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November 29, 2018

Statement from Jason Kenney, November 28, 2018

Four Long Years

Over 180,000 Albertans are out of work. Unemployment has climbed for six straight months. At the bottom of the downturn, we saw near record bankruptcies and insolvencies. People have lost their homes and, in too many cases, lost their hope.

Unless we act now, we could be on the verge of another major round of layoffs and business failures. That’s because we are now virtually giving away an asset that belongs to all Albertans, our oil and gas. The price we’re getting for Alberta’s oil is at its lowest point in over 35 years.

Today, the market for most of our oil, at Western Canadian Select, is less than $12 US per barrel. That’s $40 less than the going price for Texas oil. Last week, it was $45 less.

That means that our oil is worth about 10 cents a litre, a fraction of the cost of a bottle of water. The price differential is so extreme that it’s moved from our heavy oil and gas and is now dragging down Alberta light crude and condensate.

Every part of our largest industry is being hit hard.

This unprecedented price differential is costing our economy up to $100 million a day. If it continues, it could cost the Alberta government over $7 billion a year, ballooning our annual deficit potentially from the current $8 billion to potentially $15 billion.

In recent days, I’ve met many of our energy industry leaders. Most tell me that they’re unable to raise equity and are burning through cash, because the cost of extracting and shipping our oil is higher than the price they get for it.

Some of our biggest employers have seen their share value decline by more than a third in the past couple of months. With no cash flow, companies are slashing their capital budgets. That means that a lot of winter drilling activity may be canceled, which would be devastating to small service contractors and their employees in communities across Alberta. That impact would then ripple through the rest of our economy.

If this giveaway of Alberta oil continues for months, many companies will run out of cash and out of time. We could face big layoffs in an industry that was already reeling. One of the top experts on our energy industry, Peter Tertzakian, writes in today’s Financial Post that if action is not taken to correct the price differential, quote, “This crisis could turn into a financial catastrophe.”

One of Alberta’s most respected business leaders told me last week that, quote, “This is a five alarm fire.”

That is why, today, I am calling on the government of Alberta to act immediately. To introduce mandatory curtailment of 10% of Alberta’s oil production. I do not make this recommendation lightly. After all, I’m a free-market conservative. I believe government intervention in markets should generally be avoided, which is why I was initially opposed to the idea of mandatory curtailment when it was first floated a few weeks ago.

After extensive consultation, I now believe that action is necessary.

Here is why: firstly, the crisis in our energy industry is largely the result of bad government policy, not bad business decisions. Energy companies invested tens of billions of dollars to increase production, in part, because governments asked them to, and promised pipelines to take our energy to markets. The Trudeau government killed Northern Gateway, and Energy East, bungled Trans Mountain, surrendered to Obama’s veto on Keystone, and opposed a West Coast tanker ban together with ramming through its no more pipelines law, Bill C-69. If government creates a problem, then government has a responsibility to help undo its damage.

Secondly, mandatory curtailment would not create a new precedent with unforeseen consequences, as some fear. Government limits on oil production in Alberta were the norm throughout most of our history. From the birth of our modern oil industry, in 1947, at Leduc, through the early days of the oil sands, in the early 70s, and even in the early 80s, used by Peter Lougheed to deal with the national energy policy. Every other major energy producer around the world, including the United States, at times, uses production limits to avoid fire sale prices of this vital asset.

Thirdly, the oil that we are currently giving away belongs to the people of Alberta, not to the companies who extracted. The government must not allow this public asset to be given away, effectively transferring billions of dollars of wealth from Albertans to American refinery owners.

Fourthly, the risk of doing nothing is much greater than the risk of government action. Some argue that a combination of voluntary reductions in output, plus higher rail shipments and the Line 3 replacement, will bring the Alberta oil market into balance by this time next year. There is no certainty around whether or when this would happen. Waiting for months for the differential to shrink will likely mean thousands of job losses, bankruptcies, and billions of dollars in lost government revenues. Curtailed production, however, would lead to higher prices and cash flow, allowing many companies to avoid layoffs and deep cuts to their capital budgets, in 2019.

