Canada’s Oil Capital Takes a Page From the OPEC Playbook

(Bloomberg Businessweek) -- When prices for Canada’s heavy crude collapsed late last year, Alberta did something quite out of character. The traditionally conservative, free-market-loving province took a page out of OPEC’s handbook and ordered its largest oil producers to throttle back output by about 325,000 barrels a day, the equivalent of almost 9 percent of daily production.

The move was an unprecedented intervention meant to rescue Canada’s oil producers—and the province’s tax revenue—from a lack of pipeline capacity that caused a glut of crude to back up in storage tanks. It worked: The price of Western Canadian Select, the benchmark for crude extracted from Alberta’s oil sands, has more than tripled since closing at $13.46 a barrel in mid-November, its lowest level in at least a decade. But the unintended consequences have critics fuming and even some of the policy’s supporters wringing their hands.

“We think free markets work,” said Rich Kruger, chief executive officer of Imperial Oil Ltd., on a recent conference call. “With a stroke of the pen, the government began picking winners and losers.” Imperial, an oil-sands producer that’s 69 percent owned by Exxon Mobil Corp., counts itself among the losers. When Canadian oil prices were low, Imperial’s refineries were able to buy crude more cheaply. That’s no longer the case.

Some are concerned that the government’s intervention will chip away at the province’s pro-business reputation, scaring off international investors. “It’s a province that’s been built around allowing the private sector to operate freely and independently,” says Rafi Tahmazian, senior portfolio manager at Canoe Financial in Calgary. “The tax regime, the royalty regime, the work environment, the quality of the resource, all of those things tick all the boxes that allowed global investment here. Why would we screw with that?”

In another move that Tahmazian doesn’t approve of, Alberta’s government is getting into the oil transport business. Premier Rachel Notley announced in February that the province will lease 4,400 rail cars, buy oil from local producers, and sell it to refiners across North America. The plan is meant to aid smaller producers, who are getting outbid by bigger rivals on access to pipelines or rail capacity. The province expects to turn a C$2.2 billion ($1.7 billion) profit on its C$3.7 billion investment.

Notley is a center-left politician whose New Democratic Party ended more than four decades of conservative rule in Alberta in 2015. But even the leader of the rival United Conservative Party, Jason Kenney, supported the production curtailment plan, though he’s balked at the crude-by-rail investment.

Notley herself has expressed discomfort with the intervention, saying in the Dec. 2 speech announcing the production cuts that markets are the best way to set prices. And since the program went into effect, officials have bristled at the OPEC comparisons, arguing that they’re only trying to head off a crisis.

Many of Alberta’s free-market oilmen were among those lobbying hardest for the government to step in. They argued it was the provincial and federal governments that had caused the oil glut by withholding permits for new pipelines even as output from Canada’s tar sands continued to climb—so it was their problem to fix. Cenovus Energy Inc. CEO Alex Pourbaix made the case that production cutbacks were needed to support the industry until additional pipeline capacity comes online at the end of 2019, starting with Enbridge Inc.’s expanded Line 3 in the fourth quarter. “Curtailment is an emergency response to an untenable situation in our province,” says Pourbaix. “It is not in any way, shape, or form a long-term solution. The solution is to get oil moving by pipe.”

He says Alberta has managed the program well, noting that the government responded to the overshoot in prices by raising the production limit by 75,000 barrels a day earlier this year. And for Cenovus, the higher prices have more than made up for the mandated reduction in output. “Think about the impact on our industry, on our province, and on everybody directly or indirectly employed by this industry,” Pourbaix says, “and I don’t know how you make a case that this has not been good for our province.”

To contact the editor responsible for this story: Cristina Lindblad at mlindblad1@bloomberg.net

©2019 Bloomberg L.P.