Cuts reduce incentives to build, Suncor says

Alberta decision creates ‘winners and losers’

CALGARY • The forced curtailment of oil production in Alberta will make it less likely for companies to invest in new refineries in the province, Suncor Energy Inc. said Friday.

Suncor said the Alberta government’s decision to force producers to cut back their output by 8.7 per cent has resulted in “winners and losers” in the province. The company, the largest integrated producer in Canada, is also discussing “unintended consequences” with the province and seeking some relief from the order.

“In the short term, the Government of Alberta action has resulted in winners and losers in the market, shutting in valuable upgrading throughput and has made transporting crude oil out of the province by rail uneconomic,” the Calgarybased operator said.

Suncor did not specifically identify itself among the “losers” in the situation, but it did — along with Husky Energy Inc. and Imperial Oil Ltd. — oppose the curtailment and on Friday acknowledged it will need to shut-in more than 8.7 per cent of its production. The company did not provide a figure for how much of its production it is required to curtail.

Despite the order, Suncor has said it intends to boost its average oil production by 10 per cent over the course of the next year.

“The Government of Alberta intervention creates long-term market uncertainty, and reduces any incentive for market participants to invest in crude oil processing facilities or commit to long-term transportation agreements,” the company said, adding the order would also result in companies “shutting in valuable upgrading throughput.”

Suncor’s announcement comes on the heels of Alberta Premier Rachel Notley’s call this week for proposals for new refinery projects in the province.

Notley issued her government’s curtailment order this month amid record-setting US$40 per barrel and US$50 per barrel discounts for Alberta heavy crude oil, relative to the West Texas Intermediate benchmark.

The order has since helped narrow the differential to about US$12.50, and boosted share prices of domestic companies that are exposed to the benchmark price. Suncor, Imperial and Husky operate refineries, however, which had insulated them from the discounts.

Suncor has much to lose from the production cuts as it also operates oilsands upgraders near Fort McMurray, Alta. as well as refineries in Alberta, Ontario, Quebec and Colorado.

“We feel that we upgrade or refine about 70 per cent of our production in Alberta already and the disproportionate allocation has idled some of that upgrading capacity and that hasn’t addressed the issue which is market access,” Suncor spokesperson Sneh Seetal said.

She declined to directly discuss the provincial government’s call for refinery proposals.

Seetal said the curtailment order could have several “unintended consequences” and as facilities operate at less than their designed capacity, there are safety concerns about potential heat loss and freezing. The company is taking steps to mitigate any potential safety risks and is in discussions with the Alberta government.

Suncor is also discussing other potential consequences with the provincial government and the Alberta Energy Regulator as the curtailment order failed to take into account how a forced production cut would affect oil that is refined and upgraded in Alberta and its in-house production and consumption of diesel as oil consumed at its own operations.

Those factors don’t affect the volumes on clogged pipelines leaving Alberta, which were the root cause of the massive price discounts that hammered smaller oil producers in the province, the company said.

Raymond James analyst Chris Cox called Suncor’s curtailment “mandatory charity” for smaller oil producers in a research note, but added the company’s capital budget on Friday was a positive for investors.

“While the impact of mandated production cuts in Alberta is likely to have a disproportionately negative impact on Suncor versus peers, we agree with the company’s assessment that the full effects of the cuts are likely to last only for the first three months of 2019,” Cox said.

Suncor unveiled a capital budget of between $4.9 billion and $5.6 billion for 2019 on Friday, roughly the same as it spent in 2018, but expects to grow its total oil production by about 10 per cent over the full course of the year to between 780,000 barrels per day and 820,000 bpd.

The company may be able to increase its spending in 2019 if its negotiations with the provincial government and AER on curtailment issues progress, National Bank Financial analyst Travis Wood said in a research note.

Suncor stock closed 3.3 per cent lower to $39.62 in Toronto on Friday.

Last week, I chastised Bill Morneau, the Finance Minister, for gloating about Statistics Canada’s latest hiring tally, which suggested a way-too-good-tobe-true 94,100 jobs were created in November.

