Tuesday, August 21, 2012

The cost to Canada of not enough ways to get oil to the market

When the price of oil is quoted each day in the news it is either one of two major benchmarks, Brent or WTI(West Texas Intermediate).   In Canada these prices are misleading because this is not the price oil from Canada fetches.   There are benchmarks for oil from Canada.

In Canada we have several from Newfoundland and a number for the west, the two I want to highlight are:

  • Syncrude Sweet Blend - a medium oil that is low in sulfur
  • WCS(Western Canada Select) - a heavy oil that is high in sulfur

The Syncrude Sweet Blend fob (free of bruden) at Edmonton has a price that is normally a bit lower than the price for WTI fob Cushing Oklahoma.   The price of oil at Cushing has been lower than the Brent price for the last two years with the difference becoming bigger over time and the differential being $12 to $22 per barrel in recent months.   This is in large part due to the excess of supply over demand at Cushing and the barriers to moving more oil from there.

WCS has a significant price differential with WTI, it has been $10 to $20 lower than WTI.  

Prices on August 20th

  • WCS - $85
  • WTI - $95
  • Syncrude Sweet - $103
  • Brent - $115

It is important to keep the differential in mind because a $100 per barrel price in news does not mean $100 per barrel for tar sands oil.  It is fairly safe to assume the price of tar sands oil is 25-30% cheaper.

There are implications of this in Canada.   Since the oil sells for less, there are lower profits and lower government revenues.   It is also has huge implications on the investment in tar sands development.

For an investment in the tar sands to make sense the value of the oil has to be high enough.   What is the current break even point for tar sands oil?  Something in the range of $50 per barrel seems to be the number.     In the last four years the price for WCS has gone below that such as during the winter of 2008/09.   In much of 2009 and 2010 the price was not miles above the break even mark.

The supply of oil in Alberta has outstripped the capacity to move it - the very reason for the Keystone XL, Northern Gateway, and Kinder Morgan pipeline projects.   Since the price of Canadian oil is closely connected to WTI fob at Cushing, a glut there effects the price in Canada negatively.

As long as there are constraints to the the oil moving from Alberta to market it would only take a consistent global price of $75 a barrel to make the tar sands marginally economic at best.

One also has to keep in mind that WCS is not a premium crude and carries a discount with it because of that though this price differential is bigger than it should be.  As best as I can estimate, if the oil was easily delivered to the global market it would be $15 to $20 more expensive than it is now.

At 1.5 million barrels a day, a discount of $15 to $20 a barrel is $8 to $11 billion dollars a year.   This is more than enough to pay for the cost of the Enbridge pipeline in one year.  The increase in the value of the oil would flow through the Enbridge pipeline should be close to $2 billion a year.

Government revenues are levied against the value of the oil, how does this get dealt with if the oil company is an integrated company and sending the crude to China?    Who determines the value and how if the oil is not on the open market?

Now comes the problem for the Kitimat Clean proposal, does it still make sense if the price of the tar sands oil is higher than now?   Will the producers sell to them even though there is a strong interest in getting much of this crude to China?
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