The Alberta government’s unprecedented move to cut back oil production in the province starting next year is “a desperate measure to alleviate bottlenecks and bolster prices,” says a commentary by the Conference Board of Canada.
“Whether there’s a payoff will be hard to determine and will depend on whose opinion you ask on this complex issue with its far-reaching implications across Canada,” write Pedro Antunes, chief economist and executive director of economic outlook and analysis, and Carlos Murillo, senior research associate with the energy, environment, and transportation policy group at the Conference Board.
“Cancelled and delayed pipeline projects have been problematic for the industry for several years. But a recent ramp-up in production from expanded oil sands capacity, in addition to temporary shutdowns of refining assets south of the border, has severely exacerbated the problem – sending the price of Alberta’s crude oil to record lows in comparison with U.S. benchmark prices.”
The government recently announced it would reduce oil production by 8.7 per cent next year to cut back on elevated inventories and help improve the oil price differential.
“This is a significant move. Oil production contributes roughly 25 per cent to Alberta’s economy annually. If sustained throughout the year, and all else being equal, an 8.7 per cent reduction would take roughly 2.2 per cent out of Alberta’s GDP in 2019, potentially putting the province on course for an economic contraction,” said the commentary.
“To the east and west of the Rockies, this move is also bound to have implications for Canada’s economy due to strong trade and supply-chain linkages. The big question is whether the production declines will bolster prices enough to make up the difference, and whether that difference would generate future economic activity that would have not taken place without the mandated cuts.”
The board said the situation that Alberta faces is aberrant.
“The industry was given the green light to develop production with the expectation that transportation capacity would follow. Many pipeline projects were planned, but over the years too many of them have been cancelled or delayed, leaving less-efficient rail transportation to try to absorb the overflow. The current situation, influenced by political and judicial decisions both north and south of the border, would have been difficult for Alberta’s oil patch investors to plan for or anticipate,” it said.
“In turn, the mandated cuts are the latest in a patchwork of near-to-long-term government initiatives aimed at shoring up the current market distortion that is largely the result of failures in pipeline infrastructure development policy. Other issues include the federal government’s owning of pipeline assets, the large fiscal incentives offered by Alberta to encourage investment in new upgrading assets, and, more recently, government footing the bill for new locomotives and rail cars for transporting crude.
“While intervening in industry production plans is unconventional and could hurt the province’s attractiveness for future investment over the long term, the provincial government’s near-term solution will likely be effective in shoring up prices and heading off a decline in royalties and a larger pullback in activity in the oilfield services sector.”