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Seven questions about the oil production cut

On Sunday evening Alberta Premier Rachel Notley announced to the province that her government was legislating a temporary 8.7 per cent cut in the production of bitumen and conventional oil starting January 1, 2019.

To the degree that the current price differential is the result of an excess supply of bitumen in the face of constrained upgrading, refining, and transportation capacity, curtailing production seems like a fairly logical and straightforward short-term solution to the problem. Legislating production cuts in free-market Alberta could not have been an easy decision for Notley to make. No Alberta premier has taken such a step since Peter Lougheed legislated production cuts in 1980 as a way of fighting the National Energy Program. As was the case in Lougheed's day, there appears today to be broad support for the Notley government's move. Even the markets responded the day after the announcement with a jump in oil prices and in the value of some oil company stocks.

As is often the case with these types of announcements, however, the premier's broadcast message and the media release accompanying it leave many questions unanswered about the move, the rationale behind it, and how it relates to the government's energy policies going forward. Here, in no particular order, are some of those questions.

1. Why does the government continue to use discredited figures to justify its actions on the price differential?

The government has repeatedly stated that the increased differential between Western Canada Select (WCS) and West Texas Intermediate (WTI) is costing the Canadian economy $80 million a day. In fact, the $80-million figure is pointed to in the first line of the press release issued by the government.

This often-cited number is based on a report produced by Scotiabank back in February 2018 that tried to calculate the potential economic impacts of a growing oil price differential. Since then, energy economist Robyn Allan has looked in-depth at the report and found its calculations and methodology to be seriously flawed, overstating both the number of barrels that are subject to the deep discount and the actual size of the differential. Allan concludes, "Scotiabank concocted a narrative that does not exist." University of Calgary economist Trevor Tombe likewise recently suggested that Albertans should take the $80 million figure "with a big grain of salt."

2. Why does the premier lay the blame for the price differential on the federal government's "decades-long inability to build pipelines" rather than on the provincial government's historical practice of encouraging oil companies to grow production as fast as possible with no thought to upgrading, refining, or transportation capacity?

For years labour groups and think tanks have been encouraging the government of Alberta to slow down approvals of new bitumen extraction projects and focus instead on building necessary upgrading and refining capacity in the province in order to maximize value-added for our product and ensure better out-of-province selling prices. During the height of the last boom, even former premier Lougheed encouraged the government to slow the pace of growth in the oil sands and focus more energy on value-added processing. Then-premier Ed Stelmach famously stated that "there is no such thing as touching the brake" when it comes to oil sands developments. Subsequent governments continued to encourage rapid growth despite the non-existence of supportive infrastructure, yet here we are with all the blame now being placed on the federal government's inability to build infrastructure after the fact. To its credit, the Alberta government has recently announced new investments in upgrading capacity, but it may be a case of too little too late.

3. If only 10 per cent of the bitumen Alberta produces is subject to the full WCS-WTI differential, why is production being cut for all oil across the industry? Why not just stop production of the 10 per cent that is subject to the full differential?

Despite the fact that the Scotiabank report cited above assumes that every barrel of bitumen produced in Alberta is subject to the full WCS discount, and the fact that Premier Notley repeatedly implies that all or most Alberta oil is selling at rock-bottom prices, Robyn Allan estimates that only about 10 per cent of the bitumen produced in Alberta faces the full discount. She breaks it down as follows:

  • 40 per cent gets upgraded to Synthetic Crude Oil (SCO) in local upgraders. SCO has been selling near par with or higher than WTI of late, so this is the opposite of a discount.
  • 15 per cent goes directly to domestic refineries for processing into petroleum products (think gas at the pump).
  • 15 per cent goes to integrated refinery operations in the US owned either by Suncor, Husky, or Imperial (either directly or through Imperial's parent company, ExxonMobil).
  • 15 percent goes to the US Gulf Coast, where it receives the same price as Maya oil (Mexican heavy).
  • 5 per cent is locked into higher prices through long-term supply contracts and other hedging and price-swap activities.

4. What will the reduced production levels mean for the bottom lines of the three large integrated oil sands companies (Husky, Imperial, and Suncor) that have actually seen an increase in profitability due to the growing differential?

