Oil discount a ‘long-term’ problem
Gap with U.S. benchmark puts province in a bind
Energy Minister Ken Hughes says the plummeting price of Alberta’s heavy oil is a “longterm problem” that is having a big impact on Alberta’s bottom line.
Last week, Bloomberg reported the price of Alberta’s Western Canadian Select grade oil had tumbled to a record low, with each barrel selling for $37 US less than the American benchmark.
Alberta relies heavily on royalty revenues to fund government programs, so any change in resource prices directly affects the provincial treasury and, in turn, services for Albertans.
“It is of very deep concern for industry and for the government of Alberta,” Hughes said, calling the issue “very real and very concerning.
“The spread between the Western Canadian Sedimentary Basin pricing and the world price has come upon us quite quickly, and the solutions are longer-term solutions.”
By Tuesday, the price of Western Canadian Select had rebounded to $55 US per barrel, so each barrel was selling for $33 US less than the American benchmark. That benchmark is known as West Texas Intermediate grade, which was trading at about $88 per barrel on Tuesday. The world price for light sweet Brent Crude was just shy of $109 per barrel.
Still, provincial leaders are concerned because royalties make up a hefty chunk of Alberta’s budget: In 2012-13, the province estimated it would earn $11.2 billion form nonrenewable resources, nearly 28 per cent of the total $40.3-billion budget.
For every dollar drop in the price of West Texas Intermediate, the 2012 budget forecasted a loss of $223 million from provincial coffers.
Hughes said the “sudden shift in revenues” has already started to affect the province’s finances, but he wouldn’t speculate on the long-term consequences.
“I can assure you that it’s having a big impact on industry, on Canada and on Alberta,” Hughes said. “This appears to be a long-term problem. … It has become the most important — or one of the most important — challenges in Alberta.”
Hughes said the “strategic imperative” is to get Alberta’s products to the ocean, via rail and pipeline.
Joseph Doucet, a University of Alberta energy expert, said the problem is the result of limited pipeline capacity and increased oil production in the United States.
“The reason it’s quite worrisome for us is that there is nothing that suggests that increased production is temporary,” he said. “It really speaks to the necessity of finding both more pipeline capacity, but also broadening the markets.
“It’s important not just to producers, but it’s obviously important to every Albertan, because of the impact that it has on the royalty payments that the government of Alberta receives.”
CIBC World Markets analyst Andrew Potter said even if Alberta builds new pipelines to the United States, Western Canadian Select will continue to sell at a major discount.
“We’re just so far off global oil pricing at this point, it’s a pretty messy situation,” Potter said. “We sell most of our oil to one market, and that market is pretty much fullup right now.
“The new pipes certainly help the situation and keep it from being a complete disaster over the long term, but we have to realize that the odds of us being able to sell western Canadian crudes (at) global prices is just not going to happen.”
Still, Potter said building pipelines to diversify markets is the province’s best strategy going forward.
“If pipes are not built, then discounts will be whatever they have to be to keep supply … more or less in line,” he said.
“That’s where the situation gets pretty scary.”