Critics see a ‘slippery slope’ in Alberta oil

More government meddling could lead to cuts in crude production

CALGARY— While Alberta’s plan to mandate OPEC-style production cuts is already boosting oil prices and shares, the revival of Canada’s resource nationalism adds another layer of risk for investors to consider.

The removal of millions of barrels of crude from the market will help shareholders of smaller producers who are exempt from the cuts, like Bonterra Energy Corp., as well as larger producers such as Cenovus Energy Inc. and Canadian Natural Resources Ltd. that were being hammered by the supply glut.

But the measure may also rattle the sense of security investors had in companies like Suncor Energy Inc., whose large refining operations had shielded it from the worst of the crisis and were actually profiting from cheap feedstock, said Randy Ollenberger, an analyst at Bank of Montreal. That’s on top of mounting concern that the country’s regulatory framework makes it very difficult to get much-needed pipeline projects approved.

“Investors will definitely worry that this is a slippery slope, and that the government can curtail production or interfere in business to pick winners and losers,” Ollenberger said in an interview. “That’s going to be a big concern.”

To be sure, the Canadian government has had its hand in the energy industry before. The technology used to extract Alberta’s oilsands was developed largely through government-backed programs that started around the 1920s and continued for decades.

In the 1970s, the federal government instituted price controls on oil to keep prices low for domestic consumers and created the Crown corporation PetroCanada to ensure Canadian ownership of some of the country’s energy industry, which at the time was heavily owned by Americans. The company lives on today

as a gas-station chain owned by Suncor.

Pierre Elliott Trudeau, father of the current prime minister, introduced the National Energy Program in 1980, instituting further price controls and increasing taxes on oil and gas companies. The plan sparked resistance from Alberta’s premier at the time, Peter Lougheed, who cut the province’s oil production to protest the measure. The NEP remains infamous in Alberta, seen both as shorthand for government overreach and a reason to be wary of leaders named Trudeau.

The most striking recent example of government interven- tion was Justin Trudeau’s $4.5-billion purchase of the Trans Mountain pipeline and expansion project from Kinder Morgan Inc.’s Canadian unit earlier this year.

The move was a bid to keep the project alive after Kinder threatened to walk away.

Then on Sunday, Alberta Premier Rachel Notley announced that she’s mandating a 325,000barrel-a-day reduction in the province’s oil production to help boost prices off record lows.

Alex Pourbaix, chief executive officer of oilsands producer Cenovus, which may have to shut in about 35,000 barrels a day of production, said the industry is not happy to have the government so involved in the indus- try but realized that the curtailment plan was the only way to avoid “disaster.”

Some in the industry outright oppose the measure. Husky Energy Inc., which owns refineries in Canada and the U.S., said in an emailed statement that a government-ordered curtailment or other interventions can possibly have negative investment, economic and trade consequences.

Still, the move already appears to be having its intended effect. Western Canada Select crude’s discount to U.S. benchmark West Texas Intermediate oil narrowed on Monday to the tightest since July.

Shares of oil producers operating in Alberta also surged, with Cenovus posting its big- gest intraday gain ever.

Alberta’s curtailment should only be in place for a few months and should serve as a wake-up call that the government needs to make other larger regulatory changes to help the industry operate better on its own, said Peter Tertzakian, executive director of the ARC Energy Research Institute in Calgary.

“If we put into place the appropriate midterm and longterm remedies, hopefully we’ll be getting pipelines and won’t need to have this sort of intervention,” Tertzakian said in an interview.

“It’s incumbent upon us to use this crisis as an opportunity to think about how to bring longterm stability to the markets.”