Dire predictions become self-fulfilling prophecies
“The bitumen bubble may not have burst but it appears to be losing air.”
That statement isn’t a response to Premier Alison Redford’s state-of-the-province address last week when she warned of a looming $6-billion shortfall in government revenues due to the impact of a market saturated with oilsands crude. In fact, the words date back almost 15 years.
Redford’s reference to a “bitumen bubble” was one of the main talking points following her first televised speech as premier and the subsequent media blitz as she lays the groundwork for a March 7 budget that will push the oil-rich province into deficit.
While Redford uses words such as “unprecedented” and “unique” to warn of spending cuts, they really only apply to the scope of the issue.
The bitumen bubble isn’t new.
The fact government and industry didn’t heed the earlier warning signs about the costly impact of not having the capacity to deliver growing volumes of bitumen from the oilsands to markets is why Redford finds herself making prebudget warnings to Albertans.
“The bitumen bubble may not have burst ...” was the opening line of a June 1997 story in the Herald after Howard Dingle of Imperial Oil told the annual Canadian Association of Petroleum Producers investment conference there was more bitumen on the market than refineries could process.
At the time, the discount on bitumen from benchmark West Texas Intermediate crude had doubled from the previous year to more than $7 a barrel. In comparison, this winter the differential has regularly been between $30 and $40 a barrel.
It was at the 1997 CAPP conference that Neil Ca- marta, a vice-president at Shell Canada, warned the company was concerned about adding supply to the “bitumen bubble” when its oilsands projects came on stream in 2005.
Then, as now, a lack of pipeline capacity to the United States was a big issue.
In 2005, the Herald wrote about plans for a $3-billion heavy oil pipeline, called Altex, that would send at least 250,000 barrels a day from Alberta to the U.S. Gulf Coast. Again, industry analysts said more pipeline capacity would address the looming “bitumen bubble.”
The Altex pipeline never went ahead and environmental protests have led to delays for other proposed pipelines including TransCanada’s 830,000-barrela-day Keystone XL to the U.S. Gulf Coast and Enbridge’s 525,000-barrel-aday Northern Gateway to the B.C. coast.
Years of dire predictions about pipeline capacity have become self-fulfilling prophecies.
The market-access issue for Alberta oil was brought into sharper focus a year ago after the Obama administration delayed its decision on Keystone XL until this spring, even as oilsands production surpassed 1.8 million barrels a day last year.
The scenario is made worse since WTI has reversed its historic relationship with North Sea Brent and now trades at a discount to the world price. Estimates suggest the differential is costing the Canadian economy as much as $30 billion a year.
A year ago, Alberta forecast bitumen royalties would hit $7.6 billion for 2013-2014 and $9.9 billion for 2014-2015. The forecast now appears unrealistic, but Redford has stressed industry forecasts did not predict the historic increase in the discount on Canadian heavy oil since October.
The issue could be oilsands production has simply grown too fast.
Keep in mind the first “bitumen bubble” occurred in 1997. That was a year after a government task force predicted changes to the royalties for oilsands production would generate $25 billion in investment in the oilsands by 2020.
In fact, investment passed $100 billion in just over a decade. There was a record $20 billion invested in 2012 and the Canadian Energy Research Institute has said the overall impact from oilsands development from 2010 to 2035 will be more than $2.1 trillion.
The problem is transportation never kept pace.
In December, TD Economics warned construction of oil pipelines had to be “a national priority.”
The pipeline bottlenecks are expected to worsen through 2016. At the same time, U.S. oil output is at its highest level since 2003, imports are at their lowest levels in 15 years and there are predictions the U.S. could be the world’s biggest oil and gas producer by 2020.
Given the pipeline challenges and changing markets, Redford has called an economic summit in February for experts to discuss the issue of markets for Alberta’s oil.
It’s unfortunate the summit didn’t happen 15 years ago, before Alberta’s market-driven approach to the oilsands led to supply gluts and punishing price differentials.