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Alberta’s loathed ‘bitumen bubble’ slams Canada’s rich province Add to ...

These are stories Report on Business is following Friday, March 8, 2013.

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For Alberta, life's a bitumen
The hefty discount on Alberta oil – Premier Alison Redford refers to the phenomenon as the “bitumen bubble” – is costing the province dearly.

In yesterday’s budget, Finance Minister Doug Horner projected that Western Canadian Select, whose price has been well below global benchmarks because of pipeline constraints exacerbated by the shale boom in the United States, will continue to trade at a marked discount.

WCS, as it’s known, is forecast to sell at an average 27-per-cent below West Texas Intermediate, or WTI, in the 2013-14 fiscal year. That’s projected to shrink to 19 per cent by the next fiscal year, and it’s hitting the province hard.

“At still nearly 19 per cent of total provincial revenues, resources remain the clear source of risk to Alberta’s revenue outlook,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

A $10 drop in WTI or a 10-per-cent increase in the WCS discount would slash revenues by some $1.4-billion, he said in a research note.

“Note that resource revenues bounce back sharply (+ 15%) in fiscal year 2014-15, driven by a combination of higher WTI prices, a narrowing WCS discount and rising bitumen production,” Mr. Kavcic added, referring to the budget’s forecasts.

As The Globe and Mail’s Carrie Tait reports, it’s not just the price of WCS, but also the forecasts for WTI that are playing into Alberta’s projections. Specifically, it miscalculated last year, meaning a higher deficit.

The province now forecasts WTI an average $92.50 (U.S.) a barrel in the current fiscal year and an overall deficit of almost $2-billion. The spread between WCS and the WTI and Brent benchmarks is costing the province billions.

“Alberta’s bitumen has been selling for a larger and more substantial discount to North American global benchmark oil prices,” according to the budget highlights.

“This ‘bitumen bubble’ has had a severe impact on Alberta’s revenue outlook, with a $6.2-billion drop in 2013-14 resource revenue from the budget 2012 estimate, and even larger declines in the next several years.”

The slump in natural gas is also a factor.

“Natural gas prices fell sharply below forecast, further weighing on resource revenue,” said Warren Lovely and Emanuella Enenajor of CIBC World Markets.

“Indeed, the evolution of Alberta’s resource revenue tells the story. The province planned for $11.2-billion of resource revenue in 2012/13. But with oil and gas royalties faltering, and the value of land leases drying up, resource revenue slumped more than $4-billion below plan. This reduced resource bounty was partly offset by stronger-than-planned gains in personal and corporate income taxes, along with healthier investment income and gains elsewhere.”

The oil discount will ripple through the economy, said CIBC’s Mr. Lovely and Ms. Enenajor, meaning consumers will have to carry more of the load.

“Softer energy prices will likely hold back business investment, paring real GDP growth to 2.9 per cent in 2013,” they said.

“That’s nearly a percentage point below the 2012 pace, and roughly in line with the private sector consensus,” they said, referring to the projections.

“With business investment downshifting, consumers are expected to lead growth, with a 2.6-per cent population increase roughly matching the outgoing year’s pace.”

Growth in the jobs markets is forecast to low to 1.9 per cent from last year’s faster 2.7 per cent, but should still be “robust enough” to pump up incomes and help lower unemployment to 4.5 per cent, they added.

And while prices suffer, bitumen output is forecast to climb 12 per cent, which the CIBC economists said should offset a 7-per-cent drop in natural gas production.

Labour markets gain
Exceptionally strong – and surprising - jobs numbers today from both Canada and the United States.

Canadian employers added 50,700 jobs in February, according to Statistics Canada, while the unemployment rate held at 7 per cent as more people went looking for work.

The job gains, which topped what economists were expecting, were split between full- and part-time positions, and followed job losses in January, The Globe and Mail's Tavia Grant reports.

The services sector led the way, while manufacturing alone lost jobs.

It’s worth looking at where things stand compared to a year ago. Since last February, employment has increased by 1.9 per cent, or by 336,000 positions. Notably, they’re largely full-time jobs.

