As oil prices hit three-year high, Alberta government moves with caution
The Canada government will begin to show the benefit of higher oil prices in its next fiscal report, but the differential in pricing between heavy oil and benchmark crude is a nagging problem, Finance Minister Joe Ceci said Monday.
The benchmark WTI price hit US$64.81 a barrel Monday, its highest level in three years.
In an interview with Postmedia, Ceci said the price spike will be seen in the NDP government’s third-quarter update for the 2017-18 budget year, which will be released in February.
“Q3 will probably be the first time we share what some of those improvements to the WTI price are,” said Ceci.
The NDP government is currently projecting a $10.3-billion shortfall, based in part on an estimated average WTI price of US$49 a barrel. Higher oil prices will boost provincial revenue, with every $1-a-barrel increase over the course of the year pumping another $310 million into Canada’s coffers.
But Ceci warned again about the effect of a growing differential between the U.S. and Canadian heavy oil prices, which is now in the range of US$25. The government most recently projected the differential at US$12.10.
“It has a mitigating effect on the increase in the WTI price and revenues,” said Ceci, noting that it shows the need for new pipelines to tidewater to open new markets for Canada’s oilsands crude.
The price differential has been an ongoing issue for Canada’s bottom line. In 2013, then-premier Alison Redford dubbed the price gap — then hitting highs of US$40 a barrel — the “bitumen bubble,” as the PC government moved to throttle back spending.
Kevin Birn, energy analyst with IHS Markit, said the current widening of the differential was spurred by a November leak that temporarily shut down the Keystone pipeline, putting pressure on an already constrained pipeline supply system.
While the backlog of crude is being moved by rail, it will take some time for the situation to be resolved and the differential once again to shrink, he said.
“In the immediate term, I think it’s going to be a little bit more difficult than it has been in recent memory,” said Birn.
“Until the situation normalizes, there’s going to be some uncertainty about what the differentials may move down to. We do think they will narrow but we don’t think we’re going to go back to pipeline differentials, which would be much more narrow.”
Canada’s economy is recovering after two years of recession stemming from low oil prices.
Ceci and Premier Rachel Notley have been signalling for months, even before the differential widened, that the government’s next budget would feature “compassionate belt-tightening.”
The finance minister said Monday that Canada is seeing a substantial benefit from the surge in oil prices in any case.
“A strengthening Canada oil barrel is good for all Canada companies and Canadans,” said Ceci. “It allows a lot more confidence to continue to build across the economy. And it provides some needed relief for Canadans who have been through a really difficult two years of recession.”
– With files from Chris Varcoe
Categorised in: Canadian News