Oil Curtailment End Signals Boost for Alberta Energy Industry
Almost a whole year after it was originally intended to end, Alberta has officially set an end date to oil production limits the province laid out in 2018. The new date all of Alberta’s oil producers can anticipate ramping up production is the end of December 2020, although the provincial government will maintain its regulatory authority to potentially curtail production again through December 2021.
Alberta’s original decision to put limits on production was mainly due to volatile market prices for Western Canadian Select (WCS), the region’s most popular crude blend. When curtailment went into effect in January 2019, Alberta limited production capacity across all producers to 325,000 barrels per day, excluding the first 10,000 barrels for each producer.
Sonya Savage, Minister of Energy for Alberta, in a press release announcing the end of production curtailment, said that getting rid of the production limit will add provided security for the region:
“Maintaining the stability and predictability of Alberta’s resource sector is vital for investor confidence as we navigate the economic conditions brought on by the pandemic, the commodity price crisis and the need for pipelines. This purposeful approach serves as an insurance policy, as it will allow Alberta to respond swiftly if there is a risk of storage reaching maximum capacity while enabling industry to produce as the free market intended.”
Throughout the year and into 2020, limits started to increase, allowing for more production. As of March 2020, producers were limited to 3.81 million barrels per day, a dramatic increase from the year prior. And while the curtailment policy did artificially boost WCS market prices, there was strong opposition by those within the industry who argued curtailment made it uneconomical to ship by rail in the short-term and could harm the industry’s ability to attract future investments, all without solving Canada’s pipeline takeaway capacity issues.
Pushback on Curtailment
From its onset, policy experts and industry executives across Canada and the United States acknowledged that a cap on production limits was not an ideal solution to increase the price of Alberta’s oil and draw down its stores.
American Energy Alliance (AEA) President Thomas Pyle was one of the first to caution against production limits, citing the true point-of-conflict lays with the province’s lack of vital energy markets, made easily accessible through pipelines:
“The primary market that Alberta’s producers have access to is the United States, which also happens to be blessed with unprecedented levels of oil production. It is clear that Albertan oil producers need access to other markets to boost the price of their product, and this is something the industry has known for years. So why have companies not acted to build new pipeline infrastructure and increase exports? The answer is they have.”
With greater access to some of Alberta’s biggest export regions, primarily the United States, costs associated with energy transportation decrease making it more profitable for industry—and with volatile markets, this access ensures that Canadian producers have more money to sustain jobs.
The lack of progress with pipeline expansion projects was felt within the first couple of months of production curtailment. In an Edmonton Journal editorial, President of Rapidan Energy Group Robert McNally illustrates how vital the aspect of transportation is to the success of the Alberta oil industry:
“The delay of Enbridge will only exacerbate this issue for Albertan producers this year because they have cancelled long-term contracts to move their oil by rail that could take months to reestablish. As production recovers, inventories will just fill up again because the rail cars are not there to move the crude. Generally speaking, Alberta’s action has brought about renewed interest in the outsized impact volatile oil prices have on governments and the public. Alberta certainly isn’t the first to try to control a dynamic and mercurial market like crude oil.”
While the policy was favored by some, including some within the oil and gas industry, many directly and indirectly involved with it said otherwise, advocating for production curtailment to be lifted as soon as possible.
Without the takeaway capacity of the existing pipeline projects, Alberta’s production still exceeds its takeaway capacity. And with the economic downturn caused by the COVID-19 pandemic still unfolding, many of Alberta’s oil producers continue to well within the established production limits.
The end of oil production curtailment in Alberta will allow the industry to put Alberta back to work. And while we continue to see some of the unintended consequences of this policy continue to play out in real-time, Alberta’s energy industry will continue to be a crucial element in the country’s fight against the COVID-19 pandemic. With demand for Canadian crude expected to grow throughout the next decade, now is the time to capitalize on energy market shares.