Alberta bets on oil production cuts but industry remains divided on market intervention

Premier Rachel Notleysaid it would be one of the toughest decisions that Albertans would make as a province.

And now she's made it.

Beginning January, Alberta will impose mandatory production cuts on theenergy sectorfor the first time in decades a measure aimed at reducing anoil glut that's punished the price of Canadian crude.

"In Alberta, we believe that markets are the best way to set prices," Notleysaid Sunday night.

"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."

It's an extraordinary intervention, a step taken with the encouragement of somenot alloil producers.

Watch Notley explain why she believes production cuts are necessary:

Rachel Notley explains why temporary oil production cut is necessary

6 years ago

Duration 1:11

Alberta Premier Rachel Notley answers questions from reporters following announcement of a temporary oil production cut in the province.

The hope is itwill be temporary, short and effective improving company cash flows, bolstering government revenues and stavingoff furtherlayoffs.

'Winners and losers'

It's an imperfect solution,one that continues to divide the oilpatchand still appears to poserisks, including potential trade issues and negative impacts on futureinvestment in the province.

"The government has, in its mind, the justification," said RichardMasson,an executive fellow at theUniversity of CalgarySchool of Public Policy.

"But to have a government intervene in a free market, which will create winners and losers, is just such a big step from the past 30 years of a deregulated marketplace."

No question, the province is undersignificantpressure to find a quick fix.

Production growth andpipeline bottlenecks have contributed to anoil glut that's weighed mightily on Albertacrude prices, cut into company cash flows and stung the province's finances.

It led some producers likeCenovus and Canadian Natural Resources tocall for mandatory production cuts.

Watch Notley's oil production cut announcement:

Alberta premier announces 8.7% oil production cut

6 years ago

Duration 1:37

Alberta Premier Rachel Notley has announced a temporary 8.7 per cent oil production cut, or decrease of 325,000 barrels a day, starting Jan. 1, 2019.

On Sunday, CenovusCEO Alex Pourbaixcommended the premier for making "the difficult but necessary decision," while Canadian Natural Resources called the action "swift and bold."

In contrast, companies with their own refineries and retail operations Suncor, Husky Energy and Imperial Oil maintainthe market is working, pointing to the fact some companies were alreadyreducing production.

"Our view remains that free markets work and intervention carries trade risks and sends a negative message to investors about doing business in Alberta and Canada," Imperial Oil CEO Rich Kruger said in a statement Sunday.

But with warnings about bigjob losses and a ballooning impact on the provincialtreasury, the premier clearly felt she had to do something fast.

A production cutof 325,000 barrels a day isa major step that will affect25 larger bitumen and conventional producers.

If it works, bloated inventorieswill shrink and discountswill return to more normal levels over the coming months.

How will the market respond?

But this move comes with some considerable challenges,questions and, as some critics have said,the potential for unintended consequences.

For one, there are potential technical and operational issues that will need to be addressed. For example:If companies have commitments on pipelines, how do they meet those obligations if they're also cutting production?

Government officials saidthey have provided latitude for producers to manage the cuts by assigning them on a per-operator basis, rather thanon individual wells or projects.

But there are also questions of how the market will respond not only to what happens to oil prices but, more broadly, how investorsor companies will respond to such government intervention.

Both Husky and Imperial said they would comply with the regulation but continued to warn of the impact Sunday evening.

Imperial's Kruger said the province's intervention doesn't appear to recognize the investment decisions companies have made to access higher-value markets.

"We regularly manage a wide range of risks associated with technical, operational and market considerations," he said.

"Now, government has introduced a new risk which will unfortunately need to be considered as it relates to future investments."

Still, some analysis hassuggested mandatory cuts couldsend a positive message to the market.

"This policy option could bolster the government's flexibility in responding to other sudden disruptive events," said a Scotiabank Economics reportlast month.

"The flexibility to respond to unforeseen events and keep the industryon steady footing would also signal to the market that the distressed discount situation is under some degree of control."

Yet others worry it could set a precedent for government intervention that the oilpatchmight laterregret.

'The devil will be in the details'

Husky Energy also raised the prospect of potential trade issues with the government's move.

"We believe the market is working and view government-ordered curtailment or other interventions as possibly having serious negative investment, economic and trade consequences," said Husky spokesman Mel Duvall in a statement.

"The devil will be in the details."

Indeed, it will be interesting to see howU.S. refiners who have benefited significantly from the discounts will respond to Alberta's decision.

As significant as Sunday's news was in Alberta, it's unlikely to reduce calls on Ottawa to help build new pipelines and stop legislation that might make them more onerous to construct, namely Bill C-69.

"The problem is that we don't have enough pipeline capacity," said Martha Hall Findlay, president of the Canada West Foundation. "The problem ishow did we get here in the first place?"

For many Albertans, the big question will be what happens next.

With a month to go before the regulations take effect, the response of the market, energycompanies, investors and U.S. refiners in the coming weeks will be telling. There will also be hope thatjob cuts don't come.

The premier will hope she's found an answer to Alberta's crude problems, but many challenges still lie ahead.