Next, voluntary reductions are not sufficient to stop the bleeding.

I called on Alberta producers to voluntarily reduce production to deal with the crisis. I commend those who have stepped forward and done so in recent weeks, reducing output by some 200,000 barrels per day. Getting Alberta oil inventories and prices back into balance will require a reduction of at least 400,000 barrels per day. It’s clear that not all producers are willing to participate. An orderly, short-term government mandated curtailment is necessary to stop this massive giveaway of our wealth and prevent huge job losses.

We therefore recommend the following: that the legislature immediately amends section 85 of the Mines and Minerals Act to define crude bitumen as petroleum. The Official Opposition is drafting such an amendment for introduction in the legislature and is willing to cooperate with the government to ensure its adoption, before the assembly rises, in December. At the very least, we believe the government should accept such an amendment so it has at least the option of action following the legislature session.

Next, cabinet should then use its authority under the Mines and Minerals Act to make regulations reducing production of petroleum by some 400,000 barrels per day. That would be equivalent to about 10% of production in Alberta. The government must make it clear, absolutely clear to markets that it will be resolute in bringing balance back to Alberta’s energy market and will not relent until surplus inventories are cleared with the price differential significantly reduced. Next, the Alberta Energy Regulator should be given responsibility for the implementation of these regulations, with the power to levy fines for non-compliance.

Monitoring of compliance would occur through monthly royalty remissions. Producers who have voluntarily reduced production should be able to include those reductions within the 400,000 barrel quota. Producers, not the government, should decide which barrels they shot in, allowing them to make the wisest commercial decision for their companies and employees. Companies that produce less than 25,000 barrels per day of petroleum should be exempted from the production limit, recognizing the disproportionate effect it would have on them. This would limit the pro-rationing to some 13 producers.

The curtailment regulation should include a sunset provision for one year after coming into force. These regulations should not be seen as a permanent feature of Alberta’s energy markets, but as a short to mid-term measure, to correct the current extreme price differential.

Market analysis suggests that these measures would likely result in an immediate increase in the price of Alberta oil and would allow for the current 35 million barrels in storage to be cut in half over the course of the next several weeks. Production would then be in balance, would take away capacity, particularly if Enbridge’s Line Three replacement and additional rail shipments move an additional half a million barrels per day by this time next year, as planned.

We also recommend that the government enforce fair rules for the nomination of oil shipments on common carrier pipelines, like the Enbridge Mainline, to stop the manipulative problem of so called air barrels, that have helped to create distressed barrels at lower prices. The principle governing such nomination should be that real barrels are nominated to their intended destination. We believe that these actions will stop the current giveaway of Alberta oil, will protect jobs, and will generate billions of dollars in royalty revenue for the Alberta government. But curtailment will not eliminate the price differential.

The expectation is that these measures would reduce it from $40 differential to about a $20 differential. Getting that $20 differential down will require the completion of coastal pipelines and reversal of federal policies, like Bill C-69. That is why the United Conservative Party will make its fight back strategy a key part of our platform in next springs election to move Alberta from being defensive and apologetic about our resources, to using every tool at our disposal to fight for Alberta jobs and prosperity.

So, to conclude, we need leadership to avoid an economic and fiscal emergency. We are calling for a short-term, modest, and temporary measure that is well rooted in Alberta history, to save jobs and stop the giveaway of our greatest asset. To quote Gwyn Morgan, one of the most respected Alberta energy leaders in the Financial Post today, quotes, “This is the only short-term solution that will benefit Albertans and the vast majority of Alberta’s oil companies. It is the only way to stop the discounting of Alberta’s oil, and keep a diverse and competitive energy sector in our province. It is the only way to get the sector back on track and stop the loss of billions of taxpayer dollars that belong to Canadians.”

Will Albertans remain passive in the face of an economic crisis, or will we act as owners, taking the reins and the steps necessary to protect the core of our national economy?

The world is watching. It’s time to act and end the fire sale of Alberta oil.