Last week the Alberta government launched an ad campaign in support of the Trans Mountain pipeline expansion, featuring the claim that the pipeline’s delay is costing Canadians “$40 million every day.”
This week, in the first question period of the fall session of the House of Commons, Justin Trudeau said – not for the first time – that without Trans Mountain’s promised access to markets beyond the United States “we get a discount of about $15 billion every year.” Former Resources Minister Jim Carr has used the same $15 billion loss figure, and the claim has been repeated by some in the media.
Not coincidentally, multiplying Alberta’s $40 million a day by 365 days gets you Trudeau’s “about $15 billion every year.” This indicates that Alberta and the federal government are singing the praises of Trans Mountain expansion from the same songbook. To the detriment of informed public debate, the tunes in the songbook are more than a little off key.
The Alberta ad, taking up a full page in the Chronicle-Herald last Thursday, invited readers to click on https://keepcanadaworking.ca/ and tell the Prime Minister, the Resources Minister and the local MP that the government “should minimize any delay to the Trans Mountain Pipeline expansion.” The website also contains additional justifications for Trans Mountain expansion, including this:
Limited pipeline capacity can cause Canadian oil to be discounted by as much as $30 per barrel. The Trans Mountain expansion will help Canada command higher value for its resources.
Clicking on the source for this statement brings up a six-page “Commodity Note” published in February 2018 by the chief economist for Scotiabank. Entitled “Pipeline Approval Delays: the Costs of Inaction” the note claimed that continuation of the discount then prevailing “would shave $15.6 billion in revenue annually from the sector.” Let’s look more closely.
$15.6 figure transitory
The notion that a pipeline to the ocean is needed to rescue Alberta’s oil from the U.S. bargain basement has been challenged before. As I wrote last May, there is some well-founded skepticism about whether Trans Mountain will deliver significantly higher returns for oil sands production.
While that question remains a matter for speculation and debate, we are confronted in the meantime with a claim by pipeline advocates that because of delayed expansion of Trans Mountain, Canadian oil is right now being discounted to the tune of $40 million a day or $15 billion a year. Equivalent to about three per cent of Canada’s total exports, $15 billion ain’t chicken feed.
Vancouver economist Robyn Allan, whose articles in the Vancouver Sun have debunked much of the Scotiabank document, confirmed by calling around that the “Commodity Note” was indeed the source for the $15 billion cited by Trudeau in Ottawa, translated to $40 million a day by Premier Rachel Notley in Alberta.
The Scotiabank analysis starts with an estimate of the price differential between West Texas Intermediate (WTI), benchmark price for light sweet crude, and Western Canada Select (WCS), heavy crude that is mostly bitumen from the oil sands. Scotiabank notes a “natural” discount of about $13 a barrel for WCS, based on costs of transportation and refining the heavy crude. On top of that, there is an additional discount caused by “too few pipelines.”
Scotiabank applies this additional discount to 2.1 million barrels a day of WCS sold to U.S. refiners. A “shave” of $15.6 billion a year (or $42.7 million a day) would suggest a discount of ($42.7m/2.1mbbl) of a little over $20 a barrel, significant, but not the $30 per barrel from limited pipeline capacity claimed in the Alberta ad.
But that’s minor league spinning – the discount, while averaging $20 a barrel, may actually have gone as high as $30 at some point. A much bigger problem is contained in the last of the six bullet points that lead off the Scotiabank note – the expectation that “a shift from pipeline to oil-by-rail will mitigate some of this impact, reducing foregone revenues in 2018 to a still-high C$10.8 billion.”
So, it turns out that the Scotiabank note doesn’t say $15.6 billion a year (translated to $40 million a day). That was the annualized estimate of the discount existing in late 2017 and early 2018 because the Keystone pipeline was out of service following a spill. With a shift of some shipments to rail, the Scotiabank projection was for only $10.8 billion a year (translated to $30 million a day). Unless someone can come up with a new source for the $15 billion discount, Trudeau’s talking points and the Alberta ad copy are on very shaky ground.
As far as getting such a new source, there won’t be much help from the Alberta government’s own “economic dashboard” website. It shows that from January to the end of July this year the differential between WTI and WCS averaged $21.33. Subtracting the $13 natural discount (acknowledged in the Scotiabank piece) leaves a pipeline capacity discount of just over $8, not $20 or $30.
