Royal Bank suggests Alberta take a royalty holiday to eat up supply in storage.
Steep oil price discounts costing Alberta producers and the provincial government millions of dollars each day in lost revenue could be eased if the industry is given a temporary royalty holiday in return for producing less, according to a bank analyst.
In a report this week, Royal Bank analyst Greg Pardy said Alberta oil is selling for multi-year discounts to US benchmark prices for two reasons — there’s not enough export pipeline space and barrels can’t go into storage in Alberta because there’s no room left.
The traditional solution is to put the stranded oil in railroad cars, but that capacity is also full and growing too slowly to make a difference, he said.
Last week, Alberta Premier Rachel Notley called on Ottawa to work to increase capacity for oil on rail as a “short- to medium-term” solution to improve market access, arguing the low prices are hurting governments as well as producers.
But Pardy argued Alberta has the power on its own to improve crude oil prices by intervening in the market to drain storage from its capacity of about 30 million barrels. “While we applaud Alberta Premier Rachel Notley’s efforts to accelerate crude-by-rail, there may also be a near-term bridge,” he told the Canadian Press.
“As a temporary measure, the royalty holiday could be called upon, as needed, until other solutions fall into place, namely incremental crude-by-rail loadings, and Enbridge’s 375,000 bpd Line 3 replacement [pipeline expected to start up in late 2019].”
In its end-August budget update, Alberta estimated it would have oil royalties of $3.6 billion this year. Giving them up for three months could cost about $900 million.
Alberta Energy Minister Marg McCuaig-Boyd threw cold water on the RBC suggestion.
“We’ve been considering a number of other options for the (price) differential but I can absolutely say this is not one of them that is suggested by the RBC report,” she told reporters.
“These are resources owned by Alberta, we need to keep the value here.”
Canada’s railroads have been reluctant to add locomotives and crews to move oil cars unless producers sign long-term contracts because they fear those customers will disappear as soon as pipeline capacity, considered to be cheaper, is available.