Brad Wall: Curtailment Considerations

Governments, no matter their ideological mooring, earnestly seek to solve problems. That’s been both my experience and my observation.

I believe that to be the case with Premier Notley’s efforts to deal with the oil industry’s backbreaking and government bank-breaking differential.

In this space a few weeks ago I offered that blunt instrument policies like curtailment often lead to unintended consequences or even predicted consequences that manifest more severely. Try as they may, government’s response to these consequences can unhelpfully complicate the matter further. A game of whack-a-mole at the expense of solid sector policy and taxpayers’ money can ensue.

Earlier this year, Genscape data confirmed declining oil inventories. An affirmation of the policy upside of curtailment. Data also confirmed however an attendant decline in oil by rail. According to published reports, the railways have each seen an approximate 33% reduction in oil shipments by rail from December and of late rail shipments have fallen more sharply and inventories have risen again.

Some in the industry were observing that with differential reductions and existing conditions continuing, February and March might just see a near complete collapse in oil by rail.

Like an echo to these somewhat predictable consequences, the Alberta government announced its intent to invest $3.7 billion to lease 4,400 oil tanker railcars over the next three years to move a projected 120,000 barrels per day by next year.

Alberta Opposition Leader Jason Kenney has committed to review the contracts with rail companies questioning whether this is the role of government in the first place and noting that producers were shipping more oil by rail prior to the implementation of curtailment.

To be sure, there is no effective long-term answer beyond more pipeline capacity to this intractable and complicated problem. That is why it behooves government, having now wielded the blunt instrument of curtailment, followed by intervention in the rail market, to be exceedingly vigilant and willing to adjust elements of the policy including the caps themselves and possibly their early elimination.

About the Author

Brad Wall served as the 14th Premier of Saskatchewan from 2007 to 2018 and is currently a special advisor to Osler, Hoskin & Harcourt LLP.

BOE Report offers real-time news and analysis on the upstream and midstream oil and gas industry, macroeconomic price environment, and government energy policy.