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November 28, 2018

United Conservatives propose temporary, mandatory curtailment in response to differential crisis

United Conservative Leader Jason Kenney today called on the provincial government to save jobs and stop the fire sale of Alberta oil by implementing a short term, temporary reduction in oil output.

“We are facing an economic emergency described by industry leaders as a ‘five alarm fire’ and ‘a financial catastrophe.” If we do not act now, Alberta’s struggling economy may be hit by large scale job losses, business bankruptcies, a huge increase in the provincial deficit, and an ongoing giveaway of Alberta oil at record low prices,” Kenney said.

“As a free market conservative, I have been reluctant to support a mandatory cut in production. But this crisis was created by a failure of governments, not businesses, to get global access for our energy. And now only governments can stop the current giveaway of Alberta oil which could result in huge job layoffs and billions of dollars in lost revenues.”

Last week Kenney called for voluntary reductions in output to bring Alberta oil markets back into balance. While several producers have reduced production by some 200,000 barrels per day, it is clear that not all companies intend to follow suit to achieve the 400,000 cut in production that analysts say is necessary to reduce significantly the unprecedented $40 price differential between Western Canadian Select and West Texas Intermediate oil.

Market analysts suggest that these measures would likely result in an immediate increase in the price for Alberta oil, and would allow for the current 35 million barrels in storage to be cut in half over the course of several weeks. Production would then be in balance with take away capacity, particularly if Enbridge’s Line 3 replacement and additional rail shipments move an additional 500,000 barrels per day by the end of 2019, as planned.

“Industry leaders have been clear that a modest, coordinated reduction in output will not result in job losses, but that a continuation of the current $40 price differential will force layoffs. Many Alberta energy companies are burning through cash right now, and have no money available for capital spending, including winter drilling activity. But quick action to reduce the current glut in Alberta oil will increase the price, meaning that employers have cash to invest for the future, and to save jobs,” Kenney said. “On top of that, action to move the differential from $40 back to $20 a barrel would mean that Albertans would receive billions in royalty payments that are currently being lost.”

Details of the UCP proposal include:

  • The Legislature immediately amending 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 Legislature raises in December.
  • Cabinet using its authority under Mines and Minerals Act to make regulations reducing production of petroleum by approximately 400,000 barrels per day. The Government must make it 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.
  •  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 in the 400,000 quota. Producers – not the government – should decide which barrels they will be shut-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 prorationing to some thirteen producers.
  •  The curtailment regulations should include a sunset provision for one year after coming into force, with periodic reviews and adjustments as necessary. 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.

Kenney also called on the Government to take action to prevent manipulation of common use carrier pipeline’s like Enbridge’s Mainline.  “The Government must enforce fair rules for the nomination of oil shipments on common carrier pipelines to stop the problem of ‘air barrels’ that have helped to create distressed barrels and lower prices. The principle governing such nominations 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 generate billions of dollars in royalty revenue for the Alberta government,” Kenney said. “But curtailment will not eliminate the price differential.  That 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 spring’s 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.

“To conclude: we need leadership to avoid an economic and fiscal emergency. We are calling for a short term, modest and temporary measure to save jobs and stop the giveaway of our greatest asset.”