Discussion Page   Home     Help   Index     Login
The elusive discount on Canadian oil sands #5174
Back To Discussion List Written: 2018.10.12 by: Robin Tivy

The purpose of this discussion is to straighten out the facts concerning the supposed "discount" Canada is forced to accept for our oil because of lack of pipeline capacity. The narrative being advanced by Postmedia newspapers (Financial Post and Vancouver Sun) is that we are "losing" up to $80 million dollars a day that we would not lose if we tripled the capacity of the Kinder Morgan pipeline to Vancouver.

The "differential" they talk about is the difference between the price of a barrel of sweet crude in Cushing Oklaholma (WTI or West Texas Intermediate) versus the price you'd have to pay for a barrel of diluted bitumen in Hardisty, Alberta (WCS or Western Canadaian Select).

The majority of bivouac subscribers live in Alberta and BC, and the false narrative has confused us so much most people I know have difficulty discussing the issue. We should be working together to ensure more of the oil is upgraded in Canada to make sustainable jobs for people in Calgary and Edmonton, rather than depending solely on ever increasing exports of raw unprocessed bitumen.


#6522 - 2019.07.08 Robin Tivy - History of Trans Mountain pipeline in new detective "novel"
Robyn Allan has just released an online "novel" about the "Trans Mountain pipeline dispute. Here is a link to the novel: You can read it for free online. When they Came for the Beach by Robyn Allan

Robyn Allan says she wants to combat fiction with fiction, but most of what is in the novel is fact. The book is intended to be a less painful way of getting up to date on the facts. So I read the whole thing. Parts of the novel remind me of a detective novel, like Nancy Drew or Trixie Belden or Hardy Boys mystery. Except the events are real historical events. Sort of like a MBA case study. The novel is a literary device to present the otherwise dry facts and financial calculations regarding the pipeline.

Here's the plot: A group of fictional characters who live near English bay start digging into the facts regarding the Trans Mountain pipeline project, and gradually uncover an implicit conspiracy to lie to the public. The book covers a period of 4 years up to the present day. Although they are supposedly only beach volleyball players working at low level jobs, they seem to get educated and be pretty persistent about their analysis. They uncover various facts about the background of Kinder Morgan and it's executives. Then the novel reveals the lies spouted by various politicians such as Joe Oliver, Rachael Notley, Justin Trudeau and others. In particular, the phony oil sands "discount" numbers. In the novel, various real life politicians seem to not understand the publically available facts that the volleyball players uncover. Or are they lying deliberately? The volleyball players get pretty sophisticated at reading and analysing financial statements, and uncover some startling facts. These facts are publically available if you know where to look. And the volleyball players and homeless person in the novel seem to stumble on the facts.

Apart from financial facts and analysis, the book has a detailed description of the series of arrests at the Burnaby mountain pipeline protests. They seem to match the events Steve Grant told me months ago about those events, so I assume the author did quite a bit of work to make the story as accurate as possible.

Of course, the trick is if the reader starts to check what really happened for any event described in this "fiction", they find out the events are actual facts.

Since the novel goes right up to June 2019, and is ongoing, it doesn't really end like a typical mystery novel. The bad guys are still at large, and the volleyball players have not won the war. It's an ongoing story, and probably Robyn Allan will be able to add more chapters in the future.

My own comment: In the past, Robyn Allan was one of the key journalists who exposed the lies about the supposed daily 30 million dollar losses related to the "discount" between Hardisty Alberta versus Cushing Okloholma. Although the historical facts are correct, what happens in the future is up in the air. When you look at the battle the Trudeau government is having just to implement even a modest national carbon tax, I personally have more despair than the volleyball players or the fictional "Friends of English Bay".

#6403 - 2018.12.08 Steve Grant - The danger of the vast discount lie
Thank you, Allan and Niniforuk for your tireless and informed commentary on this critical issue.

Regardless of the size of the discount, it still costs the same to get the crude out of the ground and the prices for finished products such as gasoline remain more or less the same. So for vertically integrated companies like Suncor, Husky and Imperial, their bottom line is not affected by the size of the discount.

