Oil price gap a handy excuse for strapped governments

According to experts inside Alberta Energy, it’s much more profitable to refine more of our oil before we ship it.

Both the Alberta and federal governments are now pointing to the “oil price differential” as the culprit that has forced them to revamp budget projections and talk darkly about the need for cuts to programs, services and public employees.

But is this really true? Or is it just a complicated but convenient excuse that draws attention away from deeper problems?

A 2011 Alberta government research document recently released to the Alberta Federation of Labour after a lengthy tussle with the Freedom of Information gatekeepers suggests that it is a convenient excuse.

“The premier is telling only half the story,” says AFL president Gil McGowan.

The oil price differential is not something people think about, even in Alberta. It’s the kind of numbers game that only experts in the field usually pay attention to.

To put it simply, the oil price differential is the gap between the price Alberta producers get for the heavy oil that comes from the oilsands and the benchmark price for West Texas Intermediate, which is a lighter oil. Right now the U.S. has access to lots of lighter oil, so our unrefined oil is less desirable and fetches less per barrel.

According to the Alberta government, Alberta heavy oil producers are getting $30 a barrel less than the benchmark priceAlberta heavy oil producers are getting $30 a barrel less than the benchmark price. And this is the main reason, says Premier Alison Redford, the provincial treasury has a $6 billion shortfall to deal with. Federal Finance Minister Jim Flaherty is using the same excuse for reduced federal revenues.

So, you might ask why don’t we refine more of our oil before we ship it south or ship it anywhere for that matter? Wouldn’t that make more economic sense?

According to the experts inside Alberta Energy who wrote the research paper that was stamped “secret” and never publicly released, it certainly does make more economic sense for a key sector of the oilsands industry, especially when there is a large price differential.

“Stand alone mining is sensitive to changing light-heavy differentials while integrated mining is much less responsive. Despite the fact that adding upgrading capacity makes less sense in today’s market (in 2011 oil was selling at $100 per barrel) our sensitivity analysis suggests an integrated upgrader serves as a hedge against volatility of light-heavy differentials,” they wrote.

In other words, in today’s market where the oil price has slipped and the differential is greater, the oilsands players who mine and refine oil are much more profitable than those who simply mine and ship it south. And profitability means more money for both the overall economy and the provincial and federal treasuries.

“We think the premier and the government should be shouting this from the rooftops,” says McGowan. “It’s the upside of the price differential and we should be taking advantage of it.”

Instead, only 57 per cent of oilsands production is upgraded, and that percentage is expected to slide dramatically in the next few years.

McGowan has long been advocating for more refineries in Alberta. So did former Alberta premier Peter Lougheed, the godfather of oilsands development, right up until he died last September.

Not only would more refineries create more value for the resource in Canada, they would provide good jobs for thousands of workers. And wouldn’t refined oil be less of an environmental threat in all those pipelines that are currently being thwarted because they will carry diluted bitumen from the oilsands?

“Government can’t force industry to build upgraders. But it can make the most of an opportunity through good policy, regulation, incentives, even equity partnerships,” says McGowan. “That’s what Lougheed did with the petrochemical industry and it worked.”

It’s not as though oil price volatility is a sudden turn of events. The price of oil has been volatile ever since someone first discovered it seeping from the ground and realized it might be useful for lighting lamps.

Governments could face up to the volatility and minimize the risks. Instead they seem to be betting that no one will notice the truth differential — the widening gap between reality and political propaganda.

The Toronto Star, Tuesday, Feb. 12, 2013
Byline: Gillian Steward, Calgary writer and journalist