Varcoe: Trans Mountain expansion's call for oil 'good news' for province's budget surplus, says premier

The expanded Trans Mountain pipeline is forecast to shrink the price differential between West Texas Intermediate and Western Canadian Select, which would bolster energy revenues to Alberta.

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The province’s target of keeping the budget in the black got a shot in the arm Friday with news the long-delayed Trans Mountain expansion project will soon start filling with Alberta oil.

One day after the UCP government released a new budget with a narrow $367-million surplus, oilsands producer MEG Energy indicated shippers were given notice to begin putting oil into the Trans Mountain expansion (TMX) development.

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The project is designed to almost triple the capacity of the existing Trans Mountain pipeline, which moves oil from Alberta to the B.C. coast.

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

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

“TMX did issue a call for line-fill yesterday. As a matter of fact, they are looking for 2.1 million barrels in April and another 2.1 million barrels in May. So, we see this as incredibly positive,” Evans said.

It’s “good news for not only us but really everybody in the heavy oil business.”

Include the Alberta treasury in that mix.

The pipeline expansion project has been more than a decade in the making, with the final price tag expected to top $31 billion.

It will help the oilsands sector get more barrels into export markets — including Asia — and allow domestic producers to increase output without overwhelming the existing transportation system.

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

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

“TMX matters because it will determine, in part, the prices that can be earned by Alberta producers,” said economist Marc Desormeaux with Desjardins.

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

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

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Due to surging oilsands output and insufficient pipeline capacity coming out of Western Canada over the past decade, the price discount has soared at times, exceeding US$50 a barrel in 2018.

That prompted 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 look like over the coming years.”

The premier hailed Evans’ comments, noting she was crossing her fingers the project would be online by the third quarter and increase Alberta’s export capacity.

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

“If we’re now seeing an increase in our production by 600,000 barrels per day, you can just do the math on that, it’s about $75 a barrel . . . we get about one-third of that in royalties. That’s a pretty significant number.”

Alberta Premier Danielle Smith
Alberta Premier Danielle Smith speaks during a press 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, did not comment Friday on the matter.

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

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

Earlier this week, the Crown corporation announced it had made progress and was working toward anticipated commercial operations beginning during the second quarter.

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

Analyst Phil Skolnick of Eight Capital said the startup of TMX should lower the price differential for WCS and remove the risks of it widening significantly as Canadian oil production continues to set records.

“We are getting close, if we’re not already there, of basically having supply outpacing pipeline capacity out of Western Canada for oil,” he said.

“For Canadian oil in general, it provides room for growth.”

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

Adam Hardi, a vice-president with Moody’s Investors Service credit rating agency, called that forecast “relatively conservative,” noting it’s below current oil prices of almost $80 a barrel.

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

“It is certainly a big benefit to the province,” said Pedro Antunes, chief economist with the Conference Board of Canada.

“If we hadn’t seen the (green) light on it coming into production, that would be a downside risk.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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