It's not the size of the discount: it's the number of barrels exposed
A discredited February 2018 Scotiabank report is the foundation for Alberta government claims about losses from the price differential between light and heavy oil. The Alberta government has repeatedly cited the report as the basis for their claim the differential costs $80 million every day.
Economist Robyn Allan's analysis reveals that the report is based on a misconstrual of how many barrels are affected by anything beyond the quality difference between light and heavy oil, plus additional costs for transportation and petrochemical lubricants. The majority of Canadian heavy oil barrels are protected from the differential.
Protected bitumen barrels include:
- barrels exported for refining into products like gasoline
- barrels exported to refineries owned by the same producer (integrated refineries),
- locked-in prices from long-term contracts,
- barrels sold on the Gulf Coast that receive global pricing
These “protected barrels” make up around 80% of all Canadian heavy oil barrels produced. Only 20% of Canadian bitumen barrels are subject to spot pricing.
The Scotiabank report, published before the sale of the Trans Mountain pipeline and tanker project from Kinder Morgan to the government of Canada, assumes all Canadian heavy oil barrels are exposed to the discount.
On October 16, one of the authors, Scotiabank commodity economist Rory Johnston said, “there are layered discounts throughout entire chain,” but said he wasn’t sure how much of the oilpatch barrels are subject to the massive discounts,' reported Geoffrey Morgan for the Financial Post.
Once Economist Robyn Allan re-calculates the number of exposed barrels, only around 20percent or one fifth of Canadian heavy oil barrels are spot priced.
At the time of the report's publication, Scotiabank was heavily invested in Kinder Morgan's Trans Mountain project.
Robyn Allan, March 4, 2018, "When Kinder Morgan Canada (KML) went public last May, Scotiabank was a major underwriter, buying $224 million in shares. The bank is a lead on KML’s $5.5-billion construction credit facility with $415 million at risk. Then there’s the $246-million US exposure Scotiabank has to U.S.-based Kinder Morgan Inc. (KMI), KML’s 70 per cent owner.
The report's authors, Scotiabank's Jean-François Perrault, Senior Vice President and Chief Economist and Rory Johnston, Commodity Economist note their assumptions on page 5, Table 1 and Chart 8:
"W.Cdn supply assumed at 2.1 MMbbpd heavy”
--> Supply is assumed at 2.1 million barrels per day, all the heavy oil barrels Canada produces. Their ananlysis assumes that every barrel pays the differential But most producers deny they're exposed.
Canada's Majors Reassure Market They Are Not Exposed to Differential
Canada’s major energy companies Suncor, Imperial, Husky publicly deny exposure to a price discount on their heavy oil barrels. Most barrels are protected from spot market pricing because major companies have spent years implementing business strategies to do so.
“We have virtually no exposure to the light/heavy differential,” Suncor Energy CEO Steve Williams, Q4 2017 Financial Results Call, February 8, 2018.
“We are receiving global pricing,” Husky Energy Acting CFO Jeff Hart, Q3 Analyst Call, October 25, 2018
“The benefit of our physical integration was demonstrated again with the majority of our production receiving global pricing. We were essentially unaffected by the wide differentials seen in the quarter. Funds from operations were more than $1.3 billion, or a 48% increase over last year. Free cash flow was $350 million. Net earnings were $545 million, up threefold from a year ago.” Husky Energy CEO Robert Peabody, Q3 Analyst Call, October 25, 2018
“I believe what the quality of our assets and the level of integration and the balance across that portfolio, that positions us quite well to compete in this environment. Our ability to compete is not something that just happened, it is a series of conscious decisions and investments that occurred over time.” Imperial Oil CEO Rich Kruger Q3 Financial Results Call, November 2 2018
Cenovus reports to its shareholders that its exposure to the wider differential is mitigated for 55–60 percent of the heavy barrels that the company produces. Oct 30, 2018: “Achieving Our Potential” Cenovus Energy [PDF]
References:
Robyn Allan, "Scotiabank's oil report a work of fiction", Vancouver Sun, Updated March 4, 2018
Robyn Allan, "False oil price narrative used to scare Canadians into accepting Trans Mountain pipeline expansion", National Observer, November 26, 2018
Andrew Nikiforuk, "Alberta’s Problem Isn’t Pipelines; It’s Bad Policy Decisions," The Tyee, November 23, 2018
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On Sunday December 2nd, Rachel Notley announced a mandate on the cutting of production as of January 1st of surplus ‘garbage crude’ bitumen by 325,000 barrels-per-day (bpd) to tighten supply and drive up prices to end the dilbit fire sale — on the following Monday the WTI-WCS differential drops by $8, while the price of WCS effectively DOUBLES from its low of the previous week.*
(*WTI is West Texas Intermediate light oil priced in Cushing, Oklahoma and WCS is Western Canadian Select heavy oil priced in Hardisty, Alberta; the WTI-WCS spread is referred to as the light-heavy differential.)
This is all while Alberta producers that can get their bitumen product to the U.S. Gulf Coast can receive prices similar to those for heavy oil blends from Mexico, Venezuela and elsewhere, which have been trading at or above the price of WTI.
Additionally, the present decrease in demand for Alberta dilbit had been anticipated, since the majority of that was due to the scheduled maintenance of several large dedicated heavy oil refineries in the US Midwest — actually the highest consumers of Canadian bitumen — incorporating about 829,000 bpd of lost capacity, and which are to be brought back online starting this month.
Thereby, Notley’s and others’ proclamations are merely planned deceptions designed to convince an otherwise uninformed Canadian public to the need for a surplus asphalt-tar pipeline system — one that would otherwise decimate the ecology of the western marine coast with a single major tanker spill.
Alberta’s apparent solution would be to move the surplus product by railcar to the Gulf Coast, where supplies of Mexican and Venezuelan bitumen are currently being undersupplied due to critically ageing oil fields and ongoing political-socio-economic problems, respectively.
It’s either that, or moving it to the Gulf Coast by means of the proposed TransCanada Keystone XL pipeline, or the proposed Enbridge Line 3 pipeline to the U.S. Midwest … and/or to have Suncor mothball their redundant, recently opened (January 2018) Fort Hills $17 billion CAD, 194,000 bpd bitumen mining operations — just kidding on the latter … But not really.
Just don’t expect to force it down B.C.’s throat, because we are not going to take it. It eventually will be up to Notley, Trudeau and Company, or the Supreme Courts.