Skip to comments.Ewart: Oilsands success, pipeline failures prove costly
Posted on 11/29/2012 10:47:21 AM PST by thackney
The Alberta government is paying the price for the success of efforts to develop the oilsands and the failure to develop pipelines to get that oil to market.
The price - as measured by what is known as the differential, or discount, from global benchmark crudes - is currently about $29 on each of the 2.5 million barrels of oil pumped every day in Canada's biggest oil-producing province. That works out to $72.5 million a day. Over a year, that's $26.5 billion of potential revenue not circulating in the provincial economy.
Finance Minister Doug Horner cited widening differentials as the primary reason resource revenues were $1.4 billion less than budgeted for the first six months of the 2012-13 fiscal year when he released his second quarter fiscal update Wednesday.
"The biggest factor affecting our resource revenue right now is the lack of market access for our oil ... it's cost us dearly" Horner said.
Alberta expects to have a budget deficit of $2.3 billion to $3 billion this fiscal year.
Horner blamed several factors - including global economic problems, the high value of the Canadian dollar versus the U.S. dollar and lower-than-expected land sales to energy companies - but singled out differentials as the biggest issue. The $1.4 billion in lower oil and gas revenues so far this year is roughly what Alberta will spend on much-needed capital projects in the transportation sector in 2012-13.
The fiscal update also confirmed bitumen production from the oilsands surpassed 2 million barrels a day in the three-month period from August through October. Conventional production also grew to 545,000 barrels a day. Oil-sands production surpassed 1 million barrels a day in 2004.
Meanwhile, high-profile delays in TransCanada's $7-billion Keystone XL to the U.S. and Enbridge's $6-billion Northern Gateway pipeline to the B.C. Coast have drawn wide-spread attention to the limited access to lucrative global markets for growing oilsands production.
The situation is likely to get worse before it gets better. Imperial Oil's Kearl oilsands project, for example, is set to come on stream with another 110,000 barrels a day early in 2013. The Alberta government has said oilsands production could surpass 3 million barrels a day by 2018 but that forecast relies on having sufficient pipeline and rail infrastructure to move the oil to markets.
Both Enbridge and rival Kinder Morgan have en-acted what is called apportionment on several crude oil pipelines in Western Canada for December. As a result, capacity is divided between the producers who have more than enough oil to fill the lines.
"This situation supports a continuation of what has already been a tight supply/demand balance for oil take-away capacity, and will exacerbate already wide differentials for at least the January trading cycle," Calgary investment firm Peters' & Co. said in a report this week.
A lack of transportation "could potentially force some producers to shut-in production," Peters' said.
Oil industry executives attending a business forum in Lake Louise last week said Canada not only needs Keystone XL and Northern Gateway but also the expansion of Kinder Morgan's TransMountain pipeline to the B.C. Coast and the reversal of pipelines to markets in Eastern Canada.
Industry analysts have predicted Western Canada would effectively run out of room on export pipelines between 2014 and 2018 because of oilsands production.
However, the lack of capacity is already costing oil producers and cash-strapped governments.
Over the past three years, discounts have doubled on Canadian oil moving into the over-supplied market in the U.S. Midwest in relation to global benchmark crudes.
Peters' forecasts discounts from West Texas Intermediate crude for Canadian light oil will be about $10 a barrel and $26 a barrel for Canadian heavy in 2013. Meanwhile, WTI is trading at a further $23 a barrel discount to oceangoing crudes like North Sea Brent or Louisiana Light Sweet.
On Wednesday, WTI closed at $86.63 US a barrel.
In the fiscal update, the province lowered its full-year forecast for WTI to $92.50 US, down $6.75 a barrel from its budget. The price of natural gas is also well below the provincial budget forecast of $3 per gigajoule and is now $2.07 per gigajoule amid a gas supply glut in North American.
As prices fall, petroleum producers are subject to lower royalty rates and pay lower royalties.
In the rush to develop the oilsands over the past two decades, the cost of not paying more attention on how all that oil was going to get to worthwhile markets to provide the most benefit to Albertans would have made a lot of sense - and billions of dollars.
