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The head of Athabasca Oil Corp. took steps to throttle back the company’s thermal oilsands production due to lousy prices.
After shutting in, CEO Rob Broen spoke out.
Broen wants the Notley government to step up in the coming weeks and temporarily curb oil output in Alberta as part of a plan to recalibrate the dizzying discounts now hitting Canadian crude prices.
Athabasca Oil joins a small but growing chorus of producers — including Canadian Natural Resources Ltd., Cenovus Energy Inc. and Whitecap Resources Inc. — calling on the province to intervene.
They want to see the government mandate lower production levels over the short term to deal with a glutted pipeline system.
“This is the time when the government has tools to be able to ask producers to cut back. That would have an immediate impact on differentials,” Broen said in an interview.
“The premier needs to look at this through the eyes of Albertans. She needs to look at what’s best for the people of Alberta, and not any particular company or big industry.
“I think if she looks through that lens, she’s going to see that Albertans are being hurt the most by the distressed barrels that are being sold — and she’s going to have to act.”
Canadian oil prices are a mess right now because of a lack of pipeline takeaway capacity and rising production.
What isn’t quite so clear is what steps, if any, the NDP government can take to resolve it.
Oil shipments by rail are increasing, but it’s not enough to unclog the system. The next pipeline project won’t be completed until later next year.
Recent studies indicate the market has about 200,000 barrels per day of excess oil supply competing for limited transportation space.
It all unfolds as crude prices are falling.
On Tuesday, U.S. benchmark West Texas Intermediate crude closed at US$55.69 a barrel, down 27 per cent since early October.
Prices for Western Canadian Select oil sat at just US$15.69 a barrel, while light crude blend Edmonton Par closed at $21.84.
“Canadian oil is now the lowest-priced oil in the world,” Cenovus CEO Alex Pourbaix said in a statement Tuesday.
“This is a crisis for governments, the industry and every person in Alberta who relies on services that depend on resource revenues.”
Pourbaix said the province should use existing legislation to require all producers to temporarily reduce production to alleviate the price discounts.
At Athabasca Oil, the intermediate producer will curb output by 5,000 to 8,000 barrels per day in November and December.
“It’s pretty simple. The oil is worth more in the ground than it is producing it,” Broen said.
“It hurts companies like us having to sell the distressed barrel. Quite frankly, the people of Alberta are probably hurt as much as anybody, because they are the original owners of the assets, the oil.”
But the idea of government intervention is anathema to much of the oilpatch.
Refiners also benefit from being able to buy cheaper crude feedstock for their facilities and the CEOs of Suncor Energy Inc., Husky Oil Inc. and Imperial Oil Ltd. have all said market forces should prevail.
Analyst Martin King of GMP FirstEnergy believes it’s simply better to let the market deal with excess supplies than have the province intercede.
“It’s going to be ugly to watch, but the market will end up correcting this faster than any kind of government edict would bring about,” King said.
Whitecap Resources CEO Grant Fagerheim usually favours market-based solutions, but said the oil transportation system is broken because of the federal government’s inability to see oil pipelines built in Canada, such as the Trans Mountain expansion or Northern Gateway.
He believes a market failure caused by government requires political intervention to fix it.
“We would need a roundtable discussion. I expect you’d need to bring people together to say what is the benefit of suspending the oil, and what qualities should be suspended — and why?” said Fagerheim.
A report by Peters & Co. estimates the entire industry has voluntarily cut production by around 140,000 barrels per day of bitumen and heavy oil recently.
It noted if the current $40-a-barrel discount continued throughout next year, it would reduce potential oilsands royalties by about $5 billion, compared with revenues generated through a more normal price differential.
So far, the Notley government has avoided engaging in a public debate on the issue of curtailment.
Instead, the province prefers to lobby Ottawa to pay for more locomotives to increase oil-by-rail shipments out of Alberta, while pushing for more pipelines to be built in the longer term.
“We have got a lot of options right now we are working on with industry,” Energy Minister Marg McCuaig-Boyd said Friday.
“But the one we are working on right now is increasing crude by rail and doing it quickly.”
If the Notley government took action to reduce output, it would come with a healthy dose of political risk, particularly as some of the industry’s biggest players disagree with this proposal.
Producers such as Athabasca Oil say they support the premier’s crude-by-rail ideas, but think it should have been pitched a year ago, as it will take time to roll out.
With petroleum producers now busy preparing their 2019 capital plans, many will be cutting back spending — and jobs — due to the wide differentials, Broen cautioned.
“The thing I would implore here is there needs to be action quickly, because it’s costing the province, it’s costing the people of Alberta, it’s costing companies money every single day,” he added.
“To study this and implement it way down the road might be too late.”
Chris Varcoe is a Calgary Herald columnist.
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