In fact they may benefit. If royalties paid to government are based on the value of the crude, a lower value for the crude would mean they pay less in royalties.

It seems there is no public understanding that oil companies protect themselves against wide price variations and how they do it. The public does not question how a producer can experience changes in price for their product that can be fourfold. This seems odd. We would not expect a car maker to stay in business if the price they got for their cars varied between $10,000 and $40,000. Yet for the oil industry this is normal.

There is something very dangerous at work here. Society cannot make rational decisions on the basis of falsehoods.

This narrative that a huge discount is costing Alberta's economy billions of dollars has gained wide and deep traction. It is depicted as grossely unfair, a result of efforts by enemies of Alberta and a result of a lack of pipeline capacity to deliver more crude, either to anyone, or to Asia.

This message is being repeated so pervasively and loudly that it seems impossible that it might be entirely false. It is repeated by all conservative politicians and others now including Notley and Trudeau. It is all over the mainstream media. There are tv ads promoting it. There are Facebook groups that are almost hourly churning out memes designed to stir up anger in their followers. These groups or people include:

- Canadian Association of Petroleum Producers - Alberta Proud - Canada's Energy Citizens - Oil Sands Action - Oil Sands Strong - Oil Respect - Rally 4 Resources - Pipeline Action - Canada Action - Save BC's Environment - Suits and Boots - Resource Works - Friends of Science - United Conservative Party of Alberta - Keep Canada Working - Jason Kenney - Michelle Rempel

Just do a search for them, "Follow" them, and observe the flood of madness. Just read the comments and see if you can restrain yourself from trying to correct the misinformation.

Now we have the Alberta government directing that crude production be curtailed, in order to raise the price of crude. This makes sense. The most basic economic theory holds that lowering supply of a desired product will increase the price.

But for many years now we have had a claim that prices for Canadian crude would increase if we built more pipelines to get more crude to market. So we have simultaneous beliefs that both decreasing and increasing crude supply will increase prices.

That these two claims can exist side-by-side, uttered by the same people and mouthpieces, indicates that we have a serious disconnect from reality. A DANGEROUS disconnect from reality. It is a dangerous situation because it is evoking deep anger in substantial numbers of people, it is helping defeat attempts to rein in greenhouse gas emissions, and is not challenged even by those who oppose expansion of the oil sands.

What has this got to do with concern for global warming?

I believe the anger generated mobilizes those who dismiss global warming. It mobilizes them to defeat carbon taxation. It mobilizes them to accept lies and spread lies about renewable energy. It mobilizes them to target for abuse those individuals and organizations who promote a shift away from fossil fuels. It IS causing delays in curtailing ghg emissions, that are going to be extremely damaging. Those responsible for making up and spreading these lies need to be identified and held responsible for their negligence.

#6402 - 2018.12.07 Robyn Allan - Premier Notley advancing false narrative about heavy oil's discount
Alberta Premier Rachel Notley is aggressively advancing a false narrative about heavy oil's deep discount. She presents the problem in two parts, neither of which stand up to scrutiny. First, Notley purports that the abnormally wide price spread affects every barrel of heavy oil leading to millions of dollars a day in losses to the Canadian economy. And second, that the Trans Mountain pipeline expansion is crucial. Neither of these claims are supported by the facts.

Most Alberta oil is sheltered from the price discount
When you crunch the numbers, and include the variety of methods even the smaller players rely on to protect their exposure including long-term supply arrangements, hedging and access to rail, it turns out that only about 20 per cent of oilsands supply is actually affected by the light-heavy differential.

WTI is West Texas Intermediate light oil priced in Cushing, Oklahoma and WCS is Western Canadian Select heavy oil priced in Hardisty, Alberta. The WTI-WCS spread is referred to as the light-heavy differential.

