Oil is Alberta’s business, however, the price of Western Canadian Select, which is made up of heavy conventional and bitumen crude oil, has been decreasing.
With the Province’s reliance on this huge energy commodity, both politicians and economists point to a sluggish Alberta economy limping into next year’s fiscal budget, which will be made public in March.
According to Net Energy Inc., a crude oil trading system based in Calgary, Western Canadian Select has been trading at roughly $35 per barrel less than benchmark West Texas Intermediate (WTI) crude.
Though the price of Alberta oil has always been offered at a discount, the differential between what’s shipped out of the province compared to WTI or other world oil prices has increased quickly and put Premier Alison Redford’s government under pressure.
The potential impacts for residents who enjoy the least amount of tax in the country and are reassured by having the “Alberta advantage” could prove costly and change what the province looks like in five years.
“It’s a big new issue and we’ve never really had to deal with it before,” said Todd Hirsch, a senior economist with ATB Financial. “Western Canadian oil has always sold as a discount to WTI because generally Alberta oil, particularly bitumen, is a heavier oil and it requires more upgrading.
“That discount has blown up over the last six to eight months,” he continued. “A lot of it has to do with the supply now coming out of North Dakota, that shale oil, which is a lighter oil.
“It’s displaced a lot of the Western Canadian oil that was going into the U.S. refinery and pipeline system.”
Ongoing pipeline issues for proposed projects like Northern Gateway, which would export Alberta’s oil to Asian markets, or Keystone XL that plans to move oil south to the Gulf Coast have caused a backlog of product going to one customer, the United States.
With environmental concerns increasing the likelihood of projects like Gateway failing to get approval, the provincial government is caught between having a huge natural resource and one shaky customer for years to come.
“The real worry for Alberta is that by all estimations this is looking to be more permanent,” the senior economist said. “It doesn’t look like this is a weird one off factor that’s going to quickly go away.
“If you look at it, there’s no real reason to expect that differential is going to go back to where it traditionally has been,” he added.
“If we can get more pipeline capacity to other non-U.S. markets, that would alleviate a lot of the problems immediately. The problem is that’s not a sure bet. Even if these pipelines were a sure bet, it’s going to take years to get them built and in the ground and operating.”
Resorting to other methods of transportation for oil, such as by rail, is another option that has been considered, but from an environmental standpoint is potentially more dangerous.
“If the environmentalists block Keystone and Northern Gateway, it might be what they call a pyrrhic victory because more of this is going to be going by rail and then you’re going to see a lot more avalanches, train derailments and tanker spilling,” he said.
“It’s way more prone to accidents than pipelines.”
Due to uncertainty regarding the large differential, Hirsch pointed out that forecasting this increase, from the view of both the political and private sector, wasn’t conventional several months ago.
“They’re trying to make forecasts in a world that is very uncertain,” he said about the current PC government. “They’ve got an enormous dart board that they’re trying to throw at and where it lands is more or less random.
“In 2013, the forecast went against what the government had hoped,” he added. “But almost a bigger problem is this isn’t just 2013, it could be a more permanent situation for Alberta where we’re going to have to scale back our expectations on how much money the government can bring in.”
Banff-Cochrane MLA Ron Casey noted the speed in which the price of Alberta oil decreased is a major factor the government is dealing with and, without establishing new markets for oil, the province must change its business ways.
“Everyone expected this to take a number of years,” Casey said. “Right now we have one customer. Getting those pipelines either to the coast or to the east coast, one way or another, we have to move it to other markets,”
Regarding shipping oil east, Enbridge is in the proposal stages of reversing a pipeline from Ontario to Quebec that would carry Alberta oil instead of importing offshore crude.
Another west to east pipeline proposal, one that could transport between 500,000 and one million barrels of oil per day from Alberta to New Brunswick, is also in the works.
“A lot of the lifestyle that we enjoy in Alberta has been because of that,” the MLA added. “We enjoy the lowest taxes in Canada because of oil. There’s still a huge advantage here, but we’re going to have to reassess and re-evaluate and look at how we do business.”
From the political opposition’s standpoint, the “bitumen bubble” budget heading into March is a result of a lack of planning, as well as overspending.
“The price differential existed at the time of the election and when they put forward the budget, so it seems that they’re (provincial government) trying to complain about revenue when in fact it’s a massive spending problem,” said Shayne Saskiw, deputy house leader for the Wildrose Party.
“We support trying to get our products out to other markets to ensure we get the maximum value of our oil, but we also support upgrading the product here in Alberta first for job creation,” he added.
“It’s unfortunate the government’s plan is probably to go through our entire savings and sustainability fund, with less money in our heritage trust fund, so that entire boom has gone to waste.”
Sluggish oil profits within the province has garnered increased attention in recent weeks and eventually led to a televised address from the premier, however, Hirsch pointed to some of the other industries within Alberta that could pick up the tab if prices continue to drop.
“I don’t think it will be a disaster,” Hirsch said. “It’s not a doomsday scenario. It’s going to be a really sluggish year for the energy sector and we could see some companies scaling back.
“The really nice thing is that other non-energy sectors are all in great shape,” he continued. “Agriculture is in the best shape it’s ever been and 2013 is likely to be a repeat of that. Forestry is on an upswing and that’s an industry that has gone through 10 or 15 years of misery. Lumber prices are at near record highs.”
The economist also pointed out the retail and construction industry in Alberta is doing well and unless the oil and gas industry completely falls through, which he doesn’t expect it will, those sectors will remain strong.
“I think it’s a wakeup call for Albertans because we spend an awful lot as a government and we don’t really pay much in tax,” he said.
“The other industries like retail, agriculture, forestry and even tourism, I think, will do well and it will be a nice offset to the softness we’re going to see in oil and gas this year.”
