Alberta's loathed 'bitumen bubble' slams Canada's rich province3/8/2013
For Alberta, life's a bitumen
The hefty discount on Alberta oil – Premier Alison Redford refers to the phenomenon as the “bitumen bubble” – is costing the province dearly.
In yesterday’s budget, Finance Minister Doug Horner projected that Western Canadian Select, whose price has been well below global benchmarks because of pipeline constraints exacerbated by the shale boom in the United States, will continue to trade at a marked discount.
WCS, as it’s known, is forecast to sell at an average 27-per-cent below West Texas Intermediate, or WTI, in the 2013-14 fiscal year. That’s projected to shrink to 19 per cent by the next fiscal year, and it’s hitting the province hard.
“At still nearly 19 per cent of total provincial revenues, resources remain the clear source of risk to Alberta’s revenue outlook,” said senior economist Robert Kavcic of BMO Nesbitt Burns.
“For example, a $10 drop in WTI prices or a 1-per-cent increase in the WCS discount would cut revenues by an estimated $1.4-billion,” he said in a research note.
“Note that resource revenues bounce back sharply (+ 15%) in fiscal year 2014-15, driven by a combination of higher WTI prices, a narrowing WCS discount and rising bitumen production,” Mr. Kavcic added, referring to the budget’s forecasts.
As The Globe and Mail’s Carrie Tait reports, it’s not just the price of WCS, but also the forecasts for WTI that are playing into Alberta’s projections. Specifically, it miscalculated last year, meaning a higher deficit.
The province now forecasts WTI an average $92.50 (U.S.) a barrel in the current fiscal year and an overall deficit of almost $2-billion. The spread between WCS and the WTI and Brent benchmarks is costing the province billions.
“Alberta’s bitumen has been selling for a larger and more substantial discount to North American global benchmark oil prices,” according to the budget highlights.
“This ‘bitumen bubble’ has had a severe impact on Alberta’s revenue outlook, with a $6.2-billion drop in 2013-14 resource revenue from the budget 2012 estimate, and even larger declines in the next several years.”
The slump in natural gas is also a factor.
“Natural gas prices fell sharply below forecast, further weighing on resource revenue,” said Warren Lovely and Emanuella Enenajor of CIBC World Markets.
“Indeed, the evolution of Alberta’s resource revenue tells the story. The province planned for $11.2-billion of resource revenue in 2012/13. But with oil and gas royalties faltering, and the value of land leases drying up, resource revenue slumped more than $4-billion below plan. This reduced resource bounty was partly offset by stronger-than-planned gains in personal and corporate income taxes, along with healthier investment income and gains elsewhere.”
The oil discount will ripple through the economy, said CIBC’s Mr. Lovely and Ms. Enenajor, meaning consumers will have to carry more of the load.
“Softer energy prices will likely hold back business investment, paring real GDP growth to 2.9 per cent in 2013,” they said.
“That’s nearly a percentage point below the 2012 pace, and roughly in line with the private sector consensus,” they said, referring to the projections.
“With business investment downshifting, consumers are expected to lead growth, with a 2.6-per cent population increase roughly matching the outgoing year’s pace.”
Growth in the jobs markets is forecast to low to 1.9 per cent from last year’s faster 2.7 per cent, but should still be “robust enough” to pump up incomes and help lower unemployment to 4.5 per cent, they added.
And while prices suffer, bitumen output is forecast to climb 12 per cent, which the CIBC economists said should offset a 7-per-cent drop in natural gas production.
(Globe and Mail)