News & Updates

    The Morning Brief - 12.03.18

    Posted by Bruce Carson on Dec 3, 2018 8:12:55 AM


    Economy—Alberta Responds to Low Oil Prices by Temporary Reduction in Production


    Alberta Responds to Low Oil Prices

    Premier Notley delivered an address last evening to Albertans and the rest of Canadians and if they didn’t realize it, they now know there is a crisis in Canada’s oil patch; a crisis that will require extraordinary measures to resolve. She began by pointing out that the situation Alberta faces today resulted from decades of failed attempts to build pipelines to tidewater to transport oil to offshore markets.

    The price gap that now is in effect between Canadian oil and that produced in the United States and in the North Sea means that Canada is basically giving its resource away for free. She noted that this was not sustainable. Notley made the point that this price gap threatens Alberta’s recovery and the economic well-being of the country. She added, it is the duty of the government to defend and protect these resources.

    The Alberta plan is multifaceted. It begins by not letting up on the pressure to get pipelines built to tidewater. She also talked about taking steps to upgrade and refine product in Alberta. The goal now is to get rid of the backlog of oil as companies are facing a cash flow problem. There is a plan to purchase 7,000 rail tanker cars and locomotives which will help move oil in the medium term.

    The immediate short term solution is a mandatory cut in production.

    On January 1, 2019, the Alberta government will mandate a reduction of 325,000 barrels per day through regulations and ministerial orders. The rules under which this will be done will be reviewed regularly to determine there are no unintended consequences. Her view is that markets are not working and therefore government must act. The reduction is to be short term in length and small producers will be protected as first 10,000 barrels of production are exempted.

    Notley was asked why this was taking place now and she replied that with Alberta oil selling for US$10 per barrel it meant that companies and the province couldn’t plan for the future or attract investment. Without this action there would be further job cuts with no relief in sight.

    The plan is that this reduction will be in effect for only a short term. While some believe the backlog could be cleared by next spring the plan is to have the reduction in place until the end of next year, if necessary.

    There is disagreement among oil producers as to whether this is the right course of action. Fully integrated companies like Suncor and Imperial Oil which extract, refine and sell refined product benefit from low feedstock prices. Others such as Cenovus which extract and then sell crude will benefit from Notley’s plan. Both the UCParty and Alberta Party in Alberta support such a measure but would have liked to see a cut of 10% in production, not the 8.7% mandated by the Notley government.

    Chris Varcoe of the Calgary Herald in a November 28 article set out the views of some energy experts he canvassed on the pros and cons of such a government mandated cut in production. Former Alberta Energy Minister Ken Hughes made the point that this is in the public interest as “it is not in the interest of Alberta to continue to subsidize America by selling our bitumen at such an outrageous low price.” He added that the down side may be that this is an “intervention by government into a market where people have made strategic decisions and invested accordingly.”

    A different view is presented by former Alberta Finance and Energy Minister Ted Morton. He is concerned about unintended consequences. He adds that such an action “sets a precedent that the industry might not appreciate having in 5 or 10 years.” He believes the markets are working.

    Peter Tertzakian of ARC Energy Research Institute says “I believe it (a reduction) would work because we do have to bring supply and demand, or throughput, back into balance.” The objective is to get the “price back to fair market international prices.” He said “I actually think the market is looking for a solution, basically mediation to what is a price war.” If nothing is done, it will “trigger a lot of unemployment and other negative effects.”

    Tertzakian was interviewed after the announcement last evening by CBC and said that what Notley announced should be an effective solution to clear the backlog of oil. It will act as a stop gap until rail cars and the Enbridge Line 3 starts operating near the end of 2019. He did stress that there is a need for a holistic solution dealing with pipelines and rail in order to get product to offshore markets. In the meantime the action announced by Notley should prevent some layoffs and save some part of the winter drilling season.

    Don Braid of the Calgary Herald in his column last evening is particularly critical of the federal government and these actions by the Alberta government are proof that the “country is in trouble.” He writes “the feds call it a crisis, yet do nothing.” He also went back to one of his familiar themes that the Trudeau plan to suppress the oil industry has been “wildly successful” in suppressing value and squeezing down investment.  He is critical of British Columbia and the federal government’s obsession with a car plant closure in Ontario.

    One of the most irritating talking points from the federal government often heard by Albertans is that the federal government bought a pipeline for $4.5 billion. Albertans want the pipeline built and want to see the federal government doing whatever it can to get it built through legislation or through court applications to restart construction such as was done successfully last week by Trans Canada in relation to the stalled Keystone XL pipeline.

    It is hard to imagine one of most entrepreneurial industries in Canada having its output regulated by government and having many industry participants welcome this intervention. It is scary to see the private sector being so closely regulated and one can only hope that this action by the Notley government, supported by the opposition parties in Alberta is successful in clearing the backlog and prices at some point next year return to normal.

    In the meantime the Trudeau government might be helpful in cost sharing the rail solution and using some imagination to get on with the construction of the Trans Mountain pipeline. There are options available to move along construction while consultations take place. But it is up to the government to act and not sit back saying we bought a pipeline and at some point it may be built.

    To Come

    --today, by-election in Leeds-Grenville-Thousand Islands-Rideau Lakes

    --today, until December 13, COP 24 meeting in Poland

    --today, Security report into the prime minister’s trip to India is to be made public

    --December 5, Bank of Canada deals with interest rates

    --December 6, Bank of Canada Governor Poloz delivers a speech in Toronto

    --December 6, OPEC meeting dealing with oil output takes place in Vienna

    --December 6, international trade numbers for October to be released

    --December 7, First Ministers Meeting on the economy and trade in Montreal—will Indigenous leaders be invited to take part in the discussions?

    --December 7, job numbers for November to be released--bc

    Topics: Morning Brief

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