Alberta takes a page out of OPEC’s playbook, sowing discord in the industry

Late last year, when prices for Canada’s heavy crude collapsed, Alberta’s NDP government ordered its largest oil producers to withhold output by about 325,000 barrels a day, the equivalent of almost 9 percent of daily production. The unprecedented intervention helped to rebound the price of Western Canadian Select, the benchmark for crude extracted from Alberta’s oil sands, which has more than tripled since closing at CAD $13.46 a barrel in mid-November, its lowest level in at least a decade.

Alberta Premier Rachel Notley announced in February that the province would also venture into the oil transport business with the lease of 4,400 rail cars to buy oil from local producers and sell it to refiners across North America. The plan is meant to aid smaller producers, who are getting outbid by bigger rivals on access to pipelines or rail capacity. The province expects to turn a CAD $2.2 billion profit on its CAD $3.7 billion investment.

However, the unintended consequences have riled supporters and critics alike. Many are concerned that the government’s intervention will further erode the province’s pro-business reputation, scaring off international investors. As Canoe Financial in Calgary senior portfolio manager Rafi Tahmazian said, “It’s a province that’s been built around allowing the private sector to operate freely and independently. The tax regime, the royalty regime, the work environment, the quality of the resource, all of those things tick all the boxes that allowed global investment here. Why would we screw with that?

Imperial Oil CEO Rich Kruger recently said, “We think free markets work. With a stroke of the pen, the government began picking winners and losers.” For refiners, such as Imperial, when Canadian oil prices were low, Imperial’s refineries could buy crude more cheaply.

Cenovus Energy’s CEO Alex Pourbaix made the case that production cutbacks were needed to support the industry until additional pipeline capacity comes online at the end of 2019, starting with Enbridge Inc.’s expanded Line 3 in the fourth quarter. “Think about the impact on our industry, on our province, and on everybody directly or indirectly employed by this industry, and I don’t know how you make a case that this has not been good for our province.

Government officials bristle at the OPEC comparisons, arguing that they’re only trying to head off a crisis, and many of Alberta’s free-market oilmen were among those lobbying hardest for the government to step in. They argued it was the provincial and federal governments that had caused the oil glut by withholding permits for new pipelines even as output from Canada’s oilsands continued to climb, and therefore their problem to fix.