Economy

Moe will not cut oil production despite pleas from Alberta's opposition leader

Moe will not cut oil production despite pleas from Alberta's opposition leader

The first stone has been cast in what is expected to be a tense First Ministers' Meeting on Friday, with Alberta Premier Rachel Notley and Saskatchewan Premier Scott Moe expressing frustration that energy industry issues have been left off the agenda.

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.

They will remain in place, dropping over time, until a backlog of about 35 million barrels of already processed oil has been shipped to market, which the government expects to take three months.

"While Saskatchewan understands the action taken by our neighbours in Alberta to reduce the oil glut that is depressing the Western Canada Select oil price, the impact of the differential and how it is spread across our energy sector represents a different challenge to our province".

"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.

The premier made the announced in Edmonton on Sunday, adding that the federal government was to blame for the high oil price differential that has driven the price of Alberta crude to almost $45 below the world price for oil. Once storage volumes return to more normal levels, the forced cuts will be reduced to 95,000 bpd.

Canadian heavy crude strengthened the most since June.

Notley says as of January there will be an 8.7 per cent reduction ordered in oil production.

Alberta has the legal authority to mandate the cuts because mineral rights are owned by the province.

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Alberta's decision to mandate output cuts to reduce a supply glut will have negative effects on North American producers of lighter oil used for blending and US refiners importing crude via rail, even as several major Canadian energy companies cheered the move.

To be sure, the Canadian government has had its hand in the energy industry before.

"We request that Energy Market Access and the Economic Impacts of the Price Differential be added as an agenda item for discussion this week".

Cutting oil production was about the premier's only option.

The current glut is due in part to pipeline bottlenecks.

"Between now and next winter the Western Canadian oil market is at the mercy of rail schedulers and their attempts to mobilize more locomotives, tank cars, and trained crews-an effort that has thus far proved insufficient to clear the market".

Enbridge's Line 3 replacement project is expected to be completed at the end of 2019, which will offer the first significant increase in takeaway capacity. Alberta is now looking to buy trains to move oil out of the province.

Share prices of Canadian companies that drill condensate, a light oil used for blending with heavy Canadian crude, hit multiyear lows on Tuesday, as demand is likely to fall as a result of the cuts, BMO Capital Markets analyst Randy Ollenberger said in a note. That's on top of mounting concern that the country's regulatory framework makes it very hard to get much-needed pipeline projects approved. "They've seen ups and downs - they've never seen anything like this before", he told CTV's Power Play on November 28.