Alberta oil selling at 50% discount to world price…

…which explains why the Canadian government is Hell-and-High-Water-bent on building a pipeline, any pipeline, anywhere.

First, the stats

Over the past few months, new stories have noted that Canada’s oil sector isn’t getting full price for its heavy oil — in large part because American pipelines are well-supplied with newly-flowing tight oil (“shale oil”) from North Dakota.

As a side note, I should clarify that heavy oil — termed Western Canada Select — is a somewhat-upgraded form of bitumen.  Removing the sulfur and upgrading the oil a bit more, would turn it into the “light sweet crude” used for the world’s billion automobiles.) 

Western Canada Select is more refined, and more value-added, than the diluted bitumen that Enbridge has proposed to ship to the coast of British Columbia.  The Kalamazoo River spill in 2010 that added $750+ million in cleanup costs to the local economy, involved diluted bitumen (and Enbridge).

The discount on Alberta heavy oil is measured relative to the North American benchmark price, which is for West Texas Intermediate (WTI) crude.  And said discount has been growing faster than a pimple before prom reaching a jaw-dropping $40 per barrel this week.  [2013-01-31: historically the discount has been about $20 per barrel  - Matthew]  WTI sells for $96 per barrel, and Alberta heavy sells for … $56.

One barrel of oil is about 160 Litres, so this means that Alberta is giving up 25 cents per litre on its oil exports.  By way of comparison, the current WTI price works out to a total price of only 60 cents per litre.  We’re talking some serious discounting, here.

Western Canada Select vs. Brent crude

Of course, the world benchmark price is Brent crude, traded in London.  And for various reasons, West Texas Intermediate Crude trades at a discount to it!  I’ve taken a snapshot of the Bloomberg Energy page below; you can see that the Brent price is $112 per barrel.

Bloomberg Energy Jan 18, 2013

We see that the price of Brent crude ($112/bbl) is exactly twice as high as the price we established for Alberta heavy ($56/bbl).  Alberta heavy crude is selling for half-off — it’s like a BOGO (buy one, get one) sale!

Oh, but it gets worse (for Alberta)

I’ve previously mused about the plausibility of US oil demand falling in the coming decade.  Which means Alberta will need to find other markets.  It will probably benefit from the building of an east-west pipeline across Canada (finally!) but wouldn’t be enough added consumption to justify expanding bitumen projects.  That would mean leaner profits for Calgary head offices, less construction work in the oil patch, and lower royalties for the Alberta government.  (Tales abound of Newfoundlanders leaving Alberta in droves, to ply their trade in their home province’s newly ascendant offshore oil sector.)

It’s a far cry from the Bow River bluster of five to ten years ago, when Alberta seemed assured of sustained, stupendous wealth — and provincial surpluses which would dwarf those of the Federal government.  (Despite the highest average yearly oil price in history, the province ran a deficit in 2012!  In basic terms, the oil sector has effected a regulatory capture of Alberta’s government, which allows them to export raw goods and perform the value-added refining elsewhere.)

The oil patch’s hopes now seem pinned on one of a few pipelines, all of which face strong opposition, and none of which can soak up the new production to which Alberta aspires.

a)  Keystone XL, by which Alberta heavy oil could be upgraded further in the US, and then exported.  Opposed by the worldwide 350.org movement.  (600,000 barrels per day)

b)  Enbridge’s Northern Gateway, by which the oil could reach the Pacific Coast.  Given the dozens of First Nations standing in the way, who have recourse to the courts and have sometimes reported dismissive treatment at the hands of Enbridge representatives, this seems unlikely.   (500,000 barrels per day)

c)  Kinder Morgan’s Trans Mountain Pipeline expansion, by which the oil would be exported via Vancouver — birthplace of Greenpeace and the David Suzuki Foundation.  (Added capacity: 600,000 barrels per day.)

Pipe dreams

CAPP, the Canadian Association of Petroleum Producers, recently projected that Alberta would produce 3.2 million barrels per day of heavy oil, by 2020.  This represents an increase of 1.6 million barrels per day.  To accommodate this increase, all three of the above pipelines would have to be approved, up and running!!  Given the opposition each pipeline will face, a Beatles reunion would seem more likely…

(Yes, Alberta could of course use a *lot* of railcars, as they’re doing in the Dakotas right now.  This is doable, but more expensive — and would again cause Alberta’s oil to sell at a discount, to reflect the added costs of rail transport.)

To sum up, it doesn’t look like Alberta will enjoy another run of euphoric boom years, for some time to come.  Their product is currently selling at a deep discount due to a surge in production of US tight oil.  Meanwhile, US oil consumption is dropping (thanks largely to more-efficient vehicles) and all three pipelines face opposition.  (A Vancouver paper recently noted that opposition to the Northern Gateway pipeline in rural British Columbia ran so high, it could prevent the Prime Minister from winning a majority in the next election.)  Industry shows no signs of wanting to locally refining the product further, meaning the province is locked out of adding further value, winning higher prices.  And perhaps most fearfully of all, the following words from the head of AIMCo, the Alberta Investment Management Company:

“The notion that oil is going to become more expensive because as Asia and India need more energy there’s going to be a demand-supply imbalance, well, it may not be as much of an imbalance as everybody thought it was.”