These three companies, responsible for just under 50 per cent of production in the oil sands, made sure that they were building refining capacity and securing transportation capacity as they ramped-up production. The result of their foresight is that they have not been negatively affected by the current low-price context. Forcing them to curtail what is currently profitable production will actually have a negative impact on their bottom lines and, by extension, on the economy as a whole. Not only will this partially offset whatever overall benefits might be derived from the government's move, it actually punishes forward-thinking companies and sends the message that producers don't need to build upgrading, refining, and transportation capacity as they grow because the government will ultimately bail them out from the consequences of their irresponsibility.

5. Premier Notley asserted that this move will ultimately reduce the differential by $4 and generate an extra $1.1 billion of government revenue in 2019–20. Can we see the math?

Given the Alberta government's ongoing use of a flawed study to determine the economic impacts of the differential, and given its seeming misunderstanding of just how many barrels are affected by the differential, it would be helpful to know what assumptions and calculations were used to arrive at these numbers. It is important to note, for example, that the WCS-WTI differential is not constant over time, but rather fluctuates from day to day. Within those fluctuations, a $4 change from one day to the next is not uncommon. For example, between Wednesday, November 21 of this year to Thursday, November 22 the differential shrunk by $5. That one-day fluctuation was of more benefit than the government is projecting this oil production cut will generate over the entire year.

6. Why did the premier's announcement not also highlight the environmental benefits of curtailing oil production?

Given that Alberta's oil and gas production accounts for about 50 per cent of total greenhouse gas emissions in Alberta—the bulk of which comes from oil production—reducing production by 8.7 per cent stands to have a significant impact on emissions in the province. A quick back-of-the-envelope calculation based on applying the 8.7 per cent reduction to the most recent emissions numbers from just the oil sands (72 megatonnes) would suggest a one-year net emissions reduction of at least 6.3 Mt. Given Alberta's total emissions of around 274 Mt, this would mean a real reduction in provincial emissions of 2.3 per cent—and that's just from the oil sands. Why would the government not promote this as one of the benefits of the production cut? Why is it still so much more politically palatable to cut production to address a crisis of profitability than it would be to address the climate crisis?

7. The government announcement highlights "Premier Notley's fight to get top dollar for our energy resources." Why was that same fight not in evidence during the 2015 royalty review?

When faced with criticism after the 2015 royalty review for failing to maximize return to Albertans from the resource they own, Premier Notley stated, "If we were still in a $100-a-barrel environment, I would suggest that perhaps we could have done better as a province. But the fact of the matter is that what we're dealing with now is fundamentally different." Her reluctance to put in a sliding scale that would ensure Albertans would collect higher royalties as oil prices go up, however, means that we will not do better even if we do reach a $100-a-barrel environment again in the future. In other words, by the premier's own admission, as the price of oil goes up we will not be getting top dollar for our energy resources. Why the difference in approach between what we do when it comes to maximizing company profitability and what we do when it comes to maximizing returns to the actual owners of the resource?


Early indications are that the government's move to curtail production appears to be having its intended impact. What this suggests over the long-term is that the Alberta government needs to get over its long-held belief that the market always knows best and government should never intervene. Whether it's about upgrading and refining capacity, pace of expansion, or, increasingly, the need to begin curtailing production permanently for the sake of addressing climate change, this episode demonstrates that it is not always in the best interests of Albertans to leave the market to its own devices.

Photo credit: Premier of Alberta under a Creative Commons licence.

Ricardo Acuna

Ricardo Acuña is the Executive Director of the Parkland Institute, Faculty of Arts at the University of Alberta – a position he has held since 2002. Previous to that he worked for nine years as Projects Coordinator for Change for Children Association, an Alberta-based international development organization working in Latin America. He has a degree in Political Science and History from the University of Alberta, and has over 20 years experience as a volunteer, staffer and consultant for various non-government and non-profit organizations around the province. He has spoken extensively and written on energy policy, democracy, privatization, and the Alberta economy. He is a regular media commentator on public policy issues, and writes a regular column for Vue Weekly in Edmonton.

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