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Alberta's dreaded "bitumen bubble" has suddenly, dramatically, lost its air. And that could breathe some life into the province's wheezing finances.
The differential on Western Canada Select (WCS) oil grade – the amount by which this benchmark for Alberta oil sands crude is priced below West Texas intermediate (WTI), the price standard for North American oil – stood at $14 (U.S.) a barrel Monday, its lowest in almost six months. That's also below the historical average spread of about $17.
It's a huge change from earlier this year, when the differential swelled to more than $40, as inadequate pipeline capacity and surging U.S. oil production created a glut in oil sands heavy crude – dubbed the "bitumen bubble" – that decimated its price. It also decimated Alberta's government coffers, which saw resource revenue come in an estimated $4-billion lower than had been originally forecast for the fiscal year ended March 31, 2013. In a chastened budget unveiled last month, the province forecast resource revenues more than $6-billion (Canadian), or 45 per cent, below its year-earlier forecast – and a $2-billion deficit for the coming fiscal year.
But that pessimism was based on what now, less than four weeks after budget day, look like very conservative assumptions for oil prices. While improved global growth optimism has pushed up the WTI price, strong demand, production slowdowns and easing in transportation bottlenecks have all but burst Alberta's bitumen bubble.
The 2013-2014 budget estimates were based, in part, on an assumption that the WTI price would average $92.50 a barrel for the fiscal year, while the WCS differential would be about $24, or 27 per cent. According to Alberta's budget documents, every 1-percentage-point change in the WCS price differential from those assumptions would, over a 12-month period, translate into a $139-million change in government revenues for the fiscal year. A $1-a-barrel change in the assumed average price of the WTI benchmark would deliver a $142-million revenue change.
Right now, WTI is trading at $96.50 (U.S.) a barrel; the WCS differential is less than 15 per cent. If those prices were to hold (granted, that's a very big "if"), that would represent an extra $3.24-billion for the Alberta coffers. The forecast $2-billion deficit would be magically transformed into a $1.24-billion surplus.
OK, so current prices may not be much of an indication of what the province can expect over the entire fiscal year. So let's consider the past 12 months, when the average WCS differential was 24 per cent. Even if Alberta merely suffered through another year as bad as the last, that would mean more than $400-million in revenues above what the budget projected. If the differential matched its five-year average of 19.5 per cent, Alberta would be looking at more than $1-billion in additional revenues.
Given all this, there's no doubt that Alberta's treasury must be right pleased with the differential's happy turn. Can the new-and-improved levels stick around for a while? That is the multibillion-dollar question.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow David on Twitter at @ParkinsonGlobe.