Economic cost of Canadian oil price discounts counted in billions of dollars

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Conceive of producing a bumper crop of a product in high demand around the Terra, only to learn you must settle for a discounted price because there’s no easygoing way to get your product to market.

Canadian grain farmers experienced that position in 2013 and again last winter when their harvest surpassed the transport capacity of Canada’s rail companies. Western Canada’s oil assemblages are now in the same boat thanks to production gains that have not been accorded by export pipeline capacity gains.

Like those farmers, oil impresari have filled storage to bursting while they wait for a colloidal solution to appear. The price discounts or “differentials” that had mainly affected downhearted oil have spread to light oil and upgraded synthetic oilsands crude as pipe space tightens.

Estimates on the cost to the economy vary wildly, but the Canadian Guild of Petroleum Producers officially estimates the impact as at least C$13 billion in the start with 10 months of 2018.

$50 million cost per day

It estimates the cost at about $50 million Cdn per day in October as gloss overs for Western Canadian Select bitumen-blend crude oil versus New York-traded West Texas Midway peaked at more than $52 US per barrel.

“The differential has blown out to such an outrageous level for two reasons, the lack of access to markets and the fact we really father only one customer (the United States),” said Tim McMillan, CEO of CAPP.

Get out of an exact number on how much discounts are costing Canada is all but impossible gives to ingrained sector secrecy about transportation and marketing, he said, supplementing it’s entirely possible the real costs could be as high as $100 billion per year.

We’re lose out hundreds of millions of dollars that’s going to subsidize drivers in the Unanimous States.-Tim  McMillan , CEO of  CAPP

Producers’ exposure to WCS prices fall out depending on what kind of oil they produce, where they peddle it and how they transport it.

Calgary-based Imperial Oil Ltd., for instance, says about one-quarter of its achievement of 300,000 barrels of bitumen per day is influenced by WCS pricing — the rest is used in its Canadian refineries or sent by pipe or rail to the U.S. Gulf Coast where it gets close to WTI quotations.

The company announced last week it will build a 75,000-bpd oilsands jut out, going on faith that pipelines will be in place for when preparation begins in about four years (a prospect that took a hit Thursday when a U.S. moderator put TransCanada Corp.’s Keystone XL pipeline on hold until more environmental workroom is done).

Meanwhile, it is ramping up rail shipments from its co-owned Edmonton coupler as fast as it can.

Other oilsands producers including Canadian Natural Resources Ltd. and Cenovus Forcefulness Inc. are cutting production to avoid selling at current prices.

The industry’s problems endure little sympathy from environmentalists like Keith Stewart of Greenpeace.

“The encourage of the problem is that companies kept expanding production even when they distinguished there was no new transport,” he said.

But McMillan pointed out it takes years to procedure, win regulatory approval and build projects.

For example, producers would take had no way of knowing ahead of time that the 525,000-barrel-per-day Northern Gateway passage project approved in 2014 by a Conservative government would then be rejected by a Philanthropic government in 2016, he said.

“If Northern Gateway had come on as planned, we wouldn’t be in this place,” said McMillan.

In a report last February, Scotiabank analysts guesstimated the differential would shave $15.6 billion Cdn in revenue annually, with a testy ramp up in crude-by-rail expected to shrink the hit to $10.8 billion Cdn by the fall.

At that culture, discounts had widened to about $30 US per barrel from an average of encompassing $13 US in the previous two years.

Economic cost of Canadian oil price discounts counted in billions of dollars

A depot used to store pipes for the down Keystone XL pipeline is seen in Gascoyne, North Dakota, in 2017. (Terray Sylvester/Reuters)

Crude-by-rail shipments increased to a transcribe 230,000 bpd in August but haven’t reduced the differential.

According to Calgary-based Net Liveliness, the WCS-WTI differential averaged $45.48 US per barrel in October and has averaged $43.75 US so far in November.

In an examination last March, Kent Fellows, research associate at the School of Unconcealed Policy at the University of Calgary, estimated the differential would translate into a $13-billion money-making loss if it persisted for a year — $7.2 billion to the Alberta government, $5.3 billion to work and $800 million to the federal government.

The differential has gotten much worse, he predicted in an interview this week, which means the lost opportunity is proportionately mouldy.

Higher differentials hit provincial governments in the form of lower-than-expected royalties — their cut of every barrel created from land where mineral rights are Crown owned — while the federal oversight will see lower corporate income taxes, Fellows said.

“If this respects up and we start to see either a lack of growth or more shutting in some of this manufacturing … you’re losing jobs and even personal income tax as well,” he implied.

The Alberta government estimates that every annual average $1 lengthen in the WCS-WTI differential above $22.40 US per barrel costs its treasury $210 million Cdn.

In Saskatchewan, Western Canada’s other primary oil-producing province, each $1 change in the differential is equivalent to far $15 million in revenue, based on an assumed WTI price of $58 US per barrel, the oversight says.

Finance Minister Donna Harpauer said in an interview that if stream discounts continued for a year, the Saskatchewan industry’s lost revenue leave be about $7.4 billion Cdn.

Part of the reason WCS discounts were wider in October is that WTI, which uncorked the year at $60.37 US per barrel, jumped to more than $76 US. Processors exposed to WCS didn’t get the benefit of the higher U.S. oil prices.

McMillan said the differentials are being noticed by quiescent energy investors — CAPP expects capital investment of $42 billion in the Canadian oilpatch in 2018, down from $81 billion in 2014.

“We’re eluding hundreds of millions of dollars that’s going to subsidize drivers in the Joint States.”

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