Producers are exploring the possibility of creating a North American oil cartel to manage production as the crisis deepens

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As Canada’s oil sector hits one of its lowest points, a new movement is gathering momentum with producers and the Alberta government to create a North American cartel that could manage production across the continent and stabilize the industry.

The idea is gaining ground among many small independent producers who are feeling the pain of a dramatic drop in oil prices, including in Alberta and also in the United States, especially in Texas, where a legal framework for cartels exists. already.

Such an organization could, in theory, function like the Organization of the Petroleum Exporting Countries or OPEC, which until recently had played the role of pivotal producer to stabilize prices. In recent weeks, Saudi Arabia, the backbone of OPEC, has decided to increase production to drive prices down, which risks excluding high-cost producers in North America and elsewhere.

Sources say preliminary discussions have taken place between US and Canadian government officials, including the Texas Railroad Commission and the Canadian government, but analysts remain skeptical about the chances of setting up such an organization.

The logo of the Organization of the Petroleum Exporting Countries (OPEC) is located outside its headquarters in Austria.


Leonhard Foeger / Reuters files

“There has actually been a lot of discussion about this,” said Tristan Goodman, president of the Association of Explorers and Producers of Canada. “It’s actually been several weeks and I think people are really feeling the pinch. “

A spokesperson for Alberta Premier Jason Kenney said he had been discussing the idea of ​​a cartel for several weeks with various US government officials and politicians, saying it was a question of energy security.

“It is time for North America to stand up against the OPEC dictatorships which continue to pour supply into the market in an effort to withdraw North American producers,” said Christine Myatt, press secretary for Prime Minister.

It is time for North America to stand up against OPEC dictatorships that continue to dump supplies into the market in an effort to remove North American producers

Christine Myatt

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Grant Fagerheim, chief executive of Calgary-based Whitecap Resources, said that “it would take a colossal effort” to form such an organization, but it is worth exploring.

A spokesperson for Seamus O’Regan, Canada’s Minister of Natural Resources, declined to say whether meetings were held with US government officials.

The idea is gaining ground with small independent producers in Alberta, many of whom must pay to produce oil when prices fall so low, otherwise they risk damaging their oil fields by shutting down production.

Meanwhile, large producers, particularly those with refineries, are able to profit even when oil prices drop, and so far they have resisted the idea.

Jay Averill, spokesperson for Canada’s oil and natural gas producers, declined to comment on this article, except for a statement noting that neither energy producers nor industry associations are legally authorized to ” coordinate production ”.

“Only governments have this power,” said the statement.

A refinery east of Edmonton.


Jordan Verlage / Special for the Sun network / Postmedia

The primary objective of any cartel would likely be to reduce oil production while demand and prices remain so low due to the coronavirus control measures. Until they do, there will be a global imbalance that will lead to an oversupply on the road that will delay any recovery when oil prices come back.

“With each passing day, the current imbalance translates into an additional 40-day hangover in terms of global excess crude stocks that will need to be destroyed in the post-coronavirus world,” according to a note in The Canadian Imperial. Bank of Commerce analysts released Wednesday.

In Texas, two independent energy companies have appealed to the Texas Railroad Commission, which regulates the state’s industry, asking it to cut production to help raise prices. A commission spokesperson referred to the individual commissioners, who were not available to comment.

In Alberta, the idea of ​​reduction is not without controversy or history. In February 2019, for example, Imperial Oil Ltd., which is majority owned by Exxon Mobil Corp., opposed the Alberta government’s decision to impose new limits on oil production, calling it “drastic manipulation” and dramatic market. “

A bitumen sample at Imperial Oil’s research laboratory.


Todd Korol / Reuters files

Analysts also said that the practical and legal barriers to establishing a North American cartel today make it unlikely to happen in the short term, if at all.

“I am very skeptical that this idea will go everywhere,” said Greg Priddy, director of global and Middle East energy at Stratfor Enterprises, a design office.

Priddy added that the firms most interested in unified government intervention to reduce production tend to be smaller firms whose operations are landlocked or who cannot sell their products in more than one market to get the price. The highest.

“I think the production cuts are coming, but they are not the result of government action,” he said. “They come from market forces and logistical bottlenecks. Unfortunately for Canada, Alberta is a mess. “

The price of Western Canadian Select, which is often traded at a discount compared to other oil references, fell below US $ 4 per barrel this week and the S&P Capped Energy index was down almost 59% in the during the first three months of 2020.

I am very skeptical about the idea that this idea goes everywhere

Greg Priddy

US producers had experienced similar price reductions following the unusual combination of lower demand caused by social distancing measures against coronaviruses and a price war between Saudi Arabia and Russia that simultaneously increased supply.

What further complicates things for Canadian producers is the lack of access to pipelines, which limits their choices of end markets. This is why the Alberta government has pledged $ 1.1 billion to help finance the construction of TC Energy Corp.’s Keystone XL pipeline, delayed this week, which will deliver oil to the U.S. Gulf Coast. , where there are several heavy oil refineries.

The move comes just days after Alberta announced that it would fire 20,000 Kindergarten to Grade 12 education support staff, while the COVID-19 coronavirus forced schools to close.

Alberta Premier Jason Kenney peaked in Calgary on Tuesday March 31, 2020 over the start-up plan for the construction of the Keystone XL pipeline.


Jim Wells / Postmedia files

Phil Skolnick, analyst at Eight Capital, said the Keystone XL pipeline makes sense as a longer-term game for Alberta energy producers because it would help them get higher prices in the future.

“It’s good because at the moment funding is just not available otherwise, I have to imagine,” said Skonick.

Like Priddy, he expressed skepticism that North American oil producers would launch an agreement to coordinate production, not least because it could require renegotiating trade agreements and building a legal framework that would take months .

With the US presidential election approaching at the end of the year, neither party will likely be interested in spending political capital on something that, ultimately, is designed to raise the price of oil, said Skolnick.

“In a crisis right now, it seems logical, but once we have gone beyond all of COVID-19, the discussion seems to change,” he said.

Financial Post

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