Experts Warn Consequences of Alberta’s Curtailment Just Beginning
Alberta Premier Rachel Notley’s controversial decision to force the Canadian province’s oil companies to cut production brought temporary relief in in the form of steady price increases. However, experts including industry analyst Martin King are now warning the move will likely hurt oil producers in the long term as unintended consequences undermine the ultimate goal of increasing production and gaining access to more pipelines.
Alberta’s oil producers have been suffering from extraordinarily low prices brought on by a lack of pipeline access to export opportunities. Albertan producers are limited to exporting their oil, predominantly by rail, to the United States, which also has an abundant supply of oil.
Cut Already Undermining Key Need to Reduce Excess Supply
The use of rail has helped mitigate some of the oversupply of oil in Alberta, but as King recently explained, this relief could be short-lived:
“U.S. refiners have been shipping barrels of the previously discounted Canadian crude by rail across the United States, which partially mitigated some of the excess inventory of Alberta oil. However, rail shipments of Canadian crude are less economical for Gulf Coast refiners because shipping by rail requires Canadian crude to cost around $18 less than oil produced in the Permian Basin. Since Albertan producers are primarily reliant on refiners in the United States and have limited pipeline infrastructure, they may now see one of their few additional options to get barrels to market rapidly dwindle.”
Even if Notley reversed this decision tomorrow, the damage is already done, according to King, “rail shipments for all of 2019 are now likely to be impacted since it could take four to six months to re-establish previous shipping patterns with rail companies, which were already skittish about making long-term commitments to moving crude by rail.”
To remedy this conundrum, the Albertan government announced the purchase of 7,000 railway tank cars. It’s unlikely these cars will be delivered before the end of 2019, however, and by that time the situation may have completely changed, undermining the government’s investment.
Unnecessary Government Intervention Hurts Alberta in the Long-Run
Others, including Edmonton chief economist John Rose, have signaled long-term economic impacts from the production cut:
“If the curtailments persist, obviously that’s going to depress overall levels of investment in the energy sector.”
Rose also spoke about the negative impact this decision could have on other sectors of the economy:
“It’s going to affect the manufacturing sector because a lot of the fabrication that goes into the products used in the energy sector are actually fabricated here.”
The curtailment also pits Albertan oil producers against one another, as small producers that would have been more likely to voluntarily cut production benefit from the mandate to the detriment of others. This could lead to further bad incentives down the road as explained by Institute for Energy Research President Tom Pyle:
“Oil companies will continue to push for access to the necessary pipeline infrastructure needed to grow their business, but now the door has been opened to rent seeking, or lobbying for government exemptions to get a leg up on the competition. This new government mandate will only contribute to the downward spiral of the Albertan oil industry in the long-run.”
This sentiment was also echoed by international energy expert David Goldwyn, president of Goldwyn Global Strategies, who argued that the cuts “…set a precedent for more government control over future production.”
John Robson, a writer for the National Post explained the ultimate folly of this OPEC-like approach:
“Cartel poster child OPEC has done little for its members and little to the world. People wanted to believe, but wishes are not horses. And Alberta isn’t even OPEC. The latter contained a bunch of players with significant market share. Alberta is just one province in the world with a healthy supply of energy…” (emphasis added)
The Bigger Problem: Canada’s Lack of Pipelines
On top of the cut’s negative impacts, it does nothing to address the core issue facing the oil industry in Alberta: a severe lack of pipeline infrastructure.
Canada exports 97 percent of its oil to the United States, which has no shortage of domestic oil. To keep prices stable, Canada needs to reach new markets. The proposed Trans Mountain pipeline would have tripled pipeline capacity and enabled Albertan companies to reach the Pacific Coast with their product. But because of extreme protesters who have joined politicians in British Columbia, this project has stalled for more than two years.
Notley’s decision to cut oil production did nothing to address the real problem facing Alberta. Building more infrastructure will help her local producers and the Albertan economy as a whole.