No new pipeline will ever be enough to eliminate the price discount Canadian tar sands/oil sands producers have to offer to get their product to market, according to a BNN Bloomberg commodities analysis this week that reinforces one of the key economic arguments coming from the climate and energy community.
The drastic difference between the cost of a barrel of Western Canadian Select (WCS) crude oil and the North American benchmark price, West Texas Intermediate (WTI), has been a source of deep consternation and interminable complaints from the Alberta oilpatch. And they’re right that an enforced discount of up to US$50 per barrel or more is costing the province and its producers a lot of money.
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But it’s a mistake to argue, as fossil industry advocates have repeatedly, that the price difference would evaporate if Canada could build more pipelines to tidewater.
“Based on some of the longstanding expert rhetoric, one could easily be led to believe the WCS discount represents a price gap that can be fully closed,” writes reporter Jameson Berkow. But while much of the discount “can be attributed to production growth outpacing the energy industry’s ability to get new output to market, such as a lack of new pipelines, some of the WCS discount is based on a factor beyond anyone’s control—quality.”
The issue is that, “in its natural state, oil sands bitumen is as viscous as peanut butter,” Berkow explains. “That makes it more expensive to refine, meaning refiners would never pay as much for it as they would for the lighter, sweeter stuff more closely tied to WTI.”
But that doesn’t stop an endless parade of analysts from complaining about what Scotiabank economists call the “self-inflicted wound” of Canada’s limited pipeline capacity. In February, with WCS selling at about $24 per barrel less than WTI—roughly half of today’s discount—Scotiabank said the price difference was costing the Canadian economy about C$15.6 billion per year.
Last week, GMP FirstEnergy analyst Martin King called the price discount “galling”.
But in an interview with BNN Bloomberg, King admitted that some degree of price difference is pretty much inevitable.
“Could it go to zero? Other than in extreme circumstances I would have to say no,” he said. “Only if there was some kind of major supply disruption in Western Canada affecting several hundred thousand barrels per day and the market got very tight could something like that happen.”
He added that “the spreads have been so wide that it incentivizes throwing everything at it to try and drive the [discount] lower.” But “you will never drive it to zero.”
Some Canadian analysts point to Mexican Maya crude, a heavy oil that is basically competitive with WTI. But “people need to be careful about saying, ‘Well, Maya trades at a premium, so if we build more pipelines, we can trade at a premium, too,’ since the world doesn’t work that way,” one Canadian energy insider told Berkow. “If you disrupt the equilibrium, then everything has to find a new settling point [and] if you make a major shift in market access, then every product will find a new equilibrium price.”
