What Alberta’s oil production cuts mean for the future

OPEC, the cartel of petroleum-producing countries, agreed on Friday to reduce oil production by 1.2 million barrels a day to boost sagging oil prices. It comes on the heels of Alberta’s decision earlier this week to reduce its own oil output. The OPEC decision wasn’t easy and it took days of back-and-forth to reach a tentative agreement. Even though the U.S. isn’t part of OPEC, American consumers are directly impacted by its decisions. Ahead of the cartel’s meeting, president Trump tweeted on Wednesday, “Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!”

The formula for boosting oil prices is simple: cut production and prices eventually climb. That’s the rationale behind the Alberta government’s decision to limit production in the province by 8.7 percent, or 325,000 barrels a day. It’s been called a “mini-OPEC”-style move to prop up the price of Canadian crude. Global oil prices have taken a hit in recent months, but things are much more dire in Alberta’s oil patch, which is seeing the worst price environment in a decade.

The production cuts kick in on January 1, and they only apply to the 25 biggest producers in the province. It’s a temporary measure meant to curb the glut of oil in the province, which is now about 35 million barrels. Experts agree something needs to be done to help the energy sector, but at least one is asking the Alberta government to consider making the cuts permanent.

Extraordinary measures

A government-mandated production cut is a big deal. The last time this happened was undertaken was a decade ago as an emergency measure to deal with a price crisis during the global recession. It’s difficult to predict whether the current cuts will work as intended, and what the results will be. For now, it’s a stop-gap, with ramifications for future production and the environment. It could be part of a bigger discussion about encouraging private investment in refineries, for example, if prices stay low for years, not months.

Alberta Premier Rachel Notley expects the situation to improve by the end of 2019, when Enbridge’s Line 3 pipeline starts up and the province implements its plan to use rail to move oil and bitumen out of the province.

Pipelines and controversy

There’s no shortage of opposing opinions about the oil industry and pipelines. Most experts across the board do, however, agree that something needed to be done to address the struggles of the oil patch. They even agree the production cut is probably the right move, even though it’s a short-term fix for a complicated issue.

Within the industry, though, there’s a clear divide in terms of who supports it and who is against it. Producers like Cenovus and Canadian Natural Resources are on board with the cuts. Operators like Imperial Oil, Suncor and Husky don’t think the intervention is needed. These companies have their own refineries and retail operations, meaning they’re set up to benefit from these historically low prices.

“There’s a certain amount of foresight and responsible forward-thinking by these companies,” Ricardo Acuña, executive director of the Parkland Institute, a non-partisan public policy research organization at the University of Alberta, told VICE. “It’s almost seems like we’re rewarding the ones who didn’t think ahead at the expense of the ones that did.”

“Crisis of profitability” vs. “climate crisis”

He also takes issue with Notley’s decision to highlight the economic benefits of the production cuts, but not the environmental benefits. By his calculations, the planned cuts would reduce Alberta’s emissions by 2.3 percent next year. “Why is it more politically palatable to cut production to address a crisis of profitability than it would be to address the climate crisis” he writes in Parkland’s latest publication.

Acknowledging the emission reductions is significant considering the oil sands are responsible for half of Alberta’s total greenhouse gas emissions, he said. “If we’re looking at the climate change file, start planning towards a permanent scale-down or decline in production going forward.” Acuña’s proposal is a political hot-potato. The case for more pipeline capacity centers around production levels remaining at or near current levels.

Blame Ottawa

Despite vocal opposition and legal hurdles to pipeline expansion, the Alberta government doesn’t point fingers at producers who haven’t successfully managed the situation. Instead, it blames the federal government’s “decades-long inability to build pipelines,” saying that “Ottawa’s failure in this area has left Alberta’s energy producers with few options to move their products, resulting in serious risks for the energy industry and Alberta jobs.”

It’s hard to argue against the benefit of pipelines compared to moving potentially volatile energy products by rail or truck, according to Grant Bishop, associate director of research at the C.D. Howe Institute, a non-profit think tank. He says the Lac-Mégantic train disaster is “an example that lurks in people’s minds.” Oil shipments by rail remain at historically high levels of about 170,000 barrels a day in Canada-- that’s about six times as much as in 2012. According to Bishop, having all that oil taking up cargo space riding the rails also impacts the cost of shipping agricultural products like wheat and potash.

But there are also concerns around how the pipeline system is managed. It’s an important part of the story because energy products that can get into a pipeline and delivered to a refinery, typically in the U.S. Gulf region, yields a much higher price than the crude that stays in the Alberta Basin. It’s the difference between being able to sell it for $50 to $60 a barrel versus $10 to $20 a barrel. The problem is that 190,000 barrels of raw crudge are currently produced every day in Alberta with no way to get out, neither by pipeline nor by rail. There’s a record amount in storage, and that space is running out.

Root cause

Acuña says the pipeline solution doesn’t address the root causes of this conundrum: too much is being produced and not enough is being done to manage it once it’s out of the ground. “Long-term we need to see more upgrading and refining capacity here in Alberta. It’s something that for decades the Alberta government has been reluctant to step in and do. Rather, it’s enjoyed encouraging companies to extract as much as possible as fast as possible and ship it out and we see the consequences of that now.”

In November, Alberta attempted to address the lack of refineries with incentives to encourage private companies to invest in refining facilities in the province. It pledged $2.1 billion towards upgrading facilities, which is expected to create more than 15,000 jobs.

Although the energy industry is important for the province, it’s not what it used to be. “It’s changed drastically since 2014 and is less labour-intensive. Most of the jobs that have been lost are never coming back,” said Acuña ‘The best companies have integrated, automated ways to do this with fewer and fewer workers.”

Once Alberta accepts this new reality, he continued, it may need to re-evaluate the most strategic way to allocate resources to help it transition if lower prices are the new normal, not just a blip.

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Cover image of the oil sands in Fort McMurray, Alberta. The Canadian Press/Jason Franson.