The Bitumen bubble’s back with a vengeance

Alberta oil discount hits $40 a barrel

Enbridge's Cushing Terminal in Cushing, Okla. (Photo: Shane Bevel/Bloomberg/Getty Images)

Enbridge’s Cushing Terminal in Cushing, Okla. (Photo: Shane Bevel/Bloomberg/Getty Images)

When the spread between West Texas Intermediate crude oil and Western Canadian Select narrowed to US$10 a barrel last summer, some analysts declared that the big price differentials were gone for good. But they may have spoken too soon. In early November, the gap leapt past US$40 again, raising the spectre of yet another market access calamity this winter.

For once, it was a politician who had it right. Alberta Finance Minister Doug Horner warned back in August that, “like a bad penny,” the differential would return. Weeks later, a FirstEnergy Capital report still clung to the idea that ramped-up rail transportation, new heavy-oil refining capacity in the U.S. Midwest and the easing of the storage glut in Cushing, Okla., would keep this monster on a leash. But now, prodded by two refinery fires and increases in oilsands output, it’s on the rampage once more, slashing netbacks for Canadian producers and the Alberta government’s royalty take.

The return of what Premier Alison Redford famously called the “bitumen bubble” shows that crude supply-demand fundamentals have not changed. The shale revolution is not over, and U.S. production continues to increase. And though some oilsands projects have been put on hold, the Canadian production trend line is going up too. The industry’s fling with train transport aside, continental supply is exceeding take-away capacity.

“The industry needs continuous access to new pipelines over the next five years to solve the problem,” says Clinton Roberts, senior vice-president with PricewaterhouseCoopers. That’s pipelines plural. Any one of the proposed projects—Keystone XL, Northern Gateway, Trans-Mountain or Energy East—by itself isn’t enough; even all four may not necessarily keep up with production growth.

Another problem—one that Keystone XL fails to address at all—is that Canadian crude effectively has just one export customer, the U.S., which is moving toward self-sufficiency. As the enduring spread between WTI and the global Brent benchmark shows, global demand growth is coming entirely from emerging markets.

University of Alberta business professor Andrew Leach says that even absent new pipelines, a long-term differential greater than the cost of moving barrels by rail “doesn’t make economic sense.” But, with the higher scrutiny over railway transport post-Lac Megantic, those costs will be driven even higher. The “diff” will be around for a while yet.