While Alberta’s plan to mandate Opec-style production cuts already is boosting oil prices and shares, the revival of Canada’s resource nationalism adds another layer of risk for investors to consider.
The removal of millions of barrels of crude from the market will help shareholders of smaller producers who are exempt from the cuts, like Bonterra Energy Corp, as well as larger producers such as Cenovus Energy Inc and Canadian Natural Resources Ltd that were being hammered by the supply glut.
But the measure also may rattle the sense of security investors had in companies like Suncor Energy Inc, whose large refining operations had shielded it from the worst of the crisis and were actually profiting from cheap feedstock, said Randy Ollenberger, an analyst at Bank of Montreal. That’s on top of mounting concern that the country’s regulatory framework makes it very difficult to get much-needed pipeline projects approved.
“Investors will definitely worry that this is a slippery slope, and that the government can curtail production or interfere in business to pick winners and losers,” Ollenberger said in an interview. “That’s going to be a big concern.”
To be sure, the Canadian government has had its hand in the energy industry before. The technology used to extract Alberta’s oil sands was developed largely through government-backed programs that started around the 1920s and continued for decades.
In the 1970s, the federal government instituted price controls on oil to keep prices low for domestic consumers and created the crown corporation Petro-Canada to ensure Canadian ownership of some of the country’s energy industry, which at the time was heavily owned by Americans. The company lives on today as a gas-station chain owned by Suncor.
Pierre Elliott Trudeau, father of the current prime minister, introduced the National Energy Program in 1980, instituting further price controls and increasing taxes on
oil and gas companies. The plan sparked resistance from Alberta’s premier at the time, Peter Lougheed, who cut the province’s oil production to protest the measure. The NEP remains infamous in Alberta, seen both as shorthand for government overreach and a reason to be wary of leaders named Trudeau.
The most striking recent example of government intervention was Justin Trudeau’s C$4.5 billion ($3.4 billion) purchase of the Trans Mountain pipeline and expansion project from Kinder Morgan Inc’s Canadian unit earlier this year. The move was a bid to keep the project alive after Kinder threatened to walk away amid fierce opposition from British Columbia. Alberta Premier Rachel Notley announced that she’s mandating a 325,000-barrel-a-day reduction in the province’s oil production to help boost prices off record lows. Notley and the industry proponents of the move have argued that it’s not so much government meddling in the market, rather it’s a way of fixing a broken market.