Oilsands to rev up

Alberta enjoyed a third year in a row of strong growth in 2012, with huge investments continuing to flow into the oilsands. Despite welcoming tens of thousands of job seekers into the province – the Alberta government estimates that the population of the province grew by 2.9% during the 12-month period ended Oct. 31, 2012 – unemployment in Alberta hovered around 4.5% last year, well below the national rate of 7.1%. Low unemployment levels led to higher wages, which in turn resulted in strong consumer spending and a robust, but not overheated housing market.

Economists believe two major issues will dampen future growth in Alberta: the lack of pipeline capacity to move oil to market; and the resultant deepening discount embedded in the price of Alberta crude oil vs North American and world crude prices.

Says Todd Hirsch, an economist with Edmonton-based crown corporation Alberta Treasury Branches (ATB Financial): “Albertans used to ask themselves, ‘What will happen when the oil runs out?’ Well, oil is never, ever going to run out.”

Hirsch suggests that with the advent of new extraction technologies, the province has a virtually limitless supply, adding: “The bigger question is: ‘What if we can’t get the oil out of here?’ That’s much more serious.”

Of the four major proposed pipeline projects being discussed, TransCanada PipeLines Ltd.’s Keystone XL project, which would transport Alberta crude to refineries in the U.S., has the highest public profile. The U.S. government, after initially denying approval, now is leaning toward approving a revamped proposal this year.

@page_break@ Enbridge Inc.’s Northern Gateway project, which would see crude oil flow from Edmonton to Kitimat, B.C., then on to markets in Asia, faces considerable opposition from environmental groups and other parties. That project also is much further away from being approved than Keystone.

And there are two other projects facing opposition: another proposal from Enbridge, to reverse the flow of the existing Montreal to Sarnia pipeline so that Western Canadian crude oil could reach refineries in Quebec and Atlantic Canada; and a proposal to twin Kinder Morgan Inc.’s existing Trans Mountain pipeline from Edmonton to Vancouver.

The lack of pipeline capacity, combined with increased crude oil production from the Bakken formation in the U.S., has put downward pressure on the Western Canadian select (WCS) price, the price that producers receive on Alberta crude.

Until relatively recently, WCS crude sold at a discount of anywhere from US$10 to US$20 vs the price of West Texas intermediate (WTI), reflecting the fact that Alberta crude is costlier to refine and transport.

However, because of pipeline capacity issues and increased production levels in the U.S., the gap between WTI, which was trading at about US$95 a barrel in mid-January, and WCS, which was trading at about US$57 a barrel at the same time, has widened to around $40, creating oilsands profitability concerns.

Economists agree, however, that while the major oil firms could delay oilsands projects or postpone expansions, they’re unlikely to abandon projects. Says Todd Crawford, senior economist with the Ottawa-based Conference Board of Canada: “In the years to come, demand from developing countries for oil will increase.”

However, these issues are reducing royalty revenue and Alberta is facing enormous pressure to cut spending. The province’s Sustainability Fund, out of which the government has been covering the deficit, could be depleted by next year. Raising taxes or putting the province into debt are politically unpopular alternatives.

“The spring budget is not going to be pretty,” Hirsch says. “We used to be able to paper over the difference with oil and gas royalties, but those royalties are not flowing in at the same rate.”

However, economists predict Alberta’s economic engine will continue to outperform those of other provinces in 2013. Non-energy sectors, such as agriculture and forestry, are experiencing robust growth after years of underperformance and are contributing, albeit modestly, to Alberta’s overall economic health.

Unemployment is expected to remain low; indeed, Alberta continues to struggle with a skilled-worker shortage.

And while growth in new housing starts is expected to slow, it isn’t expected to drop significantly.

 

Population: 3,873,745

GDP 2011 ($bil.): 274.7

GDP % change: +5.1

2012-13 deficit ($bil.): 3.0

Estimated net financial assets ($bil.): 21.1

Median after-tax income, all families: $59,800

household disposable income/capita: $37,894

Figures are from latest available reports/estimates

Sources: Statistics Canada; Government reports

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