Cenovus Urges Government-Imposed Production Cuts to Drive Up Tar Sands/Oil Sands Revenue
One of the biggest fossils in the Canadian oilpatch, Cenovus Energy, is urging the Alberta government to impose temporary production cuts across the sector in a bid to “alleviate the wide differentials” between the world price for a barrel of oil and the deeply discounted amount that tar sands/oil sands producers can fetch.
“We think there is a strong case for the government to temporarily mandate reduced production for the industry,” Cenovus told CBC News in an email. “Our inability as a country to build critical new pipeline projects means we are now in a situation where we can’t get our growing oil production to market. This has resulted in a market failure.”
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That situation, Cenovus added, “is the result of policy failures at the federal level that impacted pipeline projects, and in the short term it can only be fixed by the Government of Alberta through temporary mandatory industry-wide production cuts.”
The company noted that Alberta has legal authority to mandate production cuts and actually took similar action in the 1980s, during Peter Lougheed’s term as provincial premier. “This is an extraordinary situation brought on by extraordinary circumstances,” the company said. “The government needs to take this immediate temporary action—which is completely within the law—to protect the interests of Albertans.”
Cenovus was one of a handful of fossils that cut production earlier this month and blamed the price differential solely on a lack of pipeline capacity to tidewater. At the time, Oil Change International Senior Campaigner Adam Scott acknowledged the pipeline issue as just one factor driving a discount that fossils consider ridiculously high.
“The oil price differential right now is absurd, and exactly why Premier Rachel Notley is fighting to build new pipelines and pushing Ottawa to step up and help fix the backlog in rail shipments,” Mike McKinnon, spokesperson for Alberta Energy Minister Margaret McCuaig-Boyd, told CBC.
Scott characterized the production cuts as “a small but concrete demonstration of the link between new transportation infrastructure like pipelines and climate pollution.” But he added that “tar sands oil has always been worth less than conventional crude as a result of its lower quality and the expense of shipping it to distant markets…the discount is now also being driven by refinery outages and an increasingly full export pipeline system.”
With that combination of factors bringing the discount on Western Canadian Select (WCS) crude to about US$50 per barrel compared to the North American benchmark price, West Texas Intermediate (WTI), “some tar sands producers are selling oil for less than $20 per barrel, losing large amounts of money at a time when global oil prices have been trending upwards,” Scott noted.
[Since then, the North American oil price has fallen as low as US$55.61 per barrel (as of today 6:47 AM ET)—presumably bringing Western Canadian Select down to a price of US$5.00 or a bit less. So today, at least, Cenovus has far bigger problems than pipeline capacity.—Ed.]
TriVest Wealth Counsel portfolio manager Martin Pelletier told CBC he would have preferred to see industry come up with its own solution to the pricing conundrum rather than turning to government for help, while conceding that “desperate times call for desperate measures”.
But Warren Mabee, director of the Queen’s Institute for Energy and Environmental Policy, questioned whether companies across the oilpatch would agree to the production cuts Cenovus was advocating—and at least one other oilpatch producer might agree. On a recent investors’ call, Canadian Natural Resources Limited (CNRL) President Tim McKay berated rival fossils for taking “windfall revenues” while interfering with efficient operation of the available pipeline space out of Alberta.