Alberta could avoid losing $2.9B in sales by mandating output cuts

Alberta’s government could avoid losing out on as much as $2.9 billion in royalty revenues if it were to force local oil companies to throttle back crude production in the province, a highly divisive policy option being considered.

A Wednesday report from Scotiabank Economics shows the “extraordinary challenge” facing Alberta. The province’s treasury is set to lose between $1.5 billion and $4.1 billion in royalty revenues if record-setting discounts for Canadian oil persist. But Alberta could cut those potential losses through a dramatic intervention in the oil market, using its powers to mandate a four-per-cent production cut by all oil companies operating within its borders.

The move could save the province between $300 million and $2.9 billion in lost royalties, the report noted.

“The bar for the government to intervene directly into the energy sector should be a high one and the policy option should only be considered in an effort to prevent extreme value destruction,” the report notes.

However, the astronomical cost shows the dilemma facing the Alberta government, which is under pressure from large companies to intervene in the market by forcing producers to cut output. Integrated firms Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc. own refineries and are opposed to forced curtailments, but the option is still being studied.

“There is no option that’s been taken off the table at this point,” Alberta Premier Rachel Notley said Tuesday, when asked about forcing producers to rein in production.

The situation could still resolve itself as a handful of oil producers, including Cenovus and Canadian Natural Resources Ltd., have signalled they will cut production.

Scotiabank commodity economist Rory Johnston said he expects discounts for Canadian heavy oil will drop from current levels of roughly US$40 per barrel to US$35 per barrel by the end of this year, and to ease to US$29 per barrel in the first quarter of 2019.

As a result, he said the financial payoff to the government for intervening in the market could be too small to justify the unprecedented intervention — unless there are further delays to new pipelines or a slow uptick in oil-by-rail movements.