Giving oil discounts or taking liberties with details?

The majority of oil produced in Canada is by companies with integrated operations in the U.S. There is no 'captive market' and no 'discount' because of it

VANCOUVER, B.C., July 19, 2017 /Troy Media/ – Gwyn Morgan’s recent column Canadians’ US$38-million-a-day gift to Americans is replete with factual errors.

Morgan claims that, “five major oil-export pipelines remain unbuilt, leaving us with no choice but to sell our oil to U.S. buyers at below world prices. Depending on the world price and other factors, the resulting captive-market discount has been as much as US$10 per barrel on the 3.8-million barrels per day exported to the U.S. That amounts to a US$38-million daily gift to Americans, who then export their own oil at the full international market price.”

The majority of oil produced in Canada is by companies with integrated operations in the United States – they own refineries in the U.S., are owned by U.S. companies with major refinery interests there or are engaged in joint ventures with U.S. partners. 

So when Suncor sells into its Commerce City, Colo., refinery, or Cenovus supplies its facilities in Wood River, Ill. and Borger, Texas, owned in a joint venture with Phillips 66, or Husky supplies the refinery in Toledo, Ohio it owns in partnership with BP, or Imperial and its parent ExxonMobile deliver crude from their joint venture to ExxonMobile’s U.S. facilities, it’s hardly accurate to suggest that they are stuck taking a “captive-market discount.” There is no “captive market” and there is no “discount” because of it.

Oil producers are not forced to sell their crude oil to the U.S. Tidewater access to foreign markets exists through Trans Mountain’s Westridge dock. Since 2012, there has been firm access to the dock for 79,000 barrels a day, but that dock capacity has barely been used. In 2016, an average of 23,000 barrels a day of crude oil delivered to the dock resulted in 15 tanker loadings for the year. These few tankers loaded were destined for U.S. ports, not international markets.

The price for heavy oil in international markets, such as Asia, is less than the price for heavy oil in North America. This has been the case since 2013.

Morgan’s claim that there is a discount for Canadian oil of as much as US$10 a barrel is also incorrect.

Western Canada exports primarily heavy oil from the oilsands. The highest quality of heavy oil blend is Western Canadian Select (WCS), which operates as the benchmark against which other diluted bitumen products are priced. A natural discount of WCS to the North American benchmark, West Texas Intermediate (WTI), exists because WCS is more expensive to refine and transport to market than WTI. This natural discount for quality and transportation reasons has been estimated by the National Energy Board (NEB) at roughly $20 per barrel.

Under functioning market conditions, it would always be expected that WCS would sell at a discount to WTI. In 2016, WCS averaged $13.43 a barrel less than WTI and in June it was $9.40 per barrel. Canada’s heavy oil is selling at a premium over the expected natural discount. This premium price for Canadian heavy oil is about US$10 per barrel – not a negative discount of US$10 per barrel as Morgan suggests.

Morgan’s figure for the volume of crude oil exported is also incorrect. Exports to the U.S. have never reached 3.8 million barrels a day. During the full year 2016, exports to the U.S. averaged 3.1 million barrels per day. For the first four months of 2017, statistics show that exports have averaged 3.4 million barrels a day. 

The facts show that tidewater access to international markets for Alberta’s heavy oil exists and is not being used; Canadian producers are not stuck taking a discount because they are suffering from market capture; the discount that exists for heavy oil will always exist because of quality and transportation cost factors and is currently reflective of a premium price; and international prices for heavy oil are not higher than in North America.

Simply put, the facts show Morgan missed the mark.

Robyn Allan is an independent economist and was a qualified expert intervenor at the Trans Mountain Expansion Project review.


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One Response to "Giving oil discounts or taking liberties with details?"

  1. Wayne Froese   July 20, 2017 at 1:13 am

    Robyn Allan is spot on, as usual.
    It’s laughable claiming that U.S.-based producers are taking it on the chin, either on the supply side or on the production side. When one side gains, at the expense of the other – and you own both sides – it evens out. d-uh.