Cenovus CEO: pipeline squeeze means Canadians 'subsidize' U.S. energy consumers

CALGARY – Each Canadian is subsidizing U.S. energy consumers to the tune of $1,200 annually through cheap Alberta crude, the CEO of oilsands company Cenovus Energy Inc. (TSX:CVE) said Thursday.

“This is a major, major issue, not just for our industry but I think for all Canadians,” Brian Ferguson told a CIBC investor conference in Whistler, B.C.

A report by CIBC last year said Canada’s oil industry was missing out on $18 billion a year because of the big discount its crude gets in relation to both U.S. and global benchmarks.

Ferguson figures the price gap, or differential, has since widened to $36 billion.

“Math on that is roughly $1,200 per Canadian in a subsidy to the United States. That’s because of a lack of takeaway capacity,” said Ferguson.

Alberta crude traditionally fetches a lower price than West Texas Intermediate, a key U.S. light oil benchmark, because it is more difficult to process and is farther away from market.

But that discount has been painfully steep lately, at around $40 lower than WTI. Landlocked WTI itself has been garnering lower prices than global crudes that can reach the most lucrative markets by sea, which effectively means Alberta producers face a double whammy.

Those market dynamics have added a sense of urgency for industry and government alike to seek out new ways for Alberta crude to reach coastal waters.

Pipeline projects are in the works to link Alberta crude to the West Coast for export to Asia, a major refining complex on the U.S. Gulf Coast and markets along the Eastern Seaboard that currently import pricey overseas crude.

“I’m in favour of all pipelines going everywhere,” Ferguson said.

But all of those projects, to varying degrees, face vehement opposition from landowners, environmentalists and others who fear an oil spill could cause dire ecological damage. The bigger-picture issue of the oilsands’ climate impact, and the role pipelines play in enabling that resource’s development, has also figured heavily in the debate.

The controversies have led to regulatory delays and the spectre of opponents using lawsuits to stymie energy projects.

Cenovus has taken steps to ensure about 90 per cent of its crude volumes this year are shielded from the differential. The interests it has in refineries in Texas act as a cushion of sorts, since it can make up for the money lost in producing the oil with cost savings in processing it.

It also has hedging contracts in place to sell its crude at a set price, so it is protected by big swings in the market.

Cenovus is able to ship some 12,000 barrels of oil per day to the Vancouver area via Kinder Morgan’s existing Trans Mountain line, the size of which the Houston-based company plans to nearly triple.

Cenovus is shipping more and more of its crude by rail, doubling volumes from 5,000 barrels per day in 2012 to 10,000 barrels this year.

Jim Prentice, a former federal cabinet minister who is now a senior executive at CIBC, has in the past spoken in favour of expanding Canada’s market access for both oil and natural gas.

“At this point, what Canada really needs are more pipelines to ship significant volumes,” Prentice said in an interview from Whistler.

When in government, Prentice handled the industry, environment and Indian affairs and northern development portfolios.

“Rail capacity can alleviate some of the pressure but the volumes that we’re talking about in terms of Canada’s increased oil production really demand pipeline capacity in the long term.”

The differentials have had a big impact on Alberta’s all-important oil revenues, with Finance Minister Doug Horner warning earlier this week that his March 7 budget will not be a “fun” one.

In a speech to a Calgary business audience, Horner pegged the effect of the discount on the Canadian economy at $27 billion a year, or $75 million a day.

Alberta has the third-largest proven crude reserves in the world, behind Saudi Arabia and Venezuela, he noted.

“What could possibly go wrong?” he asked.

“Well, the price of energy could go down. Alberta’s growing inability to access new markets with our product could give our oil producers some problems and Alberta’s resource revenues could take a dramatic and unexpected plunge. Or all these things could happen at the same time,” he said.

“It seems that we scored a hat trick. These are three of the biggest challenges the Alberta government is facing today. And we have our work cut out for us.”