Although the differential between Western Canadian Select crude oil and other grades such as West Texas Intermediate and Brent will impact decisions to engage in new projects should it persist along current lines, there are approximately 170 billion barrels of reserves within Canada’s oil sands region waiting to be extracted for the benefit of the domestic economy.
Energy production in the Great White North hasn’t been as lucrative of late because of this crude-pricing differential, which is costing the country as much as CAD19 billion a year–or about CAD50 million a day–in lost wealth.
But it beggars belief to suppose that current resistance to new infrastructure will be sufficient to stop exploitation of the Canadian oil sands. The shale revolution in the US has tempered somewhat the acute need for this North American resource. But long-term global demand trends suggest oil will be in significant use for the foreseeable future.
Producers are already on track to more than double output from the Canadian oil sands to 3.5 million barrels a day by 2025, according to the Canadian Association of Petroleum Producers. Production has already grown from just over 1 million barrels a day in 2005 to about 1.6 million in 2011.
Whether TransCanada Corp’s (TSX: TRP, NYSE: TRP) Keystone XL pipeline brings Canadian oil sands crude south to Gulf of Mexico refineries for entry to the global market through US channels or Enbridge Inc’s (TSX: ENB, NYSE: ENB) Northern Gateway pipeline moves it west from Alberta to Kitimat, British Columbia, for eventual delivery to Asia or new efforts by companies such as Kinder Morgan Energy Partners LP (NYSE: KMP) to transport it by rail to processing centers, this vast resource will not be allowed to lay dormant.
Assume the Obama administration, through new Secretary of State John Kerry, rejects Keystone XL. Current odds favor completion of Northern Gateway. Canadian Prime Minister Stephen Harper has already gone to great lengths to repair relations with Chinese leaders that he initially mishandled when he assumed office in 2006. This is all about establishing ties with Eastern markets for Canadian exports, primarily of the energy variety.
Northern Gateway, as does Kinder Morgan’s TransMountain pipeline, which would also carry oil to British Columbia’s coast, faces opposition similar to that mounted against Keystone XL in the states but would almost certainly be pushed through on economic grounds.
Those who don’t favor Keystone XL, TransMountain and Northern Gateway are vocal, emotional and worthy of media attention.
At the same time, however, a recent Angus Reid poll found that of 800 people surveyed 9 percent of British Columbians completely support Northern Gateway, while 27 percent support the pipeline but could change their minds based on economic or environmental considerations. A third of respondents say they completely oppose the pipeline.
So that’s 36 percent roughly in favor, 33 percent diametrically opposed. Eventually, when Canada’s National Energy Board renders its opinion before Dec. 31, 2013, the economics will win out. And an effort that will go some distance toward relieving a pricing disparity that according to one estimate is costing each Canadian about CAD1,200 per year.
Incidentally, opponents of Keystone XL in an uproar on environmental grounds might want to consider, as Popular Mechanics suggested last week, that not building the 1,200-mile pipeline that would bring 800,000-plus barrels of oil per day from Alberta to the Gulf Coast invites even greater potential blight on the landscape–or, as it were, the seascape:
Tankers carrying the oil would join the heavy marine traffic that already churns through America’s Gulf of Alaska and close to the Aleutian Islands, areas with rough seas and abundant marine life. The Gulf of Alaska is where a Shell oil rig recently ran aground. After crossing that region, the tankers would then have to navigate some of the most dangerous waters in the North Pacific, including Unimak Pass, a harrowing 10-mile-wide passage in the Aleutian Islands that is an important habitat for sea lions, gray whales, tens of millions of seabirds, and other species.
Tankers at sea are more accident-prone than pipelines on dry land. And if a spill occurs at sea, it can be difficult to contain and is nearly impossible to clean up.
A recent report published by Royal Bank of Canada (TSX: RY, NYSE: RY), Macroeconomic Impact of the WCS/WTI/Brent Crude Oil Price Differentials, concluded that increasingly unfavorable terms of trade wrought by importing energy in the east for manufacturers and exporting energy to the US at lower prices “would ultimately first manifest themselves in the form of reduced business investment.”
Statistics Canada estimated that direct capital expenditure in the oil and gas industry in 2011 amounted to approximately CAD56 billion dollars, roughly equivalent to 3.2 percent of gross domestic product (GDP) and 15 percent of total national capital investment by all industries.
This means oil and gas production is one of the most valuable industries in Canada.
Alberta is already experiencing sharply lower oil royalties than estimated, which has left the provincial government scrambling to cover a CAD6 billion revenue shortfall. Officials built into budgets an average oil price of CAD86 per barrel for 2012-13 but have instead seen prices hovering near CAD70 and dipping recently into the CAD60s. A budget shortfall means running a deficit, increasing taxes and/or decreasing spending, all of which have an impact on ordinary people.
In 2005 the Bank of Canada noted that higher oil prices benefited the economy, as the boost from increased investment outweighed the drag on energy consumers such as factories. But a little less than a year ago the BoC provided an updated view on the impact of global energy markets on the domestic economy.
