Canada buys high and sells low when it comes to crude oil, costing the world’s 10th largest economy billions in lost revenue as it expands production from one of the world’s largest energy deposits.
The gap between Alberta’s exported Western Canada Select and Brent oil imported into Ontario and Quebec was about $30.50 a barrel yesterday, and that difference is creating a drag on growth according to Bank of Canada Governor Mark Carney.
Annual losses of about C$19 billion ($19 billion) may persist for a couple of years amid a lack of ready alternatives for oil sands bitumen. TransCanada Corp.’s Keystone XL pipeline to U.S. Gulf coast refineries was delayed by President Barack Obama while Enbridge Inc.’s proposed Northern Gateway project to the west coast faces environmental hearings and growing opposition in British Columbia. There are no advanced proposals to ship oil from Alberta east to the rest of Canada.
The price difference “highlights the importance and potentially the value of pipelines in Canada that move our oil on an east-west axis,” said Jim Prentice, vice chairman of Canadian Imperial Bank of Commerce and a former minister for the environment and industry. “That’s lost corporate revenue, government income tax, government royalties.”
CIBC estimates losses to the economy of at least C$18 billion a year, while Bank of Montreal economists say the oil-price gap costs about C$19 billion.
The economy and energy are topics that will be discussed today at a Bloomberg Summit in Toronto that includes speakers such as Ontario Premier Dalton McGuinty, former Prime Minister Paul Martin and Devon Canada Corp. President Christopher Seasons.
Canadian oil and gas stocks have lost 6.4 percent this year, the ninth out of 10 sub-groups and lagging the 2.5 percent drop for the country’s main stock index.
Companies such as Bankers Petroleum Ltd., which earn money from oil produced outside Canada, may outperform domestic drillers such as Imperial Oil Ltd., Crescent Point Energy Corp. and Suncor Energy Inc., said Paul Taylor, Chief Investment Officer at BMO Harris Private Banking in Toronto. Bankers Petroleum has production in Albania that sells at Brent prices.
“That differential is probably going to stick for some time,” Taylor said, citing Middle East tensions that may keep Brent prices elevated and dim prospects for a quick end to the glut of Canadian exported oil at Cushing, Oklahoma.
In a 2005 report, the Bank of Canada said higher oil prices benefited the economy, as the boost from increased investment outweighed the drag on energy consumers such as factories. The bank updated that view last month, saying that oil market developments this year have hurt Canada because “not all oil prices have risen equally,” with the price gap reducing Canada’s real domestic income.
Canadian oil-sands producers are ramping up investment that will more than double output from Northern Alberta’s bitumen fields to 3.5 million barrels a day by 2025, according to the Canadian Association of Petroleum Producers. Production has already risen from just over 1 million barrels a day in 2005, according to provincial government figures.
Still, higher output hasn’t been enough for Canada to escape a deficit in its broadest measure of trade, the current account. Being a net oil exporter with a current-account gap makes Canada the biggest member of a club that includes Mexico and Sudan. The International Monetary Fund projects Canada will remain in a current-account deficit through 2017.
The drag from energy may blunt Prime Minister Stephen Harper’s efforts to brand Canada as an energy superpower. Finance Minister Jim Flaherty’s March 29 fiscal plan included steps to accelerate environmental reviews of major energy projects.
The opposition New Democratic Party objects to fast-tracking new pipelines, arguing better environmental controls are needed and that Canada should consider refining bitumen at home instead of exporting it to Texas.
“This is the Wild West all over again, breaking down the basic fundamentals and saying that all decisions with regards to oil and pipelines will be political decisions,” Nathan Cullen, an NDP lawmaker from British Columbia, told reporters May 4.
Some 52 percent of British Columbia residents oppose the Northern Gateway proposal according to a Forum Research Inc. telephone poll taken April 11, up from 46 percent in January. The pipeline, which would carry crude from Alberta to the Pacific Ocean at Kitimat, British Columbia, has been opposed by environmental and aboriginal groups, who say a spill along the coast would be catastrophic.
There are efforts to rework existing pipelines to fetch better prices for Canadian oil, including Kinder Morgan Inc.’s proposed expansion of the Trans Mountain line to Vancouver and the reversal of the Seaway line owned by Enterprise Products Partners LP and Enbridge between Cushing and Houston. As well, TransCanada re-applied for a U.S. permit for Keystone XL on May 4, seeking permission to build a $5.3 billion portion of the original project from the Canadian border to Steele City, Nebraska.
Still, “Canada still exports primarily to the U.S.,” said Mazen Issa, Canada macro strategist at TD Securities Inc. in Toronto. “If you diversify it may be the case where you don’t end up on the short end of the stick,” he said.
High prices for oil and other exported commodities have helped keep the Canadian dollar at about parity with the U.S. dollar, adding to pressure on manufacturers, based primarily in Ontario and Quebec, who have fired 13 percent of their workforce in the last five years.
“If I had my preferences as to whether we have a rapidly growing oil and gas sector in the west or a lower dollar benefiting Ontario, I’d tell you where I stand - with a lower dollar,” Ontario Premier McGuinty said in February.