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Nov 30, 2018

Production cuts needed to support oil prices: Paramount CEO

A worker makes adjustments to an oil pumping jack, also known as a nodding donkey, in the Bashneft PAO oilfield outside the village of Nikolo-Beryozovka near Neftekamsk, Russia.

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CALGARY -- A rift in the Western Canadian oilpatch over how to best deal with a glut of oil blamed for wide discounts in local spot prices continues to widen despite the province's vow this week to buy locomotives and railcars to help drain the surplus.

Alberta Premier Rachel Notley said in speeches in Ottawa and Toronto this week that the province has decided to buy as many as 80 locomotives and 7,000 rail tankers -- expected to cost hundreds of millions of dollars -- to move the province's excess oil to markets, with the first shipments expected in late 2019.

But that will take too long and doesn't help with Canada's inability to build new pipelines, which is the root of the problem, said Jim Riddell, chairman and CEO of Paramount Resources Ltd., on Friday.

"It's (a government) problem that they created and they have to fix it," said the normally media-shy CEO in an interview.

"They need to, in the short term, curtail production for both gas and oil. They have to do it thoughtfully so that it influences producers to shut in the lowest value production and not shut in the highest value."

The intermediate-sized company was looking at raising its drilling budget next year to increase production but has changed its outlook in the last six to eight weeks to instead favour spending "a small fraction" of its 2018 budget of $600 million because of poor prices, Riddell said.

The curtailment plan first put forward by oilsands giant Cenovus Energy Inc. was supported this week by Jason Kenney, leader of Alberta's opposition United Conservative Party, who suggested all companies in Alberta be forced to temporarily halt 10 per cent of their production.

Western Canada had total production of about 4.3 million barrels per day of oil in September.

Curtailment is opposed by Calgary-based companies such as Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc. whose refining assets and firm pipeline contracts allow them to avoid most local price discounts.

On Friday, Imperial and Husky said they remain opposed to involuntary production cuts but support the rail investments because they could help to improve market access.

"Any and all actions that can be taken to increase takeaway capacity are ultimately in the best interest of our industry," said Imperial spokeswoman Lisa Schmidt in an email.

In Friday's fiscal update, the Alberta government says it now expects growth of 2.5 per cent in 2018, down from the 2.7 per cent growth forecast last spring, because of lower commodity prices. It says discounts on crude oil are costing the country $80 million a day in lost revenue.

It has appointed a panel to find solutions to low oil prices and says it hasn't ruled out using curtailment or adjusting its royalty scheme, through which it gets a cut of any oil or gas produced from lands where it owns the mineral rights, if necessary.

The CEO of well completion firm Trican Well Service Ltd. says he, too, is supporting production cuts even though they could translate into a short-term drop in activity this winter, the season when most drilling in Western Canada is done because the frozen ground allows access to remote sites.

"If the current situation stays where it's at, I think the industry could be in for a pretty a significant 2019 (spending) cut," said Dale Dusterhoft on Friday, adding he doesn't normally support government intervention in the market.

"Mostly, it's what's the alternative? The alternative is to let the market play out and that's a year away, likely, or three-quarters of a year, and by then we could have significant job losses and significant royalty losses for the government."

He said Trican expects to lay off about 140 people by year-end because of expectations of lower activity in Canada. It has a workforce of around 2,200 in Canada and the United States.