In an April 2012 monetary policy statement the BoC noted that the “considerably higher” international price could “dampen the improvement in economic momentum.” It also said that because “not all oil prices have risen equally” Canada’s real domestic income had been reduced.
Market participants have been late to observe the changed relationship between the Canadian dollar and crude oil prices, valuing the loonie as compared to higher-priced West Texas Intermediate or Brent rather than the Western Canadian Select benchmark to which receipts for domestic producers and the country’s economy are actually tied.
Though the loonie is no longer specifically a petro-currency, it did deserve some premium for its sound federal finances, safe banks and stolid monetary policy. That premium has eroded as the potential impact on the Canadian economy of a US sequester-induced North American downturn has set in and awareness of the impact of these crude-pricing differentials has spread.
Over the longer term, however, Canada’s global economic interest lay in exploiting its resource for export, whether that’s to the US or to markets east. And sooner or later the infrastructure to facilitate this trade–or these trades–will be put in place.
5 Comments So Far
Leave a Reply
Our comments section is reserved for productive dialogue pertaining to the content and portfolio recommendations of this service. We reserve the right to remove any comments we feel do not benefit other readers. If you have a personal question about your subscription or need technical help, please contact our customer service team. Thank you.
You must be logged in to post a comment OR register below.
You are wrong. The Northern Gateway will never happen. There is too much resistance to it. If you don’t see that you are naive. There will be hundreds of people willing to put there lives on the line to stop the breaking of BC’s ground.
This article is clearly biased. Ot makes a point that failure to put in more pipelines costs each Canadian $1200 per year. It does not state that that is an average but it is weighted very heavily to the benifit of Alberta. The benifit for most Canadians would be much lower. The article also fails to mention that the glut is do to ramping up production before there is a distribution system in place. It fails to mention that the cost to BCs economy would far outstrip the benifit in the event of an oil spill, even while it points out the danger of a spill in Alaska. The article states that pipelines are safer than tankers. That may be but the bitumen would still be put on tankers if the KM and NG pipelines are built so that is an absurd argument.
It seems to me that this is a problem of Alberta’s making with the support of the Harper government and they want to solve the problem on the back of BC. I have seen no offer from Alberta to guarantee all costs of an oil spill on land and at sea. If they want to ship off our coast, they should be willing to assume responsibility for the lost taxes to BC due to a spill. They should guarantee all the cleanup costs not covered by insurance. They should guarantee full reimbursement for all lost jobs and business in fishing and tourism, including all potential growth in those industries. If they were willing to do that perhaps we could have a discussion, but Redford has already stated that they will keep every nickel of revenue for themselves. Their greed created the problem and that unwillingness to discuss our economic concerns is what is stopping any solution. They say it is up to the companies, but they have already shielded themselves through forming a limited partnership. And tankers are not required to carry enough insurance.
David,
In addition to the huge environemental risk of shipping through Alaskan waters vs by pipeline, that you outlined, a key point that shoud be emphasized is our Gulf coast refineries are able to refine heavy sour (sulfur laden) crude oil and remove the sulfur.
Based on thew polution we encountered on a recent trip to China, I doubt that the Chinese refineries remove much if any of it. Therefore, the sulfur laden air that just happens to blow east will increaese the pollution on the west coast!
The rabid environmentalists rarely think think things all the awy through! But the law of unintended consequences
You gentlemen all — countless similar investment advisor gurus — who I have been following since mid 2009, have started sounding like stuck-groove record. Collapse of obamanomics, crash of the dollar, debt induced double-dip recession, QE induced inflation, nationalization of US banking structure, brain drain from financial services, socialization of US economy etc etc. It really appears that none of you gurus ever got past the most rudimentary 101-201 levels in economics, if I may be permitted. None of the above has come to pass. Oh, but some few of those ‘dreaded phenomena’ mentioned above will most certainly come to pass at “some point in the future” — not because you all could turn around to say “we told you so” because your dire prognostications were on much shorter timelines. No sir, they will come to pass when the economic variables in question have come to “that stage” in the continuing ebb & flow of monetary & fiscal policies which market economies by definition will encounter.
As one who has been taking a fundamental optimistic view on US economy since mid 2010 — and putting my money where my mouth lies since Sep 2011 — yes when the DOW was still well below 12000 — I assure you of my optimism in the fundamentals. If only right wing Congress were not forcing the executive to cut back in employment & income in the public sector part of what the private sector is adding in those variables, consistently for last over 24 months, we could have seen more robust growth, lower unemployment, bigger infrastructure expenditure which would have strengthened downstream growth some more. If only you gentlemen were not so sanguine about feeling “threatened” in your own ways of further wealth and allow better wealth distribution towards those who are already less advantaged.
Oh — David & Forward Thinker,
Please also do take into consideration that the all-in costs of canadian tar is not expected to sustain pipeline costs Vs alternative available to US economy from fracking oil & gas. Therefore the pell mell rush by carpetbagger oilmen in Canada has created a surfeit of crude supply which does not appear to be absorb-able by the US market. Do consider that arithmetic too for the oil at least. Will appreciate being enlightened.