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Claims that landlocked oil costing Canada billions in revenue are ‘bogus’, economists say

Claims that landlocked oil costing Canada billions in revenue are ‘bogus’, economists say

William Marsden, Postmedia News | 13/06/03 | Last Updated: 13/06/03 8:29 AM ET


Is there any truth in the “double discount” on Canada's oil? Energy economists say that the situation is not nearly as cut and dry as the politicians pretend.

WASHINGTON – Politicians call it the “double discount” and it’s supposed to be costing Canada billions of dollars in lost oil revenues.

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Last December, Natural Resources Minister Joe Oliver told a New Brunswick audience Canada was losing “$50 million every single day —$18 to $19 billion every year.”

A month later, Doug Horner, Alberta’s finance minister, raised the figure to about $100 million a day in a speech to a Calgary audience. “Right now, Alberta’s bitumen is fetching more than $40 per barrel less than oil in Mexico or Texas,” he told a Calgary audience.  “Some of our oil is fetching about $50 less than oil from the Middle East.”

Many Canadian politicians have invoked the argument that because western oil is landlocked it’s not fetching international prices and therefore is being sold at a discount. If Canada could build more pipelines such as Keystone XL or the proposed Northern Gateway through British Columbia, it would reach tidewater ports where it would attract world prices, the so-called Brent and West Texas Intermediate prices.

The second part of the discount comes from backlogs at U.S. pipeline terminals that can result in lower prices for some Canadian heavy crude oil.

But is there any truth in the “double discount”?

Energy economists say that the situation is not nearly as cut and dry as the politicians pretend. Some call the claim “bogus.” World prices are based primarily on quality and so Canada’s bitumen, which has the lowest quality of the heavy oils, naturally fetches lower prices. Sending the oil sands bitumen to Gulf Coast refineries is not going to change that fact, they note.

“It just doesn’t make any sense,” Michal Moore, an energy economist at University of Calgary, said of the discount argument. “Anything that does not meet that quality standard is going to trade at a discount relative to Brent.  All that discount means is that any refinery owner is going to pay less for something they have to spend more time and energy to upgrade. That’s all it means.”

Warren Mabee, director of the Institute for Energy and Environmental policy at Queens University, said the discount claim “is kind of bogus” If only because it is impossible to predict future prices.

“Unless you are delivering the highest quality crude, Brent Crude or West Texas Intermediate, out into that international market place, you are not going to be getting the highest price that is out there,” he said.

He said there is some discount attached to Canadian heavy oil when there are pipeline backups, but these tend to rectify over time.

Moore noted that Canada already tests international markets when it pipes thousands of barrels of bitumen daily to the Gulf Coast through existing pipelines. There is no indication this oil is attracting higher prices because it is reaching tidal waters, he said.

B.C. Energy economist Robyn Allan, who recently wrote a report on the pricing of Canadian oil, said “the discount has been used by the federal and provincial governments to shadow out the fact that by shipping raw bitumen to U.S. refineries, Canada is also shipping jobs.”

So where did Oliver and Horner get their figures from?

Christopher McCluskey, who is Oliver’s media aide, said the minister took his $50-million figure from a CIBC report of March 2012 that coined the phrase “double discount” and mentioned the $50-million-a-day figure.

It’s not clear from the report how the $50-million figure was calculated. But an analysis of crude oil prices shows that at close of Feb. 10, 2012, the price differential between West Texas Intermediate (WTI), a U.S. international bench mark, and Synthetic Crude Oil (SCO), which is a light crude upgraded from oil sands bitumen, was $23.04 a barrel. This substantial differential works out to about $50 million a day as a discount.  (A price comparison of WTI to SCO is significant because the quality is similar.)

In his report, CIBC analyst Andrew Potter cautioned that this price differential would not last because pipeline bottlenecks and refinery problems would ease and the overall vagaries of the oil market would change the pricing dynamics.

Indeed, within a week that differential was closing. By Feb. 15, 2012, the price differential was only one dollar, which means the $50-million discount claimed six months later by Oliver, was now only about $2.5 million. By August 2012, SCO was selling above WTI prices and continued to do so through to November when WTI vaulted back into the lead. But by the end of February 2013 SCO was once again surging ahead of WTI. So the discount that Horner claimed in January had reached more than $100 million a day (in fact the WTI-SCO differential on the day of his speech was only $1.74 a barrel, producing a discount of at best $4.4 million) had not only disappeared but was now a premium. Canada was selling its synthetic crude at more than $6 a barrel above the WTI world price. As of May 30, the differential was 32 cents.

After Postmedia questioned McCluskey about the use of the CIBC report, he replied on behalf of Oliver that the government is in fact using an average annual price differential between Brent and WTI prices that implies a $45-million-a-day discount on Canadian crude.

But Moore said this is not a logical comparison because Brent is a better quality sweet crude than WTI and therefore refineries are willing to pay more for it. He added that it is “just crackers” and “not realistic” to think that Brent-WTI pricing can be applied to lower quality Canadian heavy crude.

“The most desirable mix on the block is the Brent,” he said. “So anything that does not meet that quality standard is going to trade at a discount relative to Brent.  All that discount means is that any refinery owner is going to pay less for something they have to spend more time and energy to upgrade. That’s all it means.”

Moore also said it is unlikely that oil sands bitumen would find a market in refineries outside the United States. He said no producer would pay the extra shipping costs of sending the oil to, say, Europe if he is already getting the best price in Texas.

“I mean I have heard this insane argument that we would take a barrel of Western Canadian Select (a diluted bitumen from the oil sands), send it to Port Arthur, Texas, put it on a ship and sent it somewhere else like to Europe,” Moore said. “Why would you do that? That’s just nuts.”

continue reading source:  http://business.financialpost.com/2013/06/03/canada-oil-price-discount/

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