In the austere language and statistics of formal economics, the United States Department of Energy has posted a vivid message to Canadian natural gas and oil exporters.
From the vantage point of Alberta as Canada's fossil fuel mainstay, the new 2013 edition of the annual energy outlook (AEO) from the department's Energy Information Administration (EIA) shouts a warning (see related story). The Calgary-based gas and oil industry can no longer take the United States for granted as its seller's growth market.
Trends sketched by the U.S. forecast are already being felt north of the international border. Alberta Finance Minister Doug Horner vented frustration over the changing North American energy scene when he released second quarter statements on the provincial budget year that runs April 1-Oct. 31.
The Alberta treasury relies on gas and oil production royalties and drilling rights sales for up to 40% of its revenues. For the first six months of the 2012-2013 fiscal year alone the C$4.1 billion provincial share of resource industry income was C$1.4 billion or 25% below the C$5.5 billion target that the Conservative government set last spring.
"The biggest factor affecting our resource revenue right now is the lack of market access for our oil," Horner said in his financial update statement. "We have one customer and one means to ship our product to them.
"On the other hand, our customer has many different suppliers to choose from. This is not a good situation to be in, and it's costing us dearly. The differential is about C$29/bbl right now -- multiply that by 2.5 million b/d" -- the current record volume of exports to the U.S. -- "and the result is a tremendous impact to Alberta's finances." The "differential" is a discount off international prices that is caused by a combination of limited pipeline capacity to take Alberta exports beyond their traditional destinations in the Midwest and central United States plus growth in competitive U.S. production recorded by the EIA.
From the Alberta perspective, the agency's current forecast stands out as confirmation that the trouble with oil exports is not temporary, thanks to the U.S. industry's success at transplanting drilling and hydraulic fracturing technology, developed to tap natural gas locked in shale, over to liquid hydrocarbons previously sealed in "tight" geological formations.
The results of the advancing technology show vividly on the EIA's charts. The agency projects a steep decline in the share of the U.S. oil market that will belong to imports compared to their 2006 peak of 60% of national consumption or 12 million b/d out of the 20 million b/d total. By 2019, then over the next two decades, EIA foresees imports dropping down into a range of 34-37% of flat U.S. consumption of about 19 million b/d.
From the Alberta exporters'-eye view the outlook means they will be competing to place steadily growing production, chiefly from the oilsands, on a U.S. market for imports that is cut almost in half down into a range of 6.5-7.0 million b/d.
The writing on the wall for Alberta oil points to a repetition of the sorrow that has been experienced in natural gas, the former cash cow of Canada's mainstay fossil fuel supply jurisdiction. The record has become too painful for provincial finance ministers or industry leaders even to talk about.
The gas bottom line in Horner's budget statement, which he passed over in silence, shows 2012-2013 first-half royalties dropping to C$288 million -- down C$349 million or 55% from the C$637 million target set last spring. If prices, sales volumes and royalties continue their sorry first-half performance for the rest of the current provincial fiscal year, the treasury will only collect C$575-600 million on gas for all of 2012-2013 -- or as little as 7% of the record annual total, about C$8.4 billion, that the Alberta government netted from gas eight years ago.
The provincial resource revenues are a barometer of industry fortunes that exaggerates overall trends because the royalty system amplifies swings in the value of gas and oil. As percentage shares of total production income, royalty rates rise and fall on a sliding scale driven by prices under long-standing policy of sheltering private long-range investment, employment and supply development against volatile markets by making the province absorb their worst short-term effects.
The 41-year-old Conservative regime in Alberta shows no signs of attempting to change the system by repeating an ill-fated 2007-2008 effort to overhaul the royalty rules in the treasury's favor, over vehement industry protests.
But the experience recorded by Horner's 2012-2013 first-half budget statement has lit a fire under provincial government support for international export pipeline and tanker terminal projects that aim to send oilsands and liquefied natural gas overseas, to Asia or anywhere else the industry can find new customers beyond increasingly crowded traditional markets in the United States.
The desire to break out of North America is at the heart of a Canadian federal-provincial initiative, started by Alberta Premier Alison Redford, to craft a "national energy strategy" that adapts regulatory and political policies across the country to the potential for Alberta-based growth in supply capacity.
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