Will the Canadian oil producers rake in higher prices for their crude oil if they sell to Asia? Is the U.S. unfairly discounting Canada’s heavy crude oil stream – the Western Canadian Select (WCS)? Will the Kinder Morgan Trans Mountain project be a game changer for the Canadian producers?
The Ottawa and Alberta government certainly thinks so.
However, scientist and energy resources expert David Hughes is of a different opinion. In his new report titled “Will the Trans Mountain Pipeline and tidewater access boost prices and save Canada’s oil industry?”, he argues that “Canada’s oil is not being unfairly discounted by the U.S.”
“Oil prices internationally and in North America are now nearly identical. That means Canadian crude producers are likely to receive lower prices overseas than in the U.S. because of the higher transportation costs involved in transporting bitumen by pipeline to B.C.’s coast and then exporting it by tanker,” said Hughes in the report.
What is the quality of crude oil that Canada produces in Alberta?
Canada’s oil sands produce a heavy crude, similar to Mexico’s Maya crude, Venezuelan heavy crude, or the Californian heavy crude oil. These are costly to refine when compared to the West Texas Intermediate (WTI) or Brent Crude oil, both of which are light crude oil. Hence heavy crude oil is often priced at a discount to the light crude oil.
What is the discount for quality when exported to the U.S.?
As seen in the table above, the average WCS-WTI price differential fell to below $14 per barrel in 2015 and 2016. For the first four months of this year, WTI averaged $51.72 per barrel, whereas, WCS averaged $37.21 per barrel – an average discount of $14.51 per barrel, according to the Government of Alberta website.
Comparison with a similar heavy crude oil shows no unfair discounting
“Canadian oil sold on the U.S. Gulf Coast fetches the same price as comparable heavy crudes (such as Mexican Maya), which sell at a discount to WTI due to their heavy gravity and high sulphur content, which makes them more costly to refine. The difference between Canadian heavy crude (Western Canada Select [WCS]) priced at Hardisty, Alberta, and Maya priced at Houston on the U.S. Gulf Coast is solely due to the cost of transport from Hardisty to Houston, not an unfair discount,” said Hughes in his report.What is the historical price differential between WTI and Brent
The price differential between Brent and WTI rose sharply between 2011-2014 due to pipeline constraints at Cushing. Since then, the price differential has been reducing and has been steady for the past few months, as seen in the chart above.
The price differential between a barrel of Brent and WTI was $3.65 in 2015, which dropped sharply to only $0.41 in 2016. For 2017, the differential is expected to be $1.92 per barrel and for 2018 it is expected to be $2 per barrel, according to the U.S. Energy Information Administration.
Therefore, the Canadian producers will gain an average of $2 per barrel if they sell oil to Asia, however, it will entail higher transportation cost.
If, on the other hand, the price differential between Brent and WTI reverts to its historical mean – of “minus US$1.34 per barrel” according to Hughes – then the Canadian producers will get lower prices in Asia, without even considering the added transportation cost.
What is the cost of transportation from Canada to Asia?
“The tolls to move oil from Alberta to northeast Asia are higher than to move it to markets in the U.S. Midwest and the Gulf Coast, resulting in a loss of $2 to $4.80 per barrel on exports to Asia,” said Hughes in his report.
In the current environment of an oversupplied market, it is difficult to get a foothold into new markets, without competing in price. Hence, if Canada has to increase its exports to Asia, it may have to offer discounts. Combining the discounts with the transportation cost, selling to Asia is not a viable option for the Canadian producers.
By Rakesh Upadhyay for Oilprice.com