The Alberta oil patch is in a crisis that some are calling a 5 Alarm Fire or Oil-magedon! The problem is that over the last five to 10 years the oil industry has ramped up oil production to meet international demand but environmentalists, various levels of government and the courts have combined to stop the building of pipelines to get the oil to tidewater and an international market.
It is difficult to cut back oil production because it could damage some of the oil fields, at around 35 million barrels we have reached our capacity to store oil and it must now be placed on the market. The result is an oversupply of oil in the western Canadian market that has dropped the price for what we can receive for a barrel of Western Canadian Select down to somewhere around $10 barrel. The difference between what we receive and what the rest of the world would receive for a similar barrel of oil is called the differential and at times we have had as much as a $50 dollar difference between what we receive and what the international market is receiving. Some oil companies are even having to sell their product at a loss.
The ramifications of this are serious. Companies that are vertically integrated like Husky, Suncor and Imperial are able to produce, have pipeline access and can refine their product, they are still making money. However, many small and medium sized oil companies are stuck receiving the WCS differential and are on the verge of going broke. Some are cutting back on staff, shutting in wells and trying to weather the storm, the rest are shutting their doors.
Drilling companies are choosing not to drill and the many small oil communities in the Drayton Valley-Devon Constituency are witnessing closures of service companies almost every day. Many companies are saying they can survive for another two months but cannot guarantee that they will be around in 6 months.
It doesn’t get any more serious than this and in reality the problem is more complicated than I have time to write about. So what can we do about it?
The long term answer is to increase our capacity to transport our oil to international markets whether by rail or pipeline or truck. If we decrease the oversupply of oil by about 400,000 barrels per day then the price will increase back to about $20 a barrel differential and most companies will be able to produce oil and make a profit.
But rail and pipeline take time and we have run out of time. That is why the leader of the Opposition, Jason Kenney, has laid out a plan for mandatory curtailment. As Conservatives the United Conservative Party would prefer to leave an oversupply up to market forces but in the face of a collapse of the oil industry and on the advice of many oil experts the party has come out in favour of mandatory restrictions.
Many in the oil industry are split on this issue. Husky, Imperial and Suncor have not been open to mandatory curtailment. Many companies on the verge of closing their doors have already voluntarily reduced production for a combined 200,000 barrels a day. Others in the industry simply want the market to decide. In an admittedly unscientific poll I polled 213 constituents and 121 did not support mandatory curtailment, 72 did support mandatory curtailment and 8 were undecided.
Mandatory curtailment is a tough call but it is one of the few options that may have an immediate effect on the oversupply and could save companies and jobs in the short term. The opposition is pleased the government has decided to implement the curtailment.
Mark Smith is MLA for the Drayton Valley-Devon constituency and writes a regular column for The Pipestone Flyer.