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Alberta mandates a reduction in oil production

3 December 2018

The Canadian Province of Alberta announced it is mandating a reduction in oil production in 2019 to protect the value of Alberta’s energy resources. Due to a lack of pipeline capacity, the price of Western Canada Select (WCS) has plunged as low as $15 per barrel, representing a record discount to the West Texas Intermediate (WTI) crude.

Under the action announced by Alberta Premier Rachel Notley, production of raw crude oil and bitumen will be initially reduced by 325,000 barrels per day (bpd) to address the storage glut, representing an 8.7% reduction. The reductions will start in January 2019. After excess storage is drawn down, the reduction will drop to an estimated average of 95,000 bpd until December 31, 2019 when the rules supporting this action end.

Alberta is currently producing 190,000 bpd more than can be shipped by pipelines, rail or other means. The amount of oil that is being diverted to storage is at record highs and storage is nearing capacity. In total, 35 million barrels of oil are in storage—about twice the normal levels. The price differential for WCS versus WTI has been around $30 to $50 (USD) recently, peaking at $52 in October.

“The price gap is caused by the federal government’s decades-long inability to build pipelines,” Alberta government said in the announcement. “Ottawa’s failure in this area has left Alberta’s energy producers with few options to move their products, resulting in serious risks for the energy industry and Alberta jobs.”

Relative to inaction, curtailment of oil production is projected to narrow the price differential by at least $4 per barrel and add an estimated $1.1 billion of Alberta government revenue in 2019-20. The Alberta Energy Regulator will administer the reduction using the existing Responsible Energy Development Act.

The level of curtailment for each company will be based off its six months of highest level of production over the past 12 months (with some exemptions available for samll producers). Additional oil takeaway capacity is expected to be available in late 2019, in part “through Alberta’s major investment in crude-by-rail transport”.

Source: Government of Alberta