Pipeline bottlenecks at the U.S. border and south of the U.S. oil-hub of Cushing, Oklahoma, are shaving off some $50 million per day in lost revenue from Canadian oil exports to the U.S., according to a new report by the Canadian Chamber of Commerce. Does this number make sense? Possibly.
The calculations to reach $50 million per day are sourced from CIBC reports, but you can get similar numbers as follows.
Canada exports a variety of grades of crude, so you need to compare each of them to a benchmark that reflects what that crude oil might be worth if transportation infrastructure were not constrained. In 2012 and the first half of 2013, Canada’s oil exports averaged about 2.4 million barrels per day. These exports are classified by the National Energy Board as conventional light, medium, and synthetic (0.8-1 million barrels per day) and conventional heavy oil and blended bitumen (1.4-1.6 million barrels per day). Those were the classifications I used (the range in quantities cited is due to different classifications used in different data sets available on the NEB website).
If you match up the NEB volumes with a comparison of landed costs of similar crude import streams into the U.S. vs. the prices of Canadian crudes, you can get a sense for the foregone value. Between July 2012 and June 2013 (the latest date for which the EIA has publicly available landed cost data for all crude streams), the difference between the landed costs of Saudi Light oil into the U.S. and the price of light oil at Edmonton was $CDN 18.48 per barrel, while the difference in costs between Mexican Maya landed in the U.S. and Western Canada Select (WCS) heavy blend at Hardisty, Alta. was $29.02 per barrel. This gives you a total discount of $15-18 million per day on light oil and $40-46 million per day on heavy crude. So, the calculated average daily loss range is $55-64 million per day, even higher than the Canadian Chamber of Commerce’s $50 million number.
There’s a problem, though. The Canadian oil prices I used in my calculation are for delivery in Hardisty or Edmonton, from where the crude would still have to make its way to refineries on the coast. The U.S. prices, on the other hand, are landed costs on the Gulf Coast, where a number of U.S. refineries are located. To compare apples to apples, you’d have to add to the Edmonton and Hardisty dollar estimates the cost of pipeline tolls to the coast. If you assume that you can get Canadian oil to the Gulf Coast for $6-8 per barrel and to the West Coast for $3.50-5 per barrel, and assume we’d have received similar prices on the west coast as the landed U.S. prices I used above, you’re still looking at $8-19 million per day in transportation costs. That lowers the range to $36-56 million per day of savings we would have realized from having our infrastructure serving coastal crude markets as opposed to the mid-continent in 2012-2013. So, the 2012-2013 data validates the CIBC figure, although readers should keep in mind that spreads have narrowed significantly. This week, we saw West Texas Intermediate trade at roughly a $2 discount to Brent, although Western Canada Select discounts have crept back up to the $30 per barrel range.
What these calculations often miss is the reasons our pipelines serve the U.S. mid-continent and what it would have meant at the time to ship crude elsewhere. It’s a bit of rose-coloured-hindsight to suggest that we should have been smart enough to diversify our markets earlier on. The Canadian Chamber of Commerce shows a graph of discounts to Canadian crude that goes back only as far as January 2011, which hides a lot. They also state that, “the price difference between Brent and WTI is normally around $5, over the last few years it has widened to around $20.” In fact, in the 10 years previous to the January 2011 cut-off of the graph, Canadian light oil sold (in Edmonton) at a $2 per barrel premium to the average cost of U.S. Saudi Light oil imports because of our access to premium-priced markets in the mid-continent. Over that period, WTI sold at an average $1.32 per barrel premium to Brent.
So yes, we must look ahead and ask what infrastructure investments will allow us to maximize the value of our resources, but let’s also not lose sight of the fact that this is exactly what we did in the past and why our pipelines are where they are today. We might have lost $50 million per day over the last year because our pipelines feed the middle of North America as opposed to the coasts, but when companies were selling the idea of more pipelines right into the heart of the now-discounted mid-continent market, they did so on the basis that we’d make millions of dollars per day taking advantage of a growing market premium. It’s easy to look back now and say that we should have done things differently, but it would likely have been a lot harder at that time to get shippers to sign on.