Saskatchewan not following Alberta’s lead in cutting oil production

Alberta orders oil production cut to deal with price differential

Output of raw crude oil and bitumen will be reduced initially by 325,000 barrels per day.

On Monday, Alberta Energy Minister Marg McCuaig-Boyd said her government had been in contact with Saskatchewan. Western Canada Select (WCS) has plunged below $15 per barrel, representing a discount to WTI that has hovered at around $40 per barrel. The surplus is filling storage up quickly.

Oil production cuts announced by the Alberta government will have the desired outcome of reducing steep price discounts on western Canadian crude, but will also create winners and losers, financial analysts say.

The province also expects a deal in the works to purchase its own railcars to transport oil will help with the backlog next year.

"We have set out a 10,000 barrel [a day] exemption for all producers".

Members of the oil industry, meanwhile, were split Monday on whether production cuts are a good idea.

"We're facing, I think, something that qualifies as a crisis, or very almost that, and there are no other tools available to the provincial government so given that the market or even coalition of players in the market can't do this on their own without running afoul of price fixing laws, this is something that makes a lot of sense for all of the parties but I give full credit, not just to the fact that they are agreeing on this, but that they're saying that they don't want this to be about partisan politics and they want it to be about the interests of Alberta and I have no question that Albertans want to see more of that kind of collaboration", she said.

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While the Conservatives have consistently supported pipeline construction, the Liberals refused to say during the 2015 election whether they would champion the building of several proposed pipelines. That additional rail would add 120,000 bpd in takeaway capacity but wouldn't be available for another year, and would take time to scale up. After the province achieves an 8.7 per cent reduction in supply, it will then lower production cuts to 95,000 barrels per day, ending in December 2019. Any effort to cut output by one company only stands to benefit another.

The planned cuts by the world's fifth-biggest producer follows a renewed commitment over the weekend by Saudi Arabia and Russian Federation to extend their deal to manage the oil market.

"We are at an historically crucial point in terms of how tight this infrastructure is", Oberstoetter said.

The statement goes on to say this is an extreme case in need of curtailment. Those railcars won't come into effect at least until mid-2019. The reductions will erase some of the inventory overhang, allowing the cuts to be phased out. More rail capacity could ease the midstream burden as well.

Industry feelings prior to the announcement had been mixed.

It's worth noting that years of pipeline fights from environmental groups, local communities and First Nations are bearing some fruit.

Western Canadian Select, the heavy oil benchmark in Canada, soared almost 37 per cent on the news, up to around US$30 per barrel, according to Bloomberg data, with the blend trading in the low $20 range below the USA crude, compared WITH $32 before the announcement. Industry groups and pundits scolded protestors, declaring that the oil would find its way to the market one way or another. However, pipeline delays and logjams are literally keeping oil in the ground.


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