Is Alberta's petroleum industry missing out?
Petroleum pipeline proponents say it’s an economic necessity to get oilsands crude to foreign markets. Opponents argue it’s an environmental imperative to prevent that flow.
Alberta government officials have been strenuously making the former case. They warn of imminent spending cuts due to plummeting royalty revenues, which in turn are the result of the low prices that oil companies in the province are receiving.
“Over the last few years, there’s been a growing differential between what Alberta producers get and what the world price is,” said Energy Minister Ken Hughes, pointing out that there’s a gap of approximately $40 between the price of Western Canadian select blend and West Texas intermediate crude.
Part of the problem stems from a glut of oil being produced in North America, most notably in the Bakken fields of North Dakota, Montana and Saskatchewan, said Hughes.
“The energy industry has been immensely successful at developing reserves that previously weren’t thought to be economic,” he explained.
“They have doubled production there in the last few years.”
That, combined with limited pipeline capacity to carry Western Canadian crude to costal ports and refineries, has resulted in the discrepancy between the world price and the Alberta price.
Greg Stringham, vice-president of oilsands and markets with the Canadian Association of Petroleum Producers, pointed out that the difference also reflects the fact that West Texas intermediate is a light crude while Western Canadian select is a lower-value blend of heavy oils. But, he added, the prices for both heavy and light crude in Canada are still well below the world rate.
Stringham agreed that access to global markets is an issue.
“The real crunch has been trying to get to places on the coast where they’re actually paying world oil prices.”
The Alberta discount is affecting more than government coffers, said Hughes.
“Industry is missing out on some $30 billion in revenues,” he said. “Really, it’s a net subsidy by Canadians to America of some $30 billion.”
Some companies have scaled back production and capital expenditures, said Hughes. But investment is still occurring, especially in the oilsands.
“Those are long-term projects, and people see that this is a very positive long-term place to invest.”
“We’re still expecting the oilsands to invest about $22 to $23 billion this year, and that’s consistent with what our forecast was in June.”
But oilsands companies are keeping an eye on the pricing issue, he said.
“It is something they’re watching, to see whether or not this is persistent or whether some of the expansions in pipeline capacity will help overcome that.”
Relief is at hand, said Stringham. Earlier this month, expansion work on the Seaway pipeline between Cushing, Okla., and the Gulf Coast wrapped up — resulting in a tripling of the line’s capacity to about 450,000 barrels a day. And the southern leg of Keystone XL pipeline, which will also carry crude from Cushing to the Gulf Coast, is expected to carry a further half million barrels a day when it’s completed this year.
Both projects should improve flows from Canada by reducing the backlog at Cushing, said Stringham.
“That’s really where the bottleneck has been.”
However, to really bridge the price gap between Alberta and the world, far more pipeline capacity is needed. Stringham said it’s “absolutely necessary” to develop the northern components of Keystone XL, construct the Northern Gateway pipeline from Alberta to the British Columbia coast, and increase flows of Western crude to Eastern Canada.
“It’s not one or the other. From our perspective, as we see the growth coming from the oilsands and this resurgence in the conventional oil, we’re looking at all three markets that are going to be needed.”
Hughes echoed this assessment, pointing to Asia as being particularly important to the future health of Alberta’s energy sector.
“We need to get access to those markets to be part of the growth in the global economy.”
But Keystone XL is unlikely to be completed until 2015 and Northern Gateway well after that. Both projects also face regulatory hurdles and stiff opposition.
On Thursday, the Pembina Institute released a report describing the adverse environmental impact it believes would result if Keystone XL is approved and oilsands production ramps up. Specifically, it said Keystone XL would allow oilsands production to jump by 36 per cent — with the associated incremental greenhouse gas emissions the equivalent of more than six coal-fired power plants or 4.6 million cars.
Speaking from Washington, D.C., where he presented the report, Pembina senior policy analyst Nathan Lemphers said the same argument can be applied to other pipeline projects that would carry oilsands crude. He acknowledged that constricting this flow would have an adverse economic impact on Alberta, but said the alternative would be even more costly.
“With Hurricane Sandy costing $80 billion, or the cost of additional and more severe storms and weather, and the disruptions that happen from climate change, it will easily dwarf any sort of economic benefit that would happen from a single pipeline.”
Lemphers also thinks this economic loss would be more than recovered if Canada embraces clean energy technologies.
“This is a $3-trillion global sector that Canada is failing to be a part of because they’re putting so much emphasis on developing a high-carbon fuel source.”
Alberta Finance Minister Doug Horner is focused on the present. He said the provincial deficit for the current fiscal year is “probably north of $3 billion,” and his government has to figure out how to cope with the sudden drop in oil prices and royalties.
“That’s why we’re delaying the budget (until March 7). We’re reworking a lot of numbers because of the rapidity, the speed, at which this has hit us.”