The Oil Production Response to Alberta's Government-Mandated Quota

Two years ago, the Alberta government put in place a temporary oil-production quota. However, the quota’s impact could well be felt in the province’s oil production for years to come. The quota applied only to firms producing more than 10,000 barrels of oil per day and was instituted as a response to pipeline constraints that caused Alberta oil prices to be much lower than prices elsewhere. Production from both oilsands mines and oil wells dropped as soon as the government announced the quotas. The media warned that the quotas would force production to transfer to Saskatchewan, but the research for this paper found that this never occurred. The quota policy was announced in December 2018 and a week later, the price of Alberta oil had jumped from $29.09/bbl to $50.08 bbl, a 72 per cent rise. When the quota policy actually took effect the first of January 2019, the price increased again, but by much less. The anticipation of the quota alone was enough to create the desired price increase. The quota, which set limits for the total combined crude oil and bitumen permitted to be produced, was assigned to individual operators and designed to provide an 8.5 per cent reduction in oil production. The total quota was fixed at 3.56 million barrels a day in January 2019, but individual quotas could be traded across eligible operators, minimizing the overall costs of achieving the total goal. However, total production continued falling even when the quota was eventually relaxed; the market and a low world price created a scenario in which production fell below the amount permitted by the quota. All the oil companies reduced their production regardless of whether they fell within the quota’s guidelines or not; however, the firms that were subject to the quota reduced their production more than the others. The quota was lifted in December 2020 when export capacity again became sufficient. While curtailing production had the desired result of raising Alberta oil prices and resolving the differential between local prices and the world benchmark, its ripple effects may well be felt in the longer term. This paper finds that fewer wells are being drilled and more wells are suspending production. Tradition dictates that when a well becomes inactive, it is rarely returned to a productive state. Those firms that resorted to low levels of drilling in order to meet the quota have created a situation that could affect Alberta oil production in the years ahead.