The idea that greater pipeline capacity and access to tidewater would maximize the value Alberta receives for its tar sands crude is a standard talking point for industry, politicians, and other commentators in the ongoing oil price-induced recession in Alberta. With the province bearing significant consequences of the collapse of global oil prices, attention is rightfully focused on what can and should be done to support Alberta through, and out of, its economic rut.
However, if Alberta had expanded access to tidewater today, in the form of pipelines to east or west coasts, it would not be any better off for three key reasons:
• The value of Western Canadian Select (WCS) – the benchmark for Canadian tar sands crude – would not be any higher. This is because the completion of pipelines between Illinois, Cushing and the Gulf Coast in 2013 and 2014 has unlocked the regional transportation bottleneck that was causing an oversupply in the U.S. Midwest;
• Crude sent to Europe or Asia would likely fetch lower prices for Canadian producers than they currently receive at U.S. refineries. The best price available for Canadian heavy crude is at the world’s largest heavy oil refining hubs in the United States, which producers currently enjoy full access to; and
• In late 2015, the United States lifted its 40-year ban on the export of domestically produced oil. The effects of the ban were complex, but in the long term they stood to drive down U.S.
prices for light oil, as shale production expanded and had nowhere to go, creating a glut in Gulf Coast refineries. Whatever effect this had on light (synthetic and conventional) Canadian crudes, any price distortion it may have created is now gone.
The tar sands sector has sufficient pipeline capacity to get its existing production to the largest heavy oil markets in the world (the U.S. Gulf Coast and the U.S. Midwest) and obtain the best available global price for its product. Those markets have the highest demand for the heavy sour crude the Canadian tar sands yield.
Current pipelines to these markets have, in fact, some 500 kbpd of surplus capacity. The pipeline capacity therefore has no bearing on the price differential between Canadian heavy crude (WCS) and other continental prices, which reflect only quality differences and transport cost. It is the global oil price that is the cause of the Alberta oil sector’s woes, not the price differential. New pipeline capacity and ‘tidewater’ access would not solve this problem.
Read the whole article online – TAR SANDS: The Myth of Tidewater Access
Read the whole article as .pdf – Tidewater-2016-final