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‘Bitumen bubble’ to cost Alberta C$6B Province’s premier hammers home message ‘we absolutely must’ find ways to get Alberta oil to multiple customers around the world Gary Park For Petroleum News
Alberta Premier Alison Redford started what she called a conversation with Albertans by doing all the talking in an eight-minute TV address about the dismal state of her province’s petroleum-fueled finances.
The response over the past week has been a lot of head scratching as Albertans try to figure out how Redford will deal with a projected fall of C$6 billion in oil and gas royalties over the coming year without raising taxes while meeting her pledge “not to take an axe to government spending across the board.”
Just in case anyone had trouble grasping C$6 billion, Redford explained that it was equivalent to her government’s entire education spending for a year and noted that 30 percent of the province’s budget is funded by oil and natural gas revenues.
The root of the problem is simply stated: Oil prices, especially those for Alberta’s bitumen, are sinking and creating what Redford calls a “bitumen bubble”; natural gas prices have been in the doldrums for more than two years; and whatever chance Alberta producers have to open up new markets is entangled in a national debate over whether new pipelines should be built to the east, south and west.
“We have a duty to ensure that our resources ... get to new markets at a much fairer price,” she said. “We absolutely must find ways to get Alberta oil to multiple customers around the world and get a competitive price.”
Chasing Brent That means chasing customers in Asia who pay benchmark Brent prices rather than relying on U.S. markets where the price gap between bitumen and West Texas Intermediate has been hovering around US$30-$40 per barrel in recent weeks.
For the 2012-13 budget year which ends March 31, the Redford government had forecast a WTI price of US$99.25 per barrel and a Western Canadian Select price at the province’s Hardisty Hub of C$83.28 per barrel.
The challenge facing Alberta is mirrored in its Sustainability Fund, comprising surplus oil and gas revenues that are drawn down in difficult times. Over the past three years alone that fund has slumped to C$5 billion from C$14.9 billion.
“It isn’t the (WTI) price that is causing the real problem,” she said. “Historically, the price we receive for our oil has been a few dollars lower than (WTI) and that difference has been manageable.
“But since September, that gap has grown considerably and the trend is getting worse for the foreseeable future.
“The vast majority of our oil is now bitumen from the oil sands. And because of the rapidly growing levels of oil production in the United States and the fact we have virtually nowhere else to sell our oil but the U.S. market, Alberta is getting just over US$50 a barrel for our oil.”
No option Redford said Alberta has no option but to put its finances on a more stable footing. A province as prosperous as Alberta should not be as susceptible as it is to swings in the price of oil and gas.
“It’s why I will continue to fight for a Canadian energy strategy that gets our oil both to the west and east costs in Canada and to refineries in the U.S. Gulf Coast and to markets overseas, particularly growing economies in Asia.
“That means we absolutely must find ways to get Alberta oil to multiple customers around the world and get a competitive price,” she said, while conceding that won’t happen overnight.
“It will take focus and determination over the next several years to open new markets,” Redford said.
The problem for Alberta is that it can’t act alone to gain access to Redford’s cherished goal of Asia, not when the British Columbia government of Premier Christy Clark is so reluctant to clear the way for Enbridge and Trans Mountain pipelines that could carry a combined 1.42 million barrels per day to tanker terminals on the Pacific coast and final approval is needed from the Obama administration to ship another 830,000 bpd to the Gulf Coast.
Glimmer of hope However, there is a growing glimmer of hope on Canada’s East Coast where New Brunswick Premier David Alward is rolling out a welcome mat for a pipeline that could carry 500,000 to 1 million bpd to the Irving Oil refinery and a deepwater port at Saint John.
Alward plans his first trip to Alberta in early February to meet with Redford, visit the oil sands region and speak with industry leaders, making it clear he would welcome a pipeline that would provide cheap feedstock for the Irving refinery, which currently relies entirely on imported crude for its feedstock.
Redford and Alward have also been wooing Quebec Premier Pauline Marois, who faces determined opposition to pipelines from Alberta, despite the dependence of Quebec refineries on imported crude.
Redford views a cross-Canada pipeline as “critically important,” claiming it is “quite feasible” and “economically viable.”
TransCanada Chief Executive Officer Russ Girling told a CIBC World Markets conference Jan. 24 his company will decide “within the next few months” whether it will hold an open season to test shipper interest in crude oil pipelines to the North American East Coast to compete for business with 1 million-2 million bpd of imported crude.
He said the future of those plans hangs on “probably five big players,” who are likely to sign up if they see a chance to reduce the current price differential between light and heavy crudes.
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