That’s more than five times the monthly average since 1976. StatCan advises against making big statements based on singular readings from the Labour Force Survey (LFS); the margin of error is too large. Election season must be close, because politicians and politicos who should know better are ignoring such warning labels.

The goal appears to be to lure partisans into an alternative universe until Election Day, when they will be sent back to this Earth to vote. How else do you explain the candy-coloured world that so many Liberals inhabit on social media, and the dystopian fantasies that play out on the Twitter feeds of Conservatives such as Pierre Poilievre, the Opposition finance critic?

This should trouble all of us, and especially readers of the business pages, who might have a tendency to dismiss political gamesmanship where the merits and drawbacks of various policies are exaggerated. Now, basic facts are fair game. When there is nothing on which partisans can agree, the result can only be more of the chaos of the sort that has brought us the trade wars. Paul Martin, the former prime minister, thinks we’re “living a throwback” to the worst era of modern history.

“One could say that we are going back to the turn of the century, which led to two world wars and a major depression,” Martin said at an event hosted by the University of Ottawa’s Institute of Fiscal Studies and Democracy. “It did that because it was impossible for governments, for parties, for political people to get along and to compromise and to understand what was required.”

The same jobs report that got Liberals excited also produced the source material for a story Poilievre told his Twitter followers about how the cost of living in Justin Trudeau’s Canada is increasing twice as fast as their wages.

He rooted around and found a subset of data that said the average weekly earnings of permanent employees were 1.2 per cent higher in November than a year earlier, while annual inflation in October was 2.4 per cent. “That’s a real wage cut for Canadians,” Poilievre said. “Trudeau’s taxes and deficits are weighing heavily on working people.”

Poilievre appears to have something in common with the minister he shadows: They both think most of us are stupid.

Fact: The cost of living isn’t increasing twice as fast as wages. The Bank of Canada tracks four wage indicators and uses them to create a composite measure of its own; taken together, those gauges show that average hourly earnings are rising at least as fast as inflation. (Unlike Poilievre, most economists track hourly pay, not weekly earnings.) The wage data in the LFS is the central bank’s least favourite because it’s so volatile.

Job creation tends not to explode the way it did in November, and upward pressure on wages doesn’t vanish overnight in an economy that has been growing at or above its non-inflationary potential for two years. On average, the hourly pay of workers 15 years and older has increased at annual rate of three per cent this year, according to StatCan. The pace has slowed in recent months despite low unemployment, which is a mystery worth solving. But overall, while many of us might still be struggling to get ahead, most of us aren’t falling behind.

Conservatives spent a lot of time before the Christmas break talking about the deficit. That suggests they sense a weak spot, which would mean Morneau and Poilievre will have feature roles in next year’s election drama. It’s a shame both men have been so willing to sacrifice their credibility in order to win cheap political points. Neither appear interested in winning converts. Their messages are designed only to keep their filter bubbles happy, or unhappy, whatever the case might be.

Deficits are a good issue. The decision of Moody’s Investors Service to downgrade Ontario’s credit rating is a reminder of what happens when governments let their debts get away from them. It plays in the federal Conservatives’ favour.

At the same time, Ottawa’s finances are nothing like those of Ontario. The latter’s debt is on track to reach 45 per cent of gross domestic product in five years, while the federal debt-to-GDP ratio is forecast to remain stable at around 31 per cent. Canada is one of only a handful of sovereign borrowers that retains the highest score from all the major debt rating agencies. It also must be said that Trudeau’s deficits have offset the negative effects of the trade wars. That plays in the Liberals’ favour.

An honest debate might cause some Conservatives to realize that there is nothing magical about a balanced budget; research by the International Monetary Fund shows that spending on infrastructure, education and other things that create wealth reduce debt over the long run. Or it might cause some Liberals to realize that their current champions have squandered Martin’s legacy as slayer of the last big deficit.

But we won’t be having that debate. If you found this article on Facebook or Twitter, it won’t take you long to figure out why.

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