Alberta orders oil production cut to deal with price differential

Alberta orders oil production cut to deal with price differential

Oil prices rose on Monday, buoyed by coordinated production cuts - cuts that did not come from Vienna (although that too could occur later this week).

Premier Rachel Notley is ordering a mandatory cut to oil production to deal with a price crisis she says threatens to gut Alberta's bedrock industry. That's down from US$28.80 a barrel on Friday; it had been as high as $40 earlier in the week.

The province says the price gap is costing Canada more than $80 million per day and is caused by the inability to build pipelines. The surplus is filling storage up quickly.

Notley said the 8.7 per cent reduction begins in January, with the expectation that figure will gradually decrease until the cuts are scheduled to end on December 31, 2019.

Alex Pourbaix, CEO of Cenovus EnergyThe chief executive of Cenovus Energy Inc said on Monday that he expects the company to invest some $1.5 billion in 2019, in line with 2018 capital spending, after the Alberta government's mandated oil output cuts boosted Canadian crude prices. Companies that produce less than 10,000 barrels a day will not be affected by the daily cuts.

The action is created to prevent job cuts by letting companies keep people on because they can "see a light at the end of the tunnel", Notley said at a news conference.

The production reduction will start in January 2019 and will be in place until the end of the year.

"In Alberta, we believe that markets are the best way to set prices", Notley said, "But when markets aren't working, when companies are forced to sell our resources for pennies on the dollar, then we have a responsibility to act, to defend our province and to defend our resources". The discount on Western Canadian Select to USA benchmark prices widened to US$50 a barrel in October, which Notley says is costing Canada billions of dollars in lost revenue.

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So, Notley's short news conference Sunday evening was a bravura performance. Further reductions in the curtailment are expected in the fall and winter as additional rail capacity comes online. As the excess storage clears, the reduction is expected to drop to 95,000 barrels a day.

"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.

The planned cuts by the world's fifth-biggest producer follows a renewed commitment over the weekend by Saudi Arabia and Russian Federation to extend their deal to manage the oil market.

The statement goes on to say this is an extreme case in need of curtailment.

Notley has already taken some steps to try to help producers ship more oil to market while the industry awaits the construction of more pipelines.

It's worth noting that years of pipeline fights from environmental groups, local communities and First Nations are bearing some fruit. "That's one of the reasons why in the past week we've been giving away our oil".

A number of pipeline projects to the United States, as well as to the Pacific and Atlantic coasts, have been cancelled or delayed over the past decade as energy production in Canada's oil patch has continued to grow.

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