Alberta's heavy oil is a low-quality crude that always sells at a discount to lighter, higher quality oil. It costs money to deliver it to Cushing which further reduces its price. The natural discount for quality and transportation is $15 US to $20 US per barrel which means if WTI is selling for $50 US a barrel we would expect WCS to sell for about $30 US to $35 US a barrel.

However, even as WTI hovers around $50 US a barrel, the discount for WCS has fallen below the normal range for quality and transportation. The problem is, Notley claims the abnormal spread affects every barrel when relatively few barrels are actually exposed. Notley's claim is based on an egregious error about how the market works. Oil producers have implemented price protection business strategies that ensure hardly any barrels are affected at all.

Notley has frequently repeated this story since last spring when she started alarming the public claiming that the heavy oil discount was costing the Canadian economy $15 billion a year - $40 million a day. That estimate was lifted from a report prepared by Scotiabank which is replete with errors and it is a huge mistake to use that one report as the entire basis for any claim.

Last week, Notley doubled the figure to $80 million a day and launched a Canada-wide ad campaign, including a Real Time Revenue Loss Calculator located near Parliament Hill.

I asked the Alberta government how the $80 million a day was calculated and was advised that Notley once again relied on the flawed Scotiabank report.

We've heard these false claims before

 It reminds me of a similar false narrative advanced in support of the Northern Gateway pipeline proposal, way back in 2012. A CIBC analyst claimed there was a $50 million a day loss because Northern Gateway was not built. When I asked for the calculation he did not have it. Natural Resources Minister, Joe Oliver aggressively relied on the figure in public statements. I asked Natural Resources Canada for their calculation and was given a run around. Eventually, an after-the-fact calculation was provided that made little sense.

This didn't stop the Canadian Chamber of Commerce from releasing a pamphlet in September 2013 claiming that same $50 million a day loss. That document was paid for by industry, including Kinder Morgan. I checked with the Chamber of Commerce. They did not confirm how the figure was derived but said they relied on sources like CIBC and Oliver.

Flawed analysis makes Notley's numbers meaningless

 Notley relies on the Scotiabank report which attempts to put some analysis behind its figure, but Scotiabank misrepresented how the market for crude oil actually works. Scotiabank mistakenly applied the discount to all barrels supplied as if they are all exposed to spot market pricing when relatively few are.

What matters is not the size of the discount, but the number of barrels exposed to it. Reliance on a flawed Scotiabank analysis renders Notley's claim meaningless.

Take for example the integrated operations of major oil producers active in the Alberta economy. Scotiabank would have Canadians believe that when Suncor, Husky and Imperial sell the crude they produce to their refineries in Canada, they suffer a loss. They don't. They make profits in their refinery operations - in Canada - as if they paid the international benchmark price, Brent, for their feedstock.

Scotiabank would also have us believe that when other Canadian refiners - such as Regina Co-op, in Saskatchewan, or Parkland in B.C. - buy discounted crude, that this is a loss to the Canadian economy, when it is a clear gain.

Since Scotiabank "forgot" that we have a refinery sector in Canada, this error alone overstated the number of barrels it subjected to its "loss" estimate by about 20 per cent. I asked Scotiabank about this. I was told that their report was not intended to be a cost benefit evaluation. When I said their report is presented as such, suddenly they had no further time for discussing the flaws in their analysis with me.

There are a number of other major flaws in Scotiabank's report. When crude oil producers deliver barrels to the U.S. Gulf Coast those barrels receive a higher price not determined by the WTI-WCS discount. Therefore, these barrels are not exposed to it. We know this because oil producers who deliver to the Gulf tell their investors they receive global pricing based on Mexican Maya heavy oil. This means that even more of the barrels Scotiabank subjected to the discount are actually not affected by it.

Notley's discount narrative presents big oil as if they have been caught totally unaware of market forces. Anyone who understands the buying and selling of Canada's crude knows most barrels are protected from spot market pricing because major companies have spent years implementing business strategies to do so.

Imperial Oil CEO, Rich Kruger, explained to investors in July how Imperial protects production: "We continue to reduce our overall exposure to differentials, through our