The argument goes like this: we need a pipeline to tidewater because it will unlock new markets overseas (usually Asia) where we can get a better price for Canadian oil than we would without those pipelines.
A number of years ago this argument may have been true, especially when you ignore the economic costs.
But we live in a different world today. Oil prices have plummeted and are forecasted to stay low for some time. The U.S. is now a major producer of oil that is cheaper than that from the oil sands, and it recently lifted its 40-year ban on exporting oil. In addition, solar and wind power are now "crushing" fossil fuels, with investment nearly double that of oil and coal combined in 2015.
All of these factors mean that the economic case for getting oil to tidewater by pipeline in Canada has evaporated. And people are starting to notice. Ross Belot, a retired senior manager with one of Canada's largest energy companies has written about the business case for pipelines falling apart. Just last week, he wrote that Alberta could build a dozen pipelines and it wouldn't help. Here's why:
Indeed, for a period in 2013 to 2014, there was a bottleneck in the U.S. Midwest to the Gulf Coast and WCS was trading at a deeper discount -- an average of $24 a barrel, with daily peaks that surpassed $40. However, since that time, enough new pipeline capacity has come online in the U.S. to alleviate the bottleneck, and "effectively eliminate the market-driven portion of the price differential."
In the last year, the WCS discount has shrunk to the $12 to $14 range to account for the unavoidable quality and geographic considerations discussed above.
In fact, there is now surplus capacity that, according to the International Energy Agency, would allow for additional Canadian exports to Asia without the construction of either Kinder Morgan's Trans Mountain expansion, Enbridge's Northern Gateway or TransCanada's Energy East pipeline. Instead, they could follow existing routes including pipelines to Oklahoma and the existing Trans Mountain line to access Asian and OECD markets.
But accessing those markets would not necessarily get Canadian producers a better price. In addition to paying the transportation costs, there would be additional costs of shipping the crude to Asia and elsewhere.
The Oil Change International brief concludes that "if sent to Europe or Asia, tar sands crude would fetch notably lower prices than in the U.S." It reaches this conclusion by comparing the prices achieved by a similar heavy sour crude benchmark, Mexican Maya, which over the past 15 months was priced, "on average $3.70 less in Europe than in the U.S. Gulf Coast and $8.73 less in the 'Far East.'"
Accessing Asian and European markets doesn't address the quality and geography discounts that WCS currently faces. In fact, those discounts may be even steeper in Europe and Asia, which are a lot farther from Canada than Oklahoma. One of the impacts of the U.S. lifting its export ban was that the WTI benchmark and European Brent Crude benchmark became much more aligned, meaning that the "world price" for oil (Brent) is more or less the same as WTI. This supports the conclusion that Canada is already getting the best price for its oil with current pipeline capacity.
more
Dilbit Dogma? The Myth of Tidewater Access | The Tyee
A number of years ago this argument may have been true, especially when you ignore the economic costs.
But we live in a different world today. Oil prices have plummeted and are forecasted to stay low for some time. The U.S. is now a major producer of oil that is cheaper than that from the oil sands, and it recently lifted its 40-year ban on exporting oil. In addition, solar and wind power are now "crushing" fossil fuels, with investment nearly double that of oil and coal combined in 2015.
All of these factors mean that the economic case for getting oil to tidewater by pipeline in Canada has evaporated. And people are starting to notice. Ross Belot, a retired senior manager with one of Canada's largest energy companies has written about the business case for pipelines falling apart. Just last week, he wrote that Alberta could build a dozen pipelines and it wouldn't help. Here's why:
Indeed, for a period in 2013 to 2014, there was a bottleneck in the U.S. Midwest to the Gulf Coast and WCS was trading at a deeper discount -- an average of $24 a barrel, with daily peaks that surpassed $40. However, since that time, enough new pipeline capacity has come online in the U.S. to alleviate the bottleneck, and "effectively eliminate the market-driven portion of the price differential."
In the last year, the WCS discount has shrunk to the $12 to $14 range to account for the unavoidable quality and geographic considerations discussed above.
In fact, there is now surplus capacity that, according to the International Energy Agency, would allow for additional Canadian exports to Asia without the construction of either Kinder Morgan's Trans Mountain expansion, Enbridge's Northern Gateway or TransCanada's Energy East pipeline. Instead, they could follow existing routes including pipelines to Oklahoma and the existing Trans Mountain line to access Asian and OECD markets.
But accessing those markets would not necessarily get Canadian producers a better price. In addition to paying the transportation costs, there would be additional costs of shipping the crude to Asia and elsewhere.
The Oil Change International brief concludes that "if sent to Europe or Asia, tar sands crude would fetch notably lower prices than in the U.S." It reaches this conclusion by comparing the prices achieved by a similar heavy sour crude benchmark, Mexican Maya, which over the past 15 months was priced, "on average $3.70 less in Europe than in the U.S. Gulf Coast and $8.73 less in the 'Far East.'"
Accessing Asian and European markets doesn't address the quality and geography discounts that WCS currently faces. In fact, those discounts may be even steeper in Europe and Asia, which are a lot farther from Canada than Oklahoma. One of the impacts of the U.S. lifting its export ban was that the WTI benchmark and European Brent Crude benchmark became much more aligned, meaning that the "world price" for oil (Brent) is more or less the same as WTI. This supports the conclusion that Canada is already getting the best price for its oil with current pipeline capacity.
more
Dilbit Dogma? The Myth of Tidewater Access | The Tyee