Oil sands producers could feel squeeze as pipeline capacity tightens
Claudia Cattaneo | Nov 28, 2012
Plans are under way to build oil pipelines south, west and east, but even if they are successful theyre not going to alleviate todays problem: Many of Canadas oil pipelines are full and its only a matter of time before they choke off oil growth.
Already, analysts are warning the next steps will be production shut-ins and the rationalization of oil sands projects so only the less expensive go ahead.
Coping strategies are expected to come into focus as producers announce their investment plans for 2013 over the next few days and weeks, starting with Canadian Oil Sands Ltd. on Thursday.
Pipeline capacity has been getting tighter because of surging production from Albertas oil sands and from tight oil fields across North America.
Space will be substantially smaller than demand in December, when Enbridge Inc. will apportion space on a number of its key pipelines Line 5, Line 14, Line 6B, Line 6A/62, Line 4/67, Line 4. Kinder Morgan Inc. is apportioning space so that only 30% of producers hoped-for volume gets into its regularly oversubscribed TransMountain pipeline in December.
Its no secret that there is pressure on the system and that we are full, said Graham White, spokesman for Enbridge.
The apportionment is significant and will mean discounts on Canadian oils could get worse into January and potentially force some producers to shut in production, Peters & Co., the Calgary energy investment bank, said in a report.
CIBC World Markets analysts expect discounts between Canadian oils and West Texas Intermediate (WTI) to persist throughout next year.
This differential has been volatile in 2012, but we believe it will be an even bigger issue in 2013. Why? Because there are only two pipelines that connect from the North of PADD 2 [in the U.S. Midwest] to Cushing (Keystone and Spearhead) and both are full. Unfortunately, this will be the case until Flanagan South comes on in mid-2014 and the full Keystone XL build in 2015 (hopefully!), they said in another report.
Canadian heavy crude sold at a discount of more than US$30 a barrel under the U.S. benchmark, WTI, this month compared with around US$15 only a month earlier.
Producers have been pushing more and more of their oil onto rail cars, but thats expensive and seen as a temporary backup plan. It has also been insufficient to remove bottlenecks and now rail cars are running out.
The discounts are biting into the returns of producers who dont have refineries and into government revenue.
In a mid-year fiscal update Wednesday, Alberta said its resource revenue was $1.4-billion lower than expected and put much of the blame on the differentials.
The biggest factor affecting our resource revenue right now is the lack of market access for our oil, Finance Minister Doug Horner said in a statement.
We have one customer and one means to ship our product to them. On the other hand, our customer has many different suppliers to choose from. This is not a good situation to be in and its costing us dearly. The differential is about $29 a barrel right now multiply that by two-and-a-half million barrels a day and the result is a tremendous impact to Albertas finances.
Saskatchewan is also being affected. In its fiscal update Tuesday, the province said its expected surplus would be significantly smaller $12.4-million, down from $95-million because of lower oil and potash revenue.
With so much value going out the door, and pipeline expansion plans so uncertain, an obvious option is to reduce growth.
CIBC analyst Andrew Potter suggests Canadian Natural Resources Ltd. may take a pause before starting its Horizon oil sands project expansion, and Suncor Energy Inc. may push back by a year its plans for the Fort Hills mine and defer indefinitely its Voyageur upgrader and Joselyn mine projects so that investors view them as cancelled.
But other projects that have been under development for years, such as Imperial Oil Ltd.s Kearl oil sands mine that is on the verge of producing its first oil, cant be switched off.
The natural gas side of the business shows stopping growth is not easy. Prices have been uneconomic for years, drilling is down, and yet production keeps increasing.
I thought Burlington Northern was offering some kind of rail transport solution. There’s too much money at stake to not have a work around.
Rail is moving more and more crude south. However it is at a significantly higher cost and it has consumed nearly every available tank car without meeting the complete demand.
That higher cost of transportation is an effective lower price for the product at the source (Canada).