Oil prices started the week…
Strong demand for oil products…
Alberta’s oil producers are facing an extraordinary challenge caused by pipeline bottlenecks combined with growing production, Scotiabank Economics said in a report released this week.
The bottlenecks could pressure the industry’s 2019 earnings by as much as US$11.33-29.45 billion (C$15-39 billion), the bank said, and government revenues could suffer a loss of between US$1.13 billion (C$1.5 billion) and US3.1 billion (C$4.1 billion).
This scenario, the bank said, factored in all other relevant circumstances remaining equal, with the only variable being pipeline capacity. With adequate capacity, Scotiabank’s analysts said, these losses will not be borne.
However, the bank is wary about a proposal from the industry to have the government order a production cut to alleviate pressure on what pipeline capacity there is. “The bar for the government to intervene directly into the energy sector should be a high one and the policy option should only be considered in an effort to prevent extreme value destruction,” Scotiabank said.
What’s more, it seems even a production cut wouldn’t make it possible to avoid all the losses that would otherwise be incurred. It would only reduce them. The potential reduction could be substantial, though: Scotiabank estimates the range of loses avoided at US$2.27-20.4 billion (C$3-27 billion).
The bank went on to say it actually expected that the huge discount at which Western Canadian heavy has been trading to West Texas Intermediate would narrow in 2019. “If discounts fall back, as we expect,” the bank said, “to a more moderate level in 2019, the pay-off of government intervention is likely to be too small to justify the policy action; however, if discounts remain wide around current level, the action could be justified given the magnitude of potential upstream earnings and royalty revenue losses.”
Earlier this week, the chief executive of Cenovus called for government intervention in crude oil production in Alberta to counter the sinking prices. Not everyone among the producers, however, is on board with this, but Premier Rachel Notley said the provincial government is discussing all options, including intervention.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.