Varcoe: Budget increase for Alberta as TMX pipeline requires oil

The Trans Mountain pipeline expansion is expected to narrow the price gap between West Texas Intermediate and Western Canadian Select, bolstering Alberta’s energy revenues.

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The province’s goal of keeping the budget in the black received a boost Friday with the news that the long-delayed Trans Mountain expansion project will soon begin filling with Alberta oil.

A day after the UCP government released a new budget with a narrow $367 million surplus, tar sands producer MEG Energy said shippers had been notified to begin placing oil at the Trans expansion development. Mountain (TMX).

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The project is designed to nearly triple the capacity of the existing Trans Mountain pipeline, which transports oil from Alberta to the British Columbia coast.

It is expected to narrow the price differential between U.S. benchmark West Texas Intermediate crude and Western Canadian Select (WCS) heavy crude, which would bolster the province’s energy revenues.

During a call with analysts on Friday, MEG CEO Derek Evans said the company, which has committed to moving oil in TMX, was told to prepare for the export pipeline to begin filling.

“TMX issued a call yesterday to complete the line. In fact, they expect 2.1 million barrels in April and another 2.1 million barrels in May. So, we see this as incredibly positive,” Evans said.

It is “good news not only for us but for everyone in the heavy oil business.”

Include Alberta’s treasure in that mix.

The pipeline expansion project has been in development for more than a decade and the final price tag is expected to exceed $31 billion.

It will help the oil sands sector get more barrels to export markets (including Asia) and allow domestic producers to increase production without overwhelming the existing transportation system.

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According to Thursday’s provincial budget, every $1 per barrel drop in the price discount facing Western Canadian Select crude would add $600 million to government revenue.

The new budget forecasts the WCS price differential will fall from an average of $17.30 per barrel for the fiscal year ending this month, to $16 in the new budget year and to $13.60 in 2026-27.

“TMX is important because it will determine, in part, the prices Alberta producers can get,” said Desjardins economist Marc Desormeaux.

“If for some reason there are delays. . . that could put pressure on the Western Canadian Select discount and ultimately weaken the revenue the government collects as oil royalties.”

The existing 1,150-kilometre Trans Mountain pipeline transports oil from the Edmonton area to a terminal in Burnaby, British Columbia. The expansion will increase its capacity from 300,000 to 890,000 barrels per day.

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Due to increased oil sands production and insufficient pipeline capacity out of Western Canada over the past decade, the price discount has ballooned at times, exceeding $50 per barrel in 2018.

That led the Alberta government to temporarily adopt production quotas.

With the province forecasting a small surplus in the new fiscal year, Premier Danielle Smith said Friday that Alberta’s finance minister “is nervous because we don’t know what oil and gas prices are going to be like in the coming years.”

The premier praised Evans’ comments and said she was crossing her fingers that the project would come online in the third quarter and increase Alberta’s export capacity.

“That’s good news,” he told reporters.

“If we are now seeing an increase in our production of 600,000 barrels per day, you can do the math, it is around $75 a barrel. . . we get about a third of that in royalties. It is a quite significant figure.”

Alberta Premier Danielle Smith
Alberta Premier Danielle Smith speaks during a news conference at St. Mary’s High School in Calgary on Friday, March 1, 2024. Gavin Young/Postmedia

Trans Mountain Corp., the federal Crown corporation that operates the pipeline, had no comment Friday on the matter.

In an interview last fall, TMX CEO Dawn Farrell said the expansion is projected to generate about $40 billion in royalties and taxes for Alberta over two decades.

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The project has been dealing with delays due to drilling challenges in the final stretch of construction in British Columbia’s Fraser Valley.

Earlier this week, the Crown corporation announced it had made progress and was working towards planned commercial operations to begin during the second quarter.

In a recent filing with the Canadian Energy Regulator, the corporation said it expected the price to be about 10 per cent higher than last spring’s $30.9 billion cost estimate.

Analyst Phil Skolnick of Eight Capital said the TMX launch should reduce the WCS price differential and eliminate risks of it widening significantly as Canadian oil production continues to set records.

“We’re getting close, if not already there, to supply basically exceeding the capacity of the pipelines from Western Canada to get oil,” he said.

“For Canadian oil overall, it offers room for growth.”

The provincial budget forecasts West Texas Intermediate crude oil prices will average $74 a barrel in the new fiscal year.

Adam Hardi, vice president of credit rating agency Moody’s Investors Service, called that forecast “relatively conservative” and noted that it is below current oil prices of nearly $80 a barrel.

The pending rollout of TMX should reduce another potential hurdle for an Alberta budget that has little room for error.

“It’s certainly a big benefit for the province,” said Pedro Antunes, chief economist at the Conference Board of Canada.

“If we had not seen the (green) light for its entry into production, that would be a downside risk.”

Chris Varcoe is a columnist for the Calgary Herald.

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