Shrinking access to markets shapes new fiscal reality for Alberta2/7/2013
The source of Alberta’s fiscal pain is not new.
The U.S. has been using less and less Canadian natural gas for years, says Washington’s Energy Information Administration.
The reason is soaring domestic shale gas production in the U.S.
In the first eight months of 2012, U.S. net imports of Canadian gas fell by roughly seven per cent to 5.7 billion cubic feet per day from the year-prior period, the EIA reported late last year. U.S. net imports from all sources over the same period totaled just 8 per cent of total natural gas consumption, the EIA said, the lowest level since 1992.
At the same time, Alberta’s resource revenue was $1.4 billion lower than expected in the first six months of fiscal 2012. Royalties from natural gas were $288 million, or $349 million lower than expected, the province said in a second-quarter fiscal update.
The retreat underscores how shifting production patterns in Alberta’s No. 1 export market are shaking the energy province from its north-south axis, upsetting old trade patterns and threatening public finances. “We’ve talked a good game in Alberta and in Canada about being global players, but actually we’ve been immensely dependent on one market,” said Alberta Energy Minister Ken Hughes, addressing a winter energy forum hosted by the Canadian Council of Chief Executives in Calgary.
While Alberta continues to cede its share of the U.S. natural gas market, oil is following close behind, says Lorraine Mitchelmore, president of Shell Canada Ltd.
“Our market for gas virtually dried up,” she told the forum, recalling the surge in shale gas production from reservoirs once deemed marginal. “You could see possibly the same kind of thing happening in the oil market.”
That prospect was served up most recently by the Paris-based International Energy Agency, which advises rich nations on energy policy. U.S. net oil imports are projected to slide from 9.5 million barrels per day in 2011 to 3.4 million bpd by 2035, thanks to new supplies of tight oil and improvements in fuel economy standards, the agency predicts in its latest World Energy Outlook.
The outlook predicts production from the Bakken, Eagle Ford and emerging fields in Colorado and California will collectively rise to more than 3.2 million bpd by 2025, allowing the U.S. to overtake Russia and Saudi Arabia as the world’s No. 1 oil producer along the way. Canadian tight oil production is forecasted to climb to 500,000 bpd by 2035.
Over the same period, oil sands production is expected to grow “rapidly,” the IEA says, from 1.6 million bpd in 2011 to 4.3 million bpd in 2035. “We need access to the biggest markets,” said Rick George, chairman of upstart Osum Oil Sands Corp. and a former chief executive officer of Suncor Energy Inc., addressing the forum.
He noted that global markets are not waiting around for Canadian exports, be they oil or liquefied natural gas.
Producers are busy exploring for unconventional gas in East Africa, for example. “These are massive volumes and the buyers are well aware of these reserves,” George said. In the absence of new markets, “What you really risk is a lower standard of living,” he warned.
Alberta and British Columbia have each been whacked by a slowdown in field activity and a pullback in commodity prices. Credit-rating agency Moody’s Investors Service last year downgraded the outlook on B.C.’s debt to “negative” from “stable” after the provincial deficit forecast deepened to roughly $1.5 billion. Alberta Premier Alison Redford, meanwhile, has said the province may turn to capital markets to help finance infrastructure spending on roads, schools and hospitals.
In a second quarter fiscal update, Alberta Finance Minister Doug Horner blamed the province’s projected deficit of up to $3 billion, in part, on “a growing discount of Alberta bitumen prices relative to international prices for crude.”
“We have one customer and one means to ship our product to them,” he said in a statement. “This is not a good situation to be in and it’s costing us dearly.”
The pain could get worse. As 2012 fades into the rearview mirror, question marks hang over Ottawa’s decision to bar state-owned enterprises from majority ownership in the oil sands. “There is the potential for less investment coming into the oil sands in Alberta,” Hughes says. “The impact of that is it will simply raise the cost of capital.”
Even so, the approval of CNOOC Ltd.’s purchase of Nexen Inc. “sent the right message,” says Dick Haskayne, who chaired Vancouver-based MacMillan Bloedel Ltd. before it was swallowed by Weyerhaeuser in the late 1990s.
“Everybody keeps saying they want a checklist of what constitutes a net benefit to Canada,” he tells Alberta Oil. “That is impossible in my view because Potash [Corp. of Saskatchewan] is different than Progress [Energy], and Progress is different than Nexen and all of them are different than RIM [Research In Motion]. There’s no kind of nice, clean checklist.”