The Canadian Chamber of Commerce has a new report out claiming that, due to pipeline bottlenecks at the U.S. border and south of Cushing, OK, we are losing $50 million per day on our oil exports to the U.S. Does this number make sense? Perhaps. The calculations to reach $50 million per day are sourced from CIBC reports, but you can get similar numbers as follows.
Canada exports varying grades of crude, and so for each grade of crude you need to compare to a benchmark which 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 (800,000 to 1 million barrels per day) and conventional heavy oil and blended bitumen (1.4 to 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 these volumes up 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 June 2012 and July 2013, the difference between the landed costs of Saudi Light oil into the U.S. and the price of light oil at Edmonton was $18.48 per barrel, while the difference in costs between Mexican Maya landed in the U.S. and Western Canada Select heavy blend at Hardisty, AB, was $29.02 per barrel. This gives you a total discount of $15 to $18 million per day on light oil and $40 to $46 million per day on heavy. So, the calculated average daily loss range of $55 to $64 million per day is even a little higher than the Canadian Chamber of Commerce’s $50 million number.
Here’s the problem: Neither Edmonton nor Hardisty is on the coast, and getting oil there costs money. That matters because the Canadian oil prices I used are for delivery in Hardisty or Edmonton, while the US prices are landed costs on the Gulf Coast. To compare apples to apples, you’d have to include pipeline tolls to the coast in the hypothetical calculation of what we would have otherwise received for our oil. A reasonable assumption, as used by Patricia Mohr at Scotiabank, is that you can get Canadian oil to the Gulf Coast for $6 to $8 per barrel and to the West Coast for $3.50 to $5 per barrel. If you add the lower of these tolls into the calculation, 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 to $12 million per day in transportation costs. That lowers the range to $43.3 to $56.9 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 to 2013, but certainly validates the Chamber of Commerce figure.
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 before and why our pipelines are where they are today. We might be losing $50 million per day today 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.