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

Calgary Herald - - FP CALGARY - GE­OF­FREY MOR­GAN

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.

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