HERE’S HOW WE CAN TACKLE DIFFERENTIAL CRISIS TOGETHER

Governments and industry all have roles to play, Ted Morton writes.

It’s time to stop the blame game and come together as Albertans and as Canadians to address the oil price crisis in a responsible and meaningful way.

Premier Rachel Notley wants to purchase additional oil tanker rail cars to increase take-away capacity for oil exports. UCP Opposition Leader Jason Kenney wants government-mandated cuts in oil production to reduce the over-supply. Prime Minister Justin Trudeau wants … Well, it’s hard to say what he wants, other than to do very little until after the federal election scheduled for next fall. The first two proposals have obvious downsides, and doing nothing has its own risks — economic and political.

With respect to Alberta’s options, we should pursue both — but prudently. Yes, more oil-by-rail will do little in the short run. And yes, normally we would never want the government of Alberta in the railroad business. But these are not normal times. And in the short term, there is no fix. Placing orders for new oil tankers now would start to help expand export capacity by summer. And by a year from now, at 120,000 barrels per day (Notley’s target figure) this would help reduce the backlog.

Kenney’s plan — legislating mandatory reductions in oil production — sounds good in theory, but is insanely complex to implement. The risk of unintended consequences — and collateral damage to innocent bystanders — is high. The following is just a first cut at the difficult decisions entailed by government-imposed pro-rationing.

Should oilsands producers be treated differently than conventional producers?

Should in situ producers be treated differently than surface-mining producers?

Should the integrated companies (Suncor, Husky and Imperial) be treated differently than producers without refineries?

Should oil from newly drilled wells be treated differently than existing production?

If pro-rationing makes it impossible for a producer to fulfil its shipping obligations under “take or pay” contracts, how would that be dealt with?

There is no “one-size-fitsall” production curtailment policy. Figuring out the answers to these questions, consulting with affected companies and fine-tuning the regulations would take months.

But that could be good. By April, the need for such massive government intervention may have dissipated. Exploration and production companies, both large and small, are already slashing their capital budgets for Q4 of this year and Q1 of 2019. They are shutting in existing production, postponing wells they had planned to drill, and putting off completions on wells already drilled.

Oil companies don’t like giving away their hardearned reserves any more than the Alberta government does. None of them want to see their debt-to-cash flow ratio balloon out of control and then get the dreaded call from their banker. For the next several months, it’s all about minimizing new debt. Alberta’s oil production will flatten out in December and begin to decline in January and February. How much and how fast? No one knows. But the direction is clear.

There are other factors in play. Some of the U.S. refineries that take Western Canadian Select oil were shut down in November for regular annual maintenance. Now they are coming back online. Today’s $40 differential is a dream-come-true for entrepreneurs who can figure out how to get western Canadian oil across the 49th parallel in something other than pipelines and trains.

Some smaller companies are already trucking oil across the border to access U.S. pipelines or trains.

Then there are the tanker trucks that are daily hauling condensate back into Alberta from Gulf Coast refineries to be reused to dilute sticky bitumen so that it can be sent south again in what pipeline space is available. Last summer these trucks were driving back to Houston empty. Today many of them are filled with oil that couldn’t find space in a pipeline or rail tanker. Necessity is the mother of invention.

Last but not least, it’s time for the Notley government to have some very private but very blunt conversations with certain large players in the midstream and downstream sectors that are exploiting — even aggravating — the $40 differential for their own gain. These companies are all subject to varying degrees of government of Alberta regulation. Administrative discretion can be used to make life easier or more difficult for them. It should be made clear to them there will be unpleasant consequences if they persist in being part of the problem rather than part of the solution.

The Notley government has time — let’s say 90 days — to develop a pro-rationing plan that avoids the pitfalls of a “one-size-fits-all” approach. This plan could be made effective April 1, if necessary. But with some luck, it might not be necessary. If global oil prices recover some of their recent losses by spring, which many predict, Canadian prices will follow them up, even with the differential. And the differential may also shrink if production has declined sufficiently to clear today’s price-crushing backlogs.

Notley will, of course, be reluctant to embrace a policy put forward by her political opponent. But now is a time for both parties to put aside their differences. Too much is at stake to play partisan politics. The premier should strike a committee of experts to develop a properly structured and modulated prorationing policy for Alberta oils. She did this successfully for oil royalty rate reforms back in 2016. She could do it again in 2019.

With respect to how Trudeau and the federal government could help, here’s a modest proposal: Effective Jan. 1, Ottawa should impose a $40 tariff on every barrel of oil imported into Canada from OPEC. Canada currently imports about 900,000 barrels per day. Most of this comes from the U.S.

NAFTA, or the new USMCA, would prevent tariffs on this oil. But about another 80,000 barrels a day comes from OPEC. A $40 tariff would raise $3.2 million a day; $96 million a month; or $1.15 billion a year.

Coincidentally, that is about the same cost as the rail car tanker plan proposed by Notley: $350 million for the rail cars and $2.6 billion over three years to operate. As such, the $40 tariff would not cost Ottawa a single penny, but be a significant contribution to helping both the Alberta government and the western Canadian oil and gas industry fight their way back from the current crisis.

But this is the means, not the end. The end purpose is to help protect the jobs of the taxpaying Canadian families who live in Alberta and Saskatchewan; families who have paid for hundreds of billions of dollars of equalizations and other transfers to assist fellow Canadians in Quebec and Atlantic Canada over the past several decades. For the next few years, we could use a little help in return.

It’s time for the Notley government to have some very private but very blunt conversations with certain large players.