"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. Any effort to cut output by one company only stands to benefit another.

"We trust that the agenda for our upcoming First Ministers' Meeting can be revised to better reflect the need for a substantive discussion on issues of critical importance to the Canadian economy", the letter said. "This is an extreme case". The restriction will come into effect in January and will be in place until December 31, 2018. "We interpret the phrasing of the announced cut as keeping production down 50 kb/d [year-on-year] in 2019 and 200 kb/d below our prior assessment with the greatest impact on 1Q19 (down 225 kb/d quarter-on-quarter) before new rail capacity gradually comes online from April onward", Goldman Sachs wrote in a note.

Moe said the province will continue to advocate for the federal government to create a long-term solution by building pipelines so both provinces can "sell our oil for what it is worth". On Friday, Canadian oil closed at US$21.93.

A number of proposed pipelines have been delayed or rejected.

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