Discount application limited
Not only does the per-barrel discount appear to be inflated, it is likely being applied to too many barrels. Robyn Allan argues that the heavy oil discount ends up applying not to 2.1 million barrels a day, as calculated by Scotiabank, but to as little as 400,000 barrels a day. As she explained in a piece in the Vancouver Sun last March:
But Big Oil isn’t stupid. Scotiabank didn’t ask the obvious question: How much Canadian crude sells at a price subjected to the light to heavy differential? If it had, it would know it’s only about 10 per cent.
Suncor is one of Canada’s largest bitumen producers. CEO,Steve Williams recently said: “We have virtually no exposure to the light/heavy differential.” Canvassing Canadian Natural Resources Ltd., Cenovus, Imperial Oil, and Husky reveals similar information. Here’s why:
Canada produces about 4.2 million barrels a day of crude, including three million barrels a day of heavy oil, with bitumen representing nine out of every 10 barrels of heavy produced. Forty per cent of the bitumen produced is upgraded to Synthetic Crude Oil (SCO) in local facilities owned by oilsands producers. SCO has been selling at a premium to WTI, not a discount.
Another 15 per cent of heavy goes directly to domestic refineries for processing into petroleum products. A quick look at the pumps tells us Canadian refiners charge at retail as if they paid world prices based on North Sea Brent. No loss there.
A further 15 per cent of heavy is sold to integrated refinery operations in the U.S. Suncor delivers to its refinery in Colorado, Cenovus supplies its joint-venture facilities in Illinois and Texas, Husky delivers to three of its mid-west U.S. refineries, and Imperial directly to its parent’s (ExxonMobile) refineries.
About 15 per cent of Alberta’s heavy makes its way to the U.S. Gulf Coast. Suncor says these deliveries are not hit by a discount…
Spot market volatility protections are also imbedded in long-term supply contracts and there are hedging activities that oilsands players engage in, such as price discount swaps.
The structure of the oil sector reveals that relatively few barrels are vulnerable to the WTI-WCS differential — something closer to 400,000 barrels a day, or about 10 per cent of all Canadian oil produced…
Allan, an independent economist who has held executive positions with the Insurance Corp. of British Columbia and B.C. Central Credit Union seems to know a lot about the intricacies of oil shipments. If she is right, we are talking about 400,000 barrels a day facing a discount. And if the pattern reported by the Alberta government’s “economic dashboard” for the first seven months of 2018 persists, the pipeline capacity discount sits around $8.33 a barrel. Do the math and it adds up to $3.3 million a day (not $40 million) and $1.2 billion a year ( not $15-billion).
My estimates may well be too low, and some may argue that quibbling over cost figures is wrong when the prize is a pipeline that will liberate Canadian oil from the influence of those capricious America-firsters in Washington. Trudeau has conflated the push for Trans Mountain with the difficult NAFTA negotiations and Alberta’s ad sounds a similar refrain. “Until it’s built, Canada is forced to ship oil by more expensive, more environmentally damaging means – and to sell Canadian oil to America at a discount”.
Irony of ironies – 30 years after a federal election campaign that in Alberta and the west was about cementing a continental energy policy we are facing one in which Alberta is leading a charge to loosen American shackles on our oil sector.
But lest anyone think that Trans Mountain expansion will make much of a dent in American domination of Canada’s oil industry, here are a few more things to consider. At present, 98 per cent of Canada’s oil exports of 3.3 million barrels a day go to the U.S., and that includes exports through the existing Trans Mountain pipeline. In the unlikely event that every one of the additional 590,000 barrels that go through the proposed Trans Mountain expansion was sold to some other country, over 80 per cent of oil exports would still be going to the U.S.
And that’s assuming exports stay flat, which is not the plan. Unless we smarten up and change course, oil exports – almost entirely from the oil sands – are expected to increase to about five million barrels daily by 2035. Without (heaven forbid) another pipeline to the sea, Canada will be back to having to send 90 per cent of exports to the U.S. But by then Trump will be gone, and it may not matter so much.