Getting Slapped in the Face by a Pipeline: A Short Story

On October 3rd, 2017, oil prices closed at $49.98 / barrel.  Fast forward one full year, and prices have increased more than 50% to close over $76 / barrel.  It would seem this news would be positive for Alberta’s economy, but the stats don’t tell the full story.  First, those prices are for West Texas Intermediate (WTI), which is a low density oil priced in the United States.  The price that most Canadian oil producers rely on, however, is another index called Western Canadian Select (WCS).  Since WCS is a heavier grade of crude, it is more costly to produce and transport.  As a result of these additional costs, there has been a historical spread between the two indexes.  Often called the Heavy Crude Discount, this spread has worsened to the largest amount in 5 years.

It’s therefore more relevant to Alberta to show what has happened to the price of Western Canadian Select.  And it ain’t pretty.  While US oil prices increased 50% in the past year, Canadian oil prices decreased nearly 12%.  

Western Canadian Select prices started narrowing the gap in May, only to drop considerably in August.  For a quick refresher, the federal government agreed to purchase the Trans Mountain Pipeline in May and a federal court rejected it in August.  Stated another way, the price of WCS went up on good news, only to sink back even further with the bad news that followed.

The depressed price of WCS highlights a problem with limited solutions; Alberta is being penalized in the global energy markets because our oil is largely land-locked.  While there is an existing infrastructure of pipelines, the systems are old, inefficient and incapable of meeting current demand.  What’s even more concerning is the fact that every recent effort to get the product to market has been thwarted.   Energy East, which would have been a $12 billion project, was cancelled last October.  The Northern Gateway Pipeline, a $7.9 billion project was also cancelled, even though it had large support within Indigenous communities.   Investors finally had reason to believe the situation would improve once the feds agreed to purchase Trans Mountain, but now that has been delayed indefinitely.  With no timetable to get it back on track, there’s a Bill before the Senate that intends to put a moratorium on tanker traffic (which inexplicably was tabled by the same government that now owns the pipeline dependent on increased tanker traffic).

All this has led up to Alberta taking a huge slap in the face.  This week, the BC government approved a massive $40 billion LNG project in Kitimat.  Included in the project is a pipeline that will extend from Dawson Creek to the coast of BC.  Yes, John Horgan, the premier of BC who holds power by way of an alliance with the Green Party, and who has been vehemently opposed to the Trans Mountain pipeline, just championed a pipeline that goes straight through BC.

All this leads us to three points:

1.  If oil can’t find a more efficient way to market than by rail we’re going to continue seeing a large spread in the Heavy Crude Discount.  Edmonton’s commercial real estate market will be impacted alongside this;
2.  There might be a solution for Alberta’s problem.  Read this article and support Calvin Helin and Eagle Spirit pipeline;
3.  If the Green Party continues to prop up John Horgan, it’s clear that no political party in BC actually cares about the environment.  It’s not about the killer whales.  It’s about the dollar bills.

We’ll save the last word for BC’s premier:

“I can’t stop smiling.”
– John Horgan, October 2, 2018

 

Our Team

Chad Griffiths

Chad Griffiths

Partner, SIOR, CCIM

Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.

Ryan Brown

Ryan Brown

Partner, BCom, SIOR

Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.

Darcie Bouteiller

Darcie Bouteiller

Associate

Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.

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