Why pipelines matter to SK: $320 million in missed royalties plus billions in capital spending per year!
The difference between what western Canada is getting for our oil and could be getting, is; vast, caused by pipeline constraints, and is costing Saskatchewan $320 million in missed royalties per year and reasonably $-billions in capital spending per year.
WTI crude is trading at $65 US per barrel today, while Western Canada Select (WCS) is trading at $35 (see charts below). WTI is the often quoted price in the news and is largely the USA price – however, most Canadian crude is priced as WCS. Brent crude is generally the price of oil shipped by tankers around the world – Brent is at $68 per barrel today.
WCS prices at a discount to WTI because it is a lower quality crude and because of a transportation differential. The price of WCS is currently set at the U.S. Gulf Coast. It costs approximately $10 per barrel for a barrel of crude to be transported from Alberta (the major hubs) to the U.S. Gulf Coast, accounting for at least $10 per barrel of the WTI-WCS discount.
So of the current $30 differential we can account for $10 – but what about the other $20 differential?
Pipeline constraints have caused the transportation differential to rise significantly – see the CBC story below. Heavy discounts on our crudes were attributed to crudes being “landlocked” in the U.S. Midwest due to pipeline constraints.
So, what does this cost Saskatchewan?
That is unclear, but, from the Government of Saskatchewan 2017/18 budget, “a US$1 per barrel change in the fiscal-year average WTI oil price, results in an estimated $16 million change in oil royalties.”
How the WTI/WCS pricing factors into this formula is not readily apparent, but let’s take a stab at it.
Using something I call CRAP math – which is cumulative resultant arithmetic pontification – or “back of the napkin” type of calculations – the $20 differential (from above of $30 – $10) at $16 million per barrel impact is logically approaching $320-million in missed oil royalties to the Province of Saskatchewan – every year!
More importantly, if the price we received for our oil was 57% higher – from $35/barrel up to $55/barrel ($65 WTI less $10 for shipping) – more wells would be drilled and more oil produced. This would cause significant job increases and local spending in Saskatchewan. The economic impact measure of this is best represented by the last oil boom, with; the dramatic increase in housing values in Estevan and Weyburn over the past several years, demands for employees sky-rocketing, car-sales taking-off, etc.
And, with more oil being produced, royalties when them climb again due to a production increase being added to the price increase.
What is holding all of this back – a lack of pipelines!
WTI Pricing – $US – for the past year
Western Canada Select (WCS) Crude Pricing – $US – for the past year
Brent Crude Pricing – $US – for the past year
Pipeline bottlenecks push Canadian oil price to deepest discount in 4 years
Canadian oil selling for just $30 a barrel, even as West Texas Intermediate nears twice that price
By Pete Evans, CBC News Posted: Dec 13, 2017 2:34 PM ET Last Updated: Dec 13, 2017 3:19 PM ET
The price gap between the price of Canada’s oil benchmark versus its U.S. equivalent, West Texas Intermediate, has widened to its biggest difference in almost four years, with Canadian crude now selling at a $25 discount.
The heavy oil coming out of Alberta’s oilsands is known Western Canada Select. It usually trades at a discount to the better known U.S. benchmark, West Texas Intermediate, in part because it is more difficult to process.
But this week, the gap expanded to more than $25 US a barrel, due to transport bottlenecks on pipelines and by rail.
Most Canadian oil is shipped down to refineries on the U.S. Gulf Coast to be refined into usable products like gasoline, diesel and jet fuel. That means Canadian producers have to compete with U.S. shale oil companies, who also sell to those same refineries and don’t have nearly the same level of transportation headaches to deal with.
TransCanada’s Keystone pipeline was shut for several weeks after a spill last month, and rival Enbridge said this week it plans to ration its capacity on a key oil pipeline between Edmonton and Wisconsin by one fifth this month.
At the same time, shipments of crude by rail are inching higher, but are still lower than they were several years ago.
The transportation bottlenecks are putting the squeeze on Canadian oil. “We have a lot of oil in the oilsands,” said Conor Bill, managing director of Mount Auburn Capital Corp., “and the problem is there aren’t a lot of ways to get that crude out of the area where it’s produced.”
The supply imbalance is especially vexing considering the price of WTI has been on a run lately, ever since an OPEC deal last month to maintain production cuts. The WTI price is up by 33 per cent since June, and a barrel of U.S. oil was changing hands at $56.81 on Wednesday.
Contrast that with a barrel of Western Canada Select, which can be had for just $31.72 US on Wednesday. That’s a gap of $25 a barrel — the widest seen since 2013, before the price of oil collapsed.
“Producers with access to international markets are earning higher receipts,” said Shane Thomson, a foreign exchange trader with Cambridge Global Solutions. “The Canadian economy is not seeing the full benefit of the increase in global prices.”
Instead of higher prices, Canadian producers are having to cut their prices to get their product to market. “You need to cut the price in order to incur the costs to ship it out of there,” Bill told the CBC’s On The Money on Tuesday.
The price gap could stick around a while longer, since transportation issues show no signs of easing any time soon.
“It will continue,” Bill said.