March 7, 2011

Rise in Oil Prices is helping Bitumen Recovery

EDMONTON — While surging oil prices will deliver a financial windfall to the petroleum-powered provincial treasury, a series of major production hiccups over the fiscal year is expected to cost the Alberta government at least $340 million.

An Enbridge pipeline rupture in Michigan last year caused a bitumen bottleneck that squeezed production volumes flowing out of Alberta to the U.S., the province’s top energy customer.

The Alberta government now estimates the Enbridge supply disruption will cost it a minimum of $300 million in lost royalties for the budget year ending in March, but the toll could be “significantly higher” by the time the 2010-11 numbers are finalized.

“We lost considerable amount of royalties because we couldn’t ship our product south,” Premier Ed Stelmach explained during a speech last week.

Furthermore, fires earlier this year at upgraders owned by Canadian Natural Resources and Husky Energy have cut overall production by an estimated 150,000 barrels per day of synthetic crude, which is expected to cost the government as much as $40 million in lost royalties in 2010-11.

“Anytime there’s a loss of production impacting royalty revenues, it is a concern,” said Alberta Energy Minister Ron Liepert. “All of it has an impact, no doubt about it.”

However, he noted the government almost certainly expects annualized oil prices over the course of the current budget year will surpass initial projections, which will stuff unexpected revenue in provincial coffers and help offset the supply hiccups.

Indeed, the government budgeted oil prices at $78.75 US per barrel for 2010-11, but crude is now trading at more than $100 due to unrest and supply worries emerging from the Middle East and North Africa.

Oil has averaged nearly $82 US over the year, and with every $1 increase in annualized crude prices generating an additional $186 million for the province, Alberta could reap an extra $600 million from the energy bonanza.

Production constraints in the U.S., combined with the slowdowns at the CNRL and Husky facilities, have driven up the price for synthetic crude, which is experiencing a premium of $15 or more over the benchmark crude sold on the New York Mercantile Exchange.

“You’ve got to take all of this over the course of the year. Take the ups, take the downs,” Liepert added. “That’s one of the difficulties of trying to predict revenue for a province that’s so dependent upon royalties.”

The supply problems — and subsequent royalty hit — stem from pipeline breaks last summer. More than 20,000 barrels of oil leaked into a Michigan river system when Enbridge’s Line 6B ruptured last July, closing the line for nine weeks.

Another spill on Line 6A, a major oil pipeline into the United States, added to a backup of barrels in Alberta and the feeder systems from producers such as Suncor.

Earlier this year, Suncor said it had been storing approximately 15,000 barrels of crude per day, while Enbridge resolved its pipeline capacity issues.

The January fire at Canadian Natural’s Horizon oilsands plant halted production that accounts for about 14 per cent of the company’s total output. Production will increase to 110,000 barrels a day from 55,000 barrels a day in the second quarter, the energy giant predicted last week.

“Clearly, the fire at Horizon will result in a temporary hit to production and cash flow,” CNRL president Steve Laut said following the release of the company’s quarterly results.

The provincial government expects the production crunch at CNRL’s facility will cost it between $30 million and $40 million in lost royalties this fiscal year.

The cash is desperately needed for a Tory government forecasting a $4.8-billion deficit for 2010-11 and an additional $3.4 billion in red ink in the new 2011-12 budget.

NDP leader Brian Mason said the revenue roller-coaster highlights just how dependent the government is on non-renewable resources, and also the need to increase royalty rates to snare additional one-time petroleum cash.

Royalty breaks to petroleum producers and other corporate tax cuts make it nearly impossible for the government to wean itself off its addiction to energy revenue, he argued.

“They’ve become overly dependent on some of this stuff for their revenues,” Mason said. “Alberta’s revenue stream is less stable and less reliable than in the past, and this is an example of that playing out.”

Calgary Herald with files from Bloomberg

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