The oil industry might be overestimating the financial gain from Trans Mountain

Canadian crude — extracted from Alberta’s controversial oil sands patch — is the cheapest oil in the world. It is a heavy blend, composed mostly of bitumen, and has very little use if isn’t refined. As of Thursday morning, this blend of Alberta oil, also known as Western Canadian Select (WSC), was trading at $49.93 per barrel, markedly lower than West Texas Intermediate (WTI), the lighter, sweeter blend of crude oil used as a benchmark in oil pricing, which was hovering around the $67 mark.

That 25 percent price differential is at the heart of the Trans Mountain pipeline feud that has been the centrepiece of Canadian politics for the last two-odd months.

On May 31, Kinder Morgan, Trans Mountain’s pipeline builder will make a final decision on whether it’s even financially viable to proceed with the project, given the growing number of protests by environmentalists and First Nations, as well as the politicking between B.C and Alberta, who are respectively in favour, and opposed to the pipeline.

Prime Minister Justin Trudeau has promised that regardless of Kinder Morgan’s decision, pipeline construction will proceed, even if it means the federal government and the government of Alberta will have to fund it.

For Canadian oil producers, employing any means necessary to get the pipeline built is simply vital — they have long argued that WCS sells for so little because it only has one market: America. If the Trans Mountain pipeline expansion is built, the argument goes, more Alberta crude would be able to reach oil tankers on the coast of Vancouver, and be shipped off to the lucrative markets of China and India, the biggest drivers of non-OECD oil demand. Higher demand, higher prices, the theory goes.

But on the opposite end of the spectrum are those who say the price argument is simply not sound enough to justify potential environmental damage and trampling all over First Nation land title rights. Even if the Trans Mountain expansion is built, what guarantee do oil producers have that Alberta crude oil will actually be bought by Asian countries, who in fact already have a large supply of lighter oil coming from places like Malaysia, Nigeria and the Middle East?

“We need to be able to sell our oil to more than just one customer”

“We’re not moving our oil in an optimum way and we’re not moving it fast enough,” says Michael Burt, Director of Industrial Economic Trends at The Conference Board of Canada, a right-of-centre, Ottawa-based think tank. “The reason why Canadian oil has been trading at a discount is because there are supply bottlenecks with the way in which we move oil now. If you had access to tidewater, you could, in theory, ship it anywhere in the world.”

There are three big pipeline projects that have either been greenlit or are currently under construction — the Trans Mountain twinning line, Enbridge’s Line 3 replacement pipeline that will run from Alberta to Wisconsin, and Keystone XL, which will run from Alberta to Nebraska.

Barring any kind of delay, the earliest date that any of these projects will be complete is late 2019. The latter two pipelines will indeed increase the amount of oil flowing out of the oil sands, but the reason why oil producers are adamant that Trans Mountain be expanded is because both Line 3 and Keystone XL do not solve the problem of tidewater access, and subsequently access to Asian markets.

Apart from pipelines, crude oil can be transported through rail — in fact, volumes of crude moving by rail have already gone up in the last few years, simply because pipelines are reaching their maximum capacity. But moving oil by rail still does not grant oil producers coastal access. (There was apparently an exception to this: in March, Bloomberg News reported that U.S. Census data recorded a cargo of heavy crude being shipped to China from a train terminal in Portland, Oregon, carrying almost 245,000 barrels of crude allegedly from the oil sands.)

“We need market optionality,” emphasizes Burt. “We need to be able to sell our oil to more than just one customer. It’s not necessarily cost effective to be transporting oil to just one market, when our pipelines are at capacity. One leak, and we’ll see the price dip even more.”

But the global oil marketplace is complicated. There are supply chains, trading agreements and infrastructure limitations that weigh in to how oil is sold, to whom, and for how much.

“There’s no appetite in Asia for heavy oil”

“If you look at what it takes to refine our oil, its the U.S. Gulf Coast that has the largest concentration of refineries designed to process heavy oil, not Asia,” explains David Hughes, an earth scientist based in B.C. who has studied the North American oil sector for decades. Hughes is affiliated with the left-leaning Canadian Centre for Policy Alternatives, and in 2017, wrote a comprehensive report evaluating whether Trans Mountain will really boost Canadian oil prices.

Refining heavy Canadian crude oil requires “coker” units that that cost billions to build. The market demand for Canadian oil is essentially tied to whether or not a country has the ability or the political and financial will to invest in refinery units, ones that have been already operating for years in the U.S. Gulf Coast.

“There’s no appetite in Asia for heavy oil,” Eoin Finn, former partner at KPMG, told DeSmog Canada in a recent interview. “They don’t have the refineries to refine it. And the world is swimming in light sweet crude that’s cheaper and easier to refine, and altogether more plentiful.”

“It's a bit of a chicken and egg scenario. You need to build that pipeline before people are going to spend billions of dollars configuring their refineries to take your crude,” Jackie Forrest of ARC Energy Research told the CBC in a 2017 interview.

In fact, Hughes says, not only do countries like China and India do not yet have the capacity to refine heavy oil — which calls into question why they would even want to buy heavy crude from Canada to begin with — Canadian crude oil sold in Asia might actually command a lower price than in the U.S due to higher transportations costs.

“The US relies on imports for 46 per cent of its crude oil requirements, and production from major heavy oil suppliers in Mexico and Venezuela is falling. The US market has the capacity to absorb significantly more Canadian oil,” writes Hughes in the 2017 report.

In other words, why focus on selling at a hypothetical price that you might not really get, instead of putting all your eggs in the American basket?

That would be foolish, says Burt, who presents the example of Mexican Mayan oil, also very heavy crude oil that in fact trades at roughly $7 more than Western Canadian Select. “They are comparable strains with different prices because Mexican Mayan just does not have supply constraints getting to the world market that our oil has.”

That price difference, claims Hughes, has actually nothing to do with the fact that Mayan oil is sold in more markets — it’s really because WCS, unlike Mayan oil, has an additional, more expensive leg of travel from Hardisty, Alberta to Houston, Texas to be refined.

“This vaporization of so much Canadian wealth — is offensive”

A report published by Scotiabank earlier this year estimated that the price difference or “discount” as it is more commonly known, between WCS and WTI, coupled with the lack of pipeline capacity could cost the Canadian economy $15.6 billion this year or 0.75 percent of Canada’s GDP. A separate analysis compiled by Bloomberg concluded that if there aren’t additional pipelines to free up more oil to move, Canada could lose out on a whopping $19 billion.

“This dissipation of resources, this waste of a great national resource — and this vaporization of so much Canadian wealth — is offensive to me,” Frank McKenna, Canada’s former ambassador to the United States told the Calgary Herald back in February.

While it is important to note that McKenna is on the board of one of Canada’s largest oil producers, Canadian National Resources Ltd., his characterization of the Trans Mountain pipeline delay as a “transfer of wealth from Alberta and Canada to U.S. refiners and U.S. consumers,” is an argument that pro-pipeliners have been using for decades now. And indeed, they are factually correct — it is America that ultimately buys our oil, refines it, and sells it.

But Hughes maintains his stance that Canadian oil sold in the U.S. not being unfairly discounted. And more importantly, he says, as long as Alberta crude oil remains cheap, it is unlikely that new oil fields will be developed — which is the ultimate win for environmentalists.

Follow Vanmala on Twitter