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Varcoe: Could Trump's tariff on Canadian oil see Alberta bring back curtailment?

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President Donald Trump’s potential tariffs on Canadian energy could increase the discount on Alberta oil sold into the United States, leaving Premier Danielle Smith with a seismic decision to contemplate.

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If the price discount, which has risen in recent weeks, continues and even grows, it could reduce revenues for petroleum producers and the province.?

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After adamantly opposing Ottawa putting an export levy on Alberta crude headed to the U.S., will her government look to bring back oil curtailment, a program that sets production quotas in the province to support Canadian oil prices??

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On Sunday night, Alberta Energy Minister Brian Jean was blunt when asked about reviving curtailment due to U.S. tariffs. (The planned tariffs were delayed on Monday for a month to allow for further talks between the two countries.)

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“We are not considering the use of curtailment at this time,” Jean said in a statement. “Doing so would hurt Albertans and Canadians.”

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Such a move would be a significant intervention to ensure the price differential between Western Canadian Select heavy oil and benchmark West Texas Intermediate crude doesn’t increase further due to Trump’s actions, analysts say.?

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And it’s a major decision that rests?within Alberta’s control, not Ottawa’s.?

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“We just need to make sure that we don’t allow the differential to get out of hand because Trump has imposed a tariff,” Richard Masson, former CEO of the Alberta Petroleum Marketing Commission, said Sunday.?

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“There probably isn’t a need for curtailment right away, but if it turns out that over the course of the next eight or 10 weeks . . . we are ending up with oversupply and filling up (storage) tanks and the differential is widening, curtailment is a logical move,” he added.

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Richard Masson, chair of the World Petroleum Council Canada poses at the BMO Centre in Calgary on Friday, September 15, 2023. Jim Wells/Postmedia Jim Wells/Postmedia
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“I’m not saying do it yet. I think we get ready and see how it plays out.”

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Trump had announced plans to impose a 10 per cent tariff on Canadian energy, which was initially set to kick in Tuesday, but has been suspended for 30 days amid ongoing trade negotiations.

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Oil is the biggest product, by value, that Canada ships to the United States. In 2023, the province sold US$94.4 billion of energy to the country.?

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The energy tariff is significantly lower than the 25 per cent rate to be placed on all other imports from Canada and Mexico, two countries that Trump signed a free-trade agreement with in 2018.

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A trade war was set to unfold that would hurt consumers on both sides of the border, and hammer many Alberta industries.

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Prime Minister Justin Trudeau announced Saturday that Canada would retaliate with 25 per cent tariffs on $30 billion of goods imported from the U.S., and also add $125 billion of tariffs on other items within a few weeks.?

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The federal response didn’t include using energy as leverage.

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In December, when I asked Smith about the province theoretically bringing back oil curtailment as a policy in a tariff battle, she didn’t rule it out. ?

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The premier noted she backed the policy when it was temporarily adopted in 2019 by the NDP government and later continued under UCP premier Jason Kenney.?

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Curtailment, which mandates oil production levels in the province, was implemented after the price differential on Western Canadian Select heavy oil soared to more than US$40 a barrel due to a lack of export pipeline capacity. (The production quotas ended in 2020.)?

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Bringing the policy back would not be the first option to deal with U.S. tariffs, the premier said in December.

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Instead, she pointed out the province could have the Alberta Petroleum Marketing Commission (APMC) ship provincially owned oil — collected from petroleum producers in lieu of royalties — to the U.S. Gulf Coast for re-export to other counties, hopefully avoiding tariffs.?

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The U.S. buys more than 60 per cent of its foreign oil from Canada, about four million barrels per day.?

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If adopted, tariffs are expected to increase gasoline prices in the U.S. Midwest, where Canadian heavy crude is bought by refineries that are set up to process such oil.

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Analysts say it’s uncertain how much of the tariff will end up being footed by U.S. refiners and consumers at the pumps, and how much is pushed back onto Alberta producers through a deeper discount on Canadian oil.

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Curtailment would likely shift more of the burden onto refiners but it’s not cost-free, as the province would be shutting in oil that normally would be produced, said Kevin Birn, Canadian oil markets chief analyst for S&P Global Commodity Insights.

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Kevin Birn, associate director of Global Oil, is pictured speaking at the Canadian Oil Sands Summit in Calgary on Tuesday. Birn’s address centred on new market access for Alberta oil. Photo: Adam Huras/Telegraph-Journal Photo: Adam Huras/Telegraph-Jour
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It could also affect investment.

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“Curtailment is a bit of a tough tool,” Birn said.?

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“It would be a retaliatory measure in my mind, if it was used this way . . . to displace or adjust the price relationship, such that the burden sits more on the U.S. side of the border than the Canadian side.”

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Tristan Goodman, president of the Explorers and Producers Association of Canada, doesn’t anticipate a significant impact on industry employment if the 10 per cent tariff is imposed, but believes companies would examine their drilling programs.?

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Curtailment wouldn’t be favoured by producers at this time, he added.

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“Over time, of course, the premier may need to look at this,” he said. “But right now, the data doesn’t seem to reflect that. I don’t think it is necessary right now.”

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Energy economist Rory Johnston, founder of the Commodity Context newsletter, estimates the 10 per cent tariff would place a levy of about US$6 a barrel on Canadian oil.?

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He pointed out the price differential, which dropped last year with the opening of the Trans Mountain expansion, has widened by about $3 a barrel since Trump began talking about tariffs on Canada.

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“A 10 per cent tariff isn’t existential, but it is immensely annoying. It is a straight-up cash grab,” Johnston said.?

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Curtailment shouldn’t be ruled out, but other alternatives should be examined first, he said.

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The bar for curtailment should be high,” Johnston said.

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However, any significant increase in the discount will have ramifications for the province.?Every $1-a-barrel widening in the differential over an entire year would cost Alberta about $600 million in lower revenues.?

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If the refiners bear all of that cost, then it doesn’t really affect royalties,” said Masson.?

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“But if it’s pushed back to us through lower differentials for light oil and heavy oil, then that is $3.6 billion over the course of a year — that’s a lot of money.”?

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Chris Varcoe is a Calgary Herald columnist.

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cvarcoe@postmedia.com

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