Alberta's Royalty Windfall

Whispering in the Wind: (November 18, 2013) WITW 5

As unbelievable as it is, the Rob Ford saga isn’t the only political story worth discussing:

Northern Gateway Pipeline Project

After months of “frosty” dialogue and intense debate Alberta Premier Redford and British Columbia Premier Clark signed an accord that moves the Northern Gateway Pipeline proposal a step closer to reality.  In the first week of November the two premiers agreed to a strategy that will most likely see Alberta bitumen shipments going to Asia through coastal facilities at Kitimat, British Columbia in 2015.  Critical to the joint announcement – Alberta royalty sharing is not part of the agreement (never a consideration according to Alison Redford) – British Columbia will have to negotiate with Enbridge and other private companies if it wants to receive “additional” economic benefit.  The BC premier also announced that her government supports Premier Redford’s “Canadian Energy Strategy” initiative.  Initially Premier Clark insisted that Alberta share its bitumen royalties with British Columbia and it became a key condition if BC was to give its okay for the transport of bitumen through BC’s territory.  Premier Redford quietly, but firmly, responded that Alberta’s royalties were not up for any discussion and reminded the BC premier that 42 percent of her province’s natural gas shipments pass through Alberta territory – does it mean BC is willing to share her province’s royalties with Alberta?  With that clear consequence, Premier Clark’s strategy of royalty sharing collapsed.   As foolish as Premier Clark’s provincial strategy was, it is going to have consequences and will linger in arguments put forth by First Nations groups.  From my perspective Premier Redford is to be congratulated for her guiding the negotiations with British Columbia and her clear commitment for a “Canadian Energy Strategy”.  But the Northern Gateway Pipeline project doesn’t end with the Alberta – British Columbia Accord – there are a number of other so called obstacles yet to be dealt with.  There are the regulatory hearings being held in Ottawa, the more active Idle No More Movement that is starting to dictate national policy measures for their territories as well as more “accommodation” when it comes to development.  And for this week’s column, a new pricing structure for bitumen. 

Pricing Bitumen

The price of oil is set by an international bidding system where there are numerous buyers and numerous sellers.  The benchmark oil price most often used in North America is WTI (West Texas Intermediate) and is the number most often seen on your television sets.  For those who watch the WTI price, the WTI varies on a daily basis, sometimes significantly – in December, 2012 the WTI averaged $106 per barrel.  The benchmark oil price in Alberta, including oil sands bitumen, is WCS (Western Canada Select) – in December, 2012 the WCS averaged $75 per barrel.  What is most relevant to Alberta, there is a third standard which Alberta should be using when planning for its future prosperity, the Maya price.  To quote from an Alberta government release:  “Maya, a benchmark for heavy oil produced in Mexico, is similar in quality to Alberta’s WCS, but sells $43 more than Alberta’s bitumen (as of January 11, 2013) at $101 per barrel in the market.  Oil from Mexico has direct access to the ocean where it can reach international markets.  For that reason, it fetches a higher price than Alberta’s oil.”  Here is my take on this very complex, risky pricing structure – when the Northern Gateway Pipeline project is completed in 2015, the international price for Alberta bitumen (will continue to be determined by the international bidding system) is likely to increase significantly and could be sold at a premium to the WTI price.  No matter how you look at it, the revenue streams going to the producers, transporters and governments will grow dramatically as well – it is not just a windfall, it is a “continuous” windfall – and it might be the underlying reason for Premier Christy Clark of British Columbia insistence that her province participate in Alberta’s royalty system.  And for anybody that will listen, the revenue pie for Alberta’s energy sector (particularly the bitumen producers) is going to grow significantly after 2015 – now is the time to re-think who should be benefiting and who shouldn’t be benefiting from the expected, ongoing windfall – to the Alberta government, re-think Alberta’s royalty system and do it now!