Over the same period, job creation in the private sector is up by 2.1 per cent, or 236,000 positions, and in the public sector by 2 per cent or 72,000.

By regions, Ontario led the way in February, creating 35,000 jobs, and largely among young people, a welcome sign given how the country’s youths are struggling in the post-crisis era.

British Columbia also created a notable 20,000 positions.

"The February employment report was strong almost cover to cover, and housing starts bounced back smartly, too," said BMO's Mr. Kavcic, referring to a separate report from Canada Mortgage and Housing Corp. showing residential construction starts gaining 14 per cent in February to an annual pace of 180,700.

"Combined with yesterday’s trade report, the Canadian economic data suddenly have a bit of spark."

He noted, however, that Canada's resources industries are now lagging, with year-over-year employment down 4.5 per cent.

In the United States, there’s renewed hope of easing the unemployment crisis, with 236,000 jobs created in February. The jobless rate dipped to 7.7 per cent, its lowest since late 2008.

"The upturn in the housing market remains a significant positive for job creation, with 48,000 jobs added in the construction sector alone," Andrew Grantham of CIBC said of the U.S. report.

"Private services posted the largest job gains for three months while the public sector only subtracted 10,000, although the drag from that area could grow as spending cuts kick in."

Finance Minister sees 'modest' growth
Canada’s Finance Minister came away from a meeting with private economists today with that slightly sinking feeling.

While the economists see “modest” economic growth this year, they have cut their outlook. And, Jim Flaherty hastened to add, that’s because of “external pressures outside of the government’s control.”

Mr. Flaherty cited the “very volatile and risk-filled” global environment given the outlook in the Europe, parts of which are in recession, and the United States, now in the midst of spending cuts.

“As I mentioned last week, we were expecting slower growth projections and that has been confirmed here today, but our objective is to balance the budget by the end of this Parliament,” Mr. Flaherty said in a statement after the meeting.

“Today’s discussion makes it clear that we must stay on course and continue to fully implement the Economic Action Plan,” he added.

GM spends at Cami
General Motors Co. plans to spend $250-million at its Cami Automotive Inc. assembly plant in Ingersoll, Ont., to turn the factory into a flexible manufacturing facility, The Globe and Mail's Greg Keenan reports.

The installation of flexible body shop equipment and tooling will enable the plant to make multiple vehicles on different platforms or basic underbodies.

The move effectively eliminates a question mark over the future of the facility, which had been competing with plants in Spring Hill, Tenn., and Mexico to build the next generation of the Chevrolet Equinox and GMC Terrain crossover utility vehicles.

SNC-Lavalin profit jumps
Dogged by scandals and probes, SNC-Lavalin Group Inc. still managed to boost its revenue and profit in the final quarter of 2012, The Globe and Mail’s Paul Waldie reports.

The Montreal-based engineering firm reported a $94.8-million profit in the quarter ended Dec. 31, 2012, up 25 per cent from the same period a year earlier. Revenue increased 14 per cent to $2.4-billion.

“While 2012 was a challenging year for SNC-Lavalin and its employees, our revenue increased and our backlog remained solid,” said chief executive officer Robert Card.

“The last months have been dedicated to putting the house in order and reinforcing our commitment to excellence, quality, safety and ethics.”

Chinese exports on rise
China’s shutdown for the biggest holiday of the year did not seriously dampen increasing exports, leaving analysts upbeat on growth in the world’s second-largest economy, Carolynne Wheeler reports from Beijing.

Customs data released today showed exports up 21.8 per cent in February, down slightly from January’s 25 per cent but beating low expectations after the Lunar New Year period, when manufacturers traditionally down tools for as long as two to three weeks to allow migrant labourers to make their long trek home.

Imports plunged 13.8 per cent, compared to growth of 28.8 per cent in January, though analysts said this too was largely expected because of the holiday period and should not be interpreted as declining demand. China recorded a trade surplus of $13.5-billion (U.S.) for the month.

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Editor's note: An earlier version of this article cited a 1-per-cent rise in the WCS-WTI discount. BMO says it should have said 10 per cent.

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