Earlier this month, the Alberta government announced new measures designed to temporarily reduce crude oil and bitumen production in the province, in order to deal with a historically high differential between Alberta oil and bitumen prices, and broader North American prices.
An initial curtailment of 8.7% has been announced for January 1, 2019, with expected adjustments to be announced as 2019 progresses and inventories are cleared.
To implement the curtailment, the Lieutenant Governor in Council issued Curtailment Rules (the “Rules”) on December 3, 2018, made under the authority of Sections 10 and 20 of the Oil and Gas Conservation Act and Sections 68 and 70 of the Responsible Energy Development Act.
Beginning on January 1, 2018, the Minister of Energy will set the total production of bitumen and crude oil in Alberta for each calendar month. The total provincial production will then be allocated pro-rata among operators in the province, according to the following process:
- For each operator, the operator’s “baseline production” will be determined. This will be equal to the average production for that operator for the most productive six calendar months in the one-year period between November 1, 2017 and October 31, 2018.
- For each operator, an “adjusted baseline production” will be determined. This will be equal to the operator’s baseline production, in barrels per month, minus 10,000 barrels per day multiplied by the number of days in that month.
- The total production for Alberta for the month will be divided by the aggregate of the adjusted baseline productions for all operators, to determine the percentage of production which must be curtailed. This is forecast to be 8.7% for January, 2019.
- Finally, each operator’s production limit will be determined by multiplying their adjusted baseline production by the percentage curtailment, and then adding the product of 10,000 barrels per day and the number of days in the month.
- The Minister will then issue a curtailment order to each operator in the province, setting out the amount of crude oil and bitumen which may be produced by that operator.
The Rules are designed so that the first 10,000 barrels per day of baseline production are not subject to curtailment. If an operator’s baseline production is less than 10,000 barrels per day, it will not be subject to the Rules.
Under Section 5(2) of the Rules, each operator is prohibited from producing more than the amount of crude oil and bitumen set forth in its curtailment order. Section 5(2) of the Rules are enforced by the AER pursuant to the administrative penalty provisions of the Responsible Energy Development Act. The maximum fine per day under those provisions, as outlined in Section 8.3(3) of the Act is $5000 per day on which a contravention occurs.
Joint ventures or partnerships may enter into agreements that permit them to trade and consolidate their production. Together, these operators can apply to the Minister for an order permitting them to consolidate their respective production amounts set by their curtailment orders. Under this regime, the Minister may impose any terms or conditions on these businesses.
An operator that commenced production after August 31, 2018 will not be subject to these rules until three months after it began production. For an operator that did not exceed an average of 10,000 barrels per day until after November 1, 2018, its baseline production will be equal to its production in the month in which they first exceeded 10,000 barrels per day.
The Rules are automatically repealed on December 31, 2019.
Please check back for updates on next steps taken by the Alberta government.
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