The Chevron Corp. oil refinery is pictured in Burnaby, British Columbia, Canada. (Photographer: Ben Nelms/Bloomberg)

Canada’s OPEC-Style Cut Stirs ‘Slippery Slope’ Meddling Concerns

(Bloomberg) -- While Alberta’s plan to mandate OPEC-style production cuts already is boosting oil prices and shares, the revival of Canada’s resource nationalism adds another layer of risk for investors to consider.

The removal of millions of barrels of crude from the market will help shareholders of smaller producers who are exempt from the cuts, like Bonterra Energy Corp., as well as larger producers such as Cenovus Energy Inc. and Canadian Natural Resources Ltd. that were being hammered by the supply glut.

But the measure also may rattle the sense of security investors had in companies like Suncor Energy Inc., whose large refining operations had shielded it from the worst of the crisis and were actually profiting from cheap feedstock, said Randy Ollenberger, an analyst at Bank of Montreal. That’s on top of mounting concern that the country’s regulatory framework makes it very difficult to get much-needed pipeline projects approved.

“Investors will definitely worry that this is a slippery slope, and that the government can curtail production or interfere in business to pick winners and losers,” Ollenberger said in an interview. “That’s going to be a big concern.”

To be sure, the Canadian government has had its hand in the energy industry before. The technology used to extract Alberta’s oil sands was developed largely through government-backed programs that started around the 1920s and continued for decades.

Canadian Ownership

In the 1970s, the federal government instituted price controls on oil to keep prices low for domestic consumers and created the crown corporation Petro-Canada to ensure Canadian ownership of some of the country’s energy industry, which at the time was heavily owned by Americans. The company lives on today as a gas-station chain owned by Suncor.

Pierre Elliott Trudeau, father of the current prime minister, introduced the National Energy Program in 1980, instituting further price controls and increasing taxes on oil and gas companies. The plan sparked resistance from Alberta’s premier at the time, Peter Lougheed, who cut the province’s oil production to protest the measure. The NEP remains infamous in Alberta, seen both as shorthand for government overreach and a reason to be wary of leaders named Trudeau.

Canada’s OPEC-Style Cut Stirs ‘Slippery Slope’ Meddling Concerns

The most striking recent example of government intervention was Justin Trudeau’s C$4.5 billion ($3.4 billion) purchase of the Trans Mountain pipeline and expansion project from Kinder Morgan Inc.’s Canadian unit earlier this year. The move was a bid to keep the project alive after Kinder threatened to walk away amid fierce opposition from British Columbia.

Then on Sunday, Alberta Premier Rachel Notley announced that she’s mandating a 325,000-barrel-a-day reduction in the province’s oil production to help boost prices off record lows. Notley and the industry proponents of the move have argued that it’s not so much government meddling in the market, rather it’s a way of fixing a broken market.

Alex Pourbaix, chief executive officer of oil-sands producer Cenovus, which may have to shut in about 35,000 barrels a day of production, said the industry is not happy to have the government so involved in the industry but realized that the curtailment plan was the only way to avoid “disaster.”

“There’s not a lot of celebrations going on around downtown Calgary,” Pourbaix said of the city where his company and most of Canada’s energy industry is based. “People are frustrated that the situation with market access has led us to this solution.”

Some in the industry outright oppose the measure. Husky Energy Inc., which owns refineries in Canada and the U.S., said in an emailed statement that a government-ordered curtailment or other interventions can possibly have negative investment, economic and trade consequences. Imperial Oil Ltd. made similar comments.

Price Rebound

Still, the move already appears to be having its intended effect. Western Canada Select crude’s discount to U.S. benchmark West Texas Intermediate oil narrowed on Monday to the tightest since July. Shares of oil producers operating in Alberta also surged, with Cenovus posting its biggest intraday gain ever.

Alberta has the legal authority to mandate the cuts because mineral rights are owned by the province. The monthly curtailment levels will be provided through an order that will expire at the end of 2019, and the Alberta Energy Regulator will be tasked with implementing the system.

The Railroad Commission of Texas did something similar in the 1930s, before OPEC was created, because large oil producers at the time were worried that independent drillers were over-supplying the market.

Temporary Solution

Alberta’s curtailment should only be in place for a few months and should serve as a wake-up call that the government needs to make other larger regulatory changes to help the industry operate better on its own, said Peter Tertzakian, executive director of the ARC Energy Research Institute in Calgary.

“If we put into place the appropriate mid-term and long-term remedies, hopefully we’ll be getting pipelines and won’t need to have this sort of intervention,” Tertzakian said in an interview. “It’s incumbent upon us to use this crisis as an opportunity to think about how to bring long-term stability to the markets.”

Or as Larry Berman, chief investment officer at ETF Capital Management, put it bluntly in an interview with BNN Bloomberg Television: “I hate governments intervening like this, but we were getting desperate here.”

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