Wednesday, 16 Jan 2019
Business

Does OPEC cut off the oil supply? No, it's Canada

The Government of Alberta, a province in western Canada, is charging oil producers a reduction of 325,000 barrels a day, an extraordinary intervention on one of North America's largest energy markets. The measure was not unprecedented: the Alberta government ordered cuts in production in the 1980s to protest against federal energy policies. But the production quotas that characterize the Organization of the Petroleum Exporting Countries are strangely similar to a market economy.

1. What motivated the action of Alberta?

Premier Rachel Notley said cuts in production, which will come into effect in January and need to be re-evaluated every month, are needed to address the glut of oil stored in Alberta, which has pushed its price to its lowest level. for at least three years. a decade. She blamed this overabundance for a shortage of pipeline capacity. The province is looking to buy cars as an alternative means of transportation; In the longer term, the Canadian oil industry is counting on three pipeline projects to help bring more oil to the market: Increased Line 3 of Enbridge Inc., Keystone XL of TransCanada Corp. . and expansion of the Trans Mountain Pipeline from Alberta to the coast of British Columbia. Prime Minister Justin Trudeau's government bought the Trans Mountain project last spring for $ 3.5 billion, saying that government ownership would increase the chances of construction.

2. How do production reductions fit into a market economy?

Rather uncomfortable, judging by the initial reactions. Randy Ollenberger, an analyst at the Bank of Montreal, said that investors "will definitely fear that it's going to be a slippery slope and that the government can reduce production or interfere in it." business to pick winners and losers ". Producers who will benefit more from rising Canadian prices applaud the decision. Devon Energy Corp. stated that a short-term intervention was necessary in an oil market as distorted as that of Alberta. Suncor Energy Inc. and Imperial Oil Ltd., two companies operating in the refining sector benefiting from cheaper oil, opposed this decision.

3. Has this been done in other parts of North America?

Yes. Mexico is one of eleven oil-producing countries, including Russia and Oman, which joined OPEC to cut production last year to support prices. In the United States, no existing law would give the US federal government the power to order production cuts, according to Josiah Neeley, director of energy policies at R Street, a Washington-based public policy research organization. In theory, several states have such authority, but the chances that they would be exercised are "practically nil". During the 1930s, 1940s and 1950s, the Texas Railroad Commission played the role that OPEC plays today by imposing reductions in production to avoid oversupply. The agency has finally become a model for OPEC.

4. How will Alberta apply the cuts?

It's still being explained. In January, the reductions represent 8.7% of production and the amount will be evaluated each month thereafter. Until now, the provincial government has stated that the cuts for each operator would be based on the six highest production months of the year. The order will expire automatically at the end of 2019. Mike McKinnon, the spokesman for the Cabinet, said the government regulations allow for the application of administrative penalties to companies that do not comply with the rules and orders. The Alberta Energy Regulator, which operates offshore oil and gas activities in the province, can use its powers under the Oil and Gas Conservation Act and the Oil Sands Conservation Act to close a well or facility when a business is not in good standing, he said. Nevertheless, much remains to be done in this area before January.

To contact the reporter about this story: Robert Tuttle in Calgary at rtuttle@bloomberg.net

To contact the editors responsible for this story: David Marino at dmarino4@bloomberg.net, Laurence Arnold

© 2018 Bloomberg L.P.

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