The bitumen barons’ triumphalism from roughly 2004 to 2008 was predicated on the belief that a rising tide of Asian oil demand would lift Alberta above its provincial peers.  If, maybe, China and India won’t need as much as everyone thought … the ebbing tide could leave them beached.  On the upside, its residents’ expertise with heavy equipment and drilling could help Alberta pivot into a wind turbine / geothermal powerhouse, if it chose to do so.

- – - – - -

[note: while environmental considerations -- and generally, the desire not to befoul one's nest -- are also a factor in the future of oil production, I side-stepped the topic altogether, as the above factors are formidable enough on their own.]

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Comments

  • TedWa  On January 19, 2013 at 5:34 am

    They should build a refinery in Canada. There are also existing refineries along the border they can update, improve and use.

    • EclecticLip  On January 19, 2013 at 2:11 pm

      I fully agree. To its credit, the Alberta government does seem to be looking into this. But goodness, it baffles and befuddles me that it’s taken them so long to think of this!

      I’m pretty sure it was the late Peter Lougheed — a Progressive Conservative recently voted Canada’s best Premier, ever — who maintained that Alberta should draw as much benefit and value-add as possible from its bitumen resources, and steward the resulting wealth for future Albertans’ benefit. While successive governments have all been Progressive Conservative, none of them seem to’ve followed through on his vision. :(

  • Anon  On January 19, 2013 at 7:25 am

    Even if the oil is piped to eastern Canada, Alberta/oil companies will be demanding that Easterners pay the high international Brent price or else they can “freeze in the dark” or something like that: http://www.ipolitics.ca/2012/11/17/letting-the-eastern-bastards-freeze-a-history/. I do not expect Easterners to pay the discounted price that Alberta has been selling to the U.S. Wasn’t that what the fight over Trudeau’s NEP about?

    I can understand Albertans voting for Harper because he looks after their interests. What I cannot understand is the ROC, and especially Ontarians, voting to sc*** themselves first by paying for their imported oil (which comprises 30-40% of its total consumption, in the case of Ontario) at Brent prices and then subsidizing (through their federal taxes) Albertan oil to sell to the U.S. at a 50% discounted rate. Are some voters stupid or what? You betcha they are.

    • EclecticLip  On January 19, 2013 at 2:18 pm

      Yes, Canada’s energy policy confuses me.
      Or, rather, Canada’s utter lack of an energy policy confuses me. ;)

      To be fair, there didn’t used to be much difference between West Texas Intermediate and Brent; from what I remember, that gap has only really opened up in the last couple years.

      And yes, this situation certainly won’t help with our traditional regional rivalries. What’s the expression, again? “You can’t choose family?” :)

  • Alex  On January 21, 2013 at 5:25 am

    Well, it didn’t make sense to build refineries in Canada until recently*, and if a big company really wanted to integrate, they would go buy a refinery in the States. So a company like Suncor would have been indifferent to large spreads**, since whatever they lost on WCS they would make up in crack spreads. Canada, of couse, isn’t indifferent to the large spreads, but then the question is, how to encourage companies to build refineries ?

    * due to lack of pipeline capability
    ** if you want to be indifferent to WCS/WTI spreads or want to bet that this discount will go on for the next few year, go buy shares of US refinery companies that take WCS feedstock

    • EclecticLip  On January 21, 2013 at 9:20 am

      Hi Alex, it’s a good point to distinguish that:
      a) vertically-integrated companies with refinery capacity in the US (or overseas) wouldn’t lose out from the WCS/WTI/Brent spreads, but
      b) Alberta would.

      From memory (which may of course be faulty) the US has spare refining capacity — even with recent increases in production, they’re way down from their 1970′s peak. If this is true, there’d be little incentive for companies to build new refineries in Canada. (But again, very BIG incentive for Alberta to convince them to.)

      Suncor probably isn’t a good example, as they apparently do a fair bit of refining, as Jeff Rubin points out here. Admittedly, Rubin has been somewhat wrong on his peak oil calls. Haven’t we all… ;)

  • Alex  On January 21, 2013 at 4:38 pm

    Suncor is (relatively) indifferent to the spreads, not so for Canadian Natural Resources. My hand is hovering over the short button, so to speak … just ’cause we were wrong in the past, doesn’t mean we’ll be wrong in the future :).

    Not sure about refining capacity, although it’s not going to be easy to convince companies to build them. Tax breaks for rich oil companies … even that’s not going to fly in Alberta. All in all, it’s not a bad thing for the environment, since the lack of pipelines will slow down carbon growth.

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