'Bitumen bubble' bad news for budget

When Premier Alison Redford talks about "a bitumen bubble," she's referring to the record amount of Alberta bitumen for sale, and the low price it's fetching in the U.S. these days.

That is partly because of competition from new supplies of higher quality crude oil from the U.S.

The price of bitumen dropped another $20 a barrel this month, so Redford's treasury will be short $6 billion by the end of next fiscal year.

Is this price gap between conventional oil and bitumen normal?

The fact is there has always been a gap between the North American price of conventional oil (West Texas International) and a barrel of sticky, thick bitumen, known as Western Canadian Select. (The world price, known as the Brent price, is another benchmark set by North Sea oil).

WTI is hovering around $95 a barrel, Brent slightly higher around $110, while bitumen, usually about $20-a-barrel less, dropped to $50 last month.

Bitumen fetches a lower price partly because it needs more upgrading before it can be turned into gasoline, says Michael Moore, energy expert in the University of Calgary's School of Public Policy. That costs money, so refineries won't pay as much for bitumen.

Usually the gap has hovers around 20-25 per cent, and in the last few months it went higher. But the gap has been higher in the past.

The lack of pipeline capacity makes it more difficult to get bitumen to market and using rail is expensive, says Moore. But there are other challenges, he adds.

The new supplies of lighter, easier-to-use oil from North Dakota are more attractive to refiners.

Then, not all U.S. refineries can handle bitumen, says Moore. Alberta bitumen has to get to specially adapted refineries on the U.S. Gulf coast.

But there's competition at those special refineries too - from heavy oil from Venezuela and Mexico which can get there cheaper, says Moore.

"So the refiners call the shots and they establish the discount. Our oil always had to go a long way and takes more processing."

So will more pipelines help?

Yes, the Keystone pipeline to the U.S. Gulf coast will be a big help, says Moore - "though we will still be trading in competition with other heavy oil like ours from Mexico. Right now, there's a lot of competition."

Gil McGowan of the Alberta Federation of Labour says there's no doubt Alberta is facing a glut in the oil market and that puts downward pressure on the price of bitumen.

The low price is a sign the market doesn't want to buy more Alberta bitumen, he says. The better solution is to upgrade the bitumen into synthetic crude in Alberta, "so we can sell a product the market wants."

"For Redford to suggest the only solution is to build more pipelines is not only simplistic, it is misleading. There are many other options," McGowan said.

Synthetic crude (upgraded bitumen), produced by a handful of oilsands companies, can be used in any refinery to make jet fuel or gasoline and it has occasionally fetched higher than the WTI price of oil, he noted.

U of C economist Ron Kneebone said the government has created its own problems by continuing to rely on volatile oil and gas revenues - despite frequent warnings from economists and its own advisers.

Calgary Herald, Wednesday, Jan. 30, 2013
Byline: Sheila Pratt, Edmonton Journal

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