Inferior Product, Not Market Access, Drives Down Price of Tar Sands/Oil Sands Crude: Allan
Former New Brunswick premier Frank McKenna, now a member of Alberta Premier Rachel Notley’s Market Access Task Force, is running into serious pushback for the inflated numbers he’s using to argue for completion of Kinder Morgan’s Trans Mountain pipeline expansion, and for the mix of reasons he might have for using them.
In an interview earlier this month with the Calgary Herald, McKenna said the difference between the price Alberta fossils can charge for their heavy crude product—known as Western Canadian Select, or WCS—and the North American benchmark—West Texas Intermediate (WTI) crude—has cost Canada about C$117 billion over the last seven years. “That is a colossal amount of money for Canadians to lose, simply because they don’t have access to competitive markets,” he told the Herald’s Chris Varcoe. “That’s money coming right out of Canadians’ pockets.”
McKenna said the price differential approached $40 per barrel in December 2013, before settling in at $11 last fall. In a separate interview with The Canadian Press, Cenovus Energy CEO Alex Pourbaix said narrowing that gap to $10 would inject $50 million per day into the Alberta economy.
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“At a time when Canadians are somewhat hostile towards Trump, I don’t know why they’re happy in subsidizing (the White House) and the United States of America to the tune as much as $30 billion a year,” McKenna said. “It makes no sense for us to have a single buyer.”
McKenna, who also served as Canada’s ambassador to the U.S., is now deputy chair of TD Bank and a board member at Canadian Natural Resources Ltd. (CNRL), one of the Big Five fossils that account for 80% of Alberta’s tar sands/oil sands production. He told Varcoe that wasn’t why he had joined Notley’s task force. But in a February 24 response to the interview, senior economist Robyn Allan questions McKenna’s numbers and suggests his various affiliations should prevent him from serving on the task force.
“There is always a discount price for WCS against WTI,” Allan explains, because for all the sustained hype around the tar sands/oil sands, the end product is inferior in world markets. “Bitumen is an ultra-heavy hydrocarbon full of complex molecules that cost more to upgrade and refine,” she writes. “Diluted bitumen costs more to transport than light oil, too. It moves more slowly down the pipe and travels further to market.”
According to the National Energy Board, that means WCS starts out selling at a $15- to $20-per-barrel discount compared to WTI, before accounting for other factors in the market. So when McKenna cites discounts of $40 per barrel in December 2013 and $11 last fall, “they must be considered within the context of the expected discount for quality and transportation, otherwise they are misleading and inflammatory.” In five of the last seven years, “WCS was selling within its expected range, and at times, at a premium,” she notes: Last fall, the premium was $4 to $9, suggesting Alberta fossils were having no trouble selling into the U.S. market.
“Market access to the south at better prices is why tidewater access on Trans Mountain’s system is barely used,” Allan adds. That’s why shippers used less than 30% of the available access at B.C.’s Westridge dock in 2016, and just a bit more in 2017. “If offshore markets promise higher prices, any reasonable businessperson would expect Alberta’s producers would have used it. They didn’t.”
When the scene shifted, she writes, it was because of a pipeline in the U.S., not the absence of a pipeline in Canada.
“Until TransCanada’s Keystone pipeline sprang a leak in South Dakota on November 16, 2017, there was sufficient pipeline capacity to the most lucrative heavy oil markets in the world—the U.S. Midwest and Gulf Coast.” The 210,000-gallon spill led to an 11-day shutdown, followed by restrictions on the pipeline’s capacity. That was a problem with “Keystone’s integrity issues,” not Canadian access to the U.S. market.
But those issues might be a bit tough for Frank McKenna to track through the haze of interests that Allan describes. CNRL, where he serves on the board, has a 20-year take-or-pay contract with Trans Mountain. And when Kinder Morgan Canada Ltd. (KML) announced its public share offering last spring, TD spent $317 million to buy 18.1% of the shares, the biggest single investment Kinder received. The bank also plays a big role as financier to both KML and its parent company, Houston-based Kinder Morgan Inc.
“Premier Rachel Notley’s task force mandate was clear. Members such as McKenna ‘are required to fulfill the duties of their appointment in a professional, ethical, and competent manner and avoid any real or perceived conflict of interest,’” Allan writes. “McKenna’s inflammatory and unsubstantiated comments not only smack of unprofessionalism, he has conflict-of-interest reasons for making them.”