Will Alberta’s Extended Oil Production Cuts Pay Off?

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Last year in December, the Alberta government decided to take matters in its own hands to cut the oil supply glut that was plaguing Canada. Premier Rachel Notley told producers that a mandatory production cut of 325,000 barrels per day is being put in place to reduce oversupply and improve prices.

The government had said that the mandated cuts will be reviewed from time to time, and it did relax the limits over time. However, the Alberta government recently announced that it will extend the cuts by a period of one year until the end of 2020.

Why the Extension?

Reuters reports that Canada still lacks the pipeline capacity that was necessary to improve market access and bring down the oversupply in the industry. This has forced Alberta’s energy minister Sonya Savage to take the step of extending the cuts to the tune of one year.

According to Reuters:

But Alberta Energy Minister Sonya Savage said that with delays in pipeline approvals such as Enbridge Inc’s Line 3 replacement, production levels could exceed rail and pipeline capacity by 150,000 barrels per day, and greater price discounts could reappear, unless the province extended curtailments. We’re doing this because we have to. In the short term, we don’t have the capacity to move the production,” Savage told reporters in Calgary.

As it turns out, Alberta’s oil output is expected to increase from a projected 3.76 million barrels per day this month to 3.79 million barrels per day in October. And with pipelines facing opposition from various quarters, the province has found it difficult to improve market access.

But it remains to be seen if the cuts will work as there has been a change in the exemption limit.

The exemption limit for oil producers has been raised to 20,000 barrels per day, which means that anyone producing lower than this level doesn’t have to slash the output. So, only 16 oil producers in Alberta out of a total strength of 300 will have to restrict their output as compared to 29 earlier.

The original mandate had called for production cuts of 325,000 barrels per day.

Is This the Right Step?

Keeping a cap on the output might work in the short run to prop up oil prices and reduce inventories, but this is not a long-term solution.

But Alberta has no other option right now as production is exceeding railway and pipeline capacity by a significant margin. The good news is that there is some progress on this front. The Alberta government has struck partnerships with the likes of Canadian National and Canadian Pacific to lease as many as 4,400 rail cars to improve market access.

These contracts were expected to kick in July with initial shipments of 20,000 barrels per day. The Alberta government expects full capacity only in mid-2020 when crude-by-rail shipments through these two railroads will hit 120,000 barrels per day.

So there’s a chance that things could improve by next year. But until and unless there is a development in pipeline capacity, Canada’s oil market will continue to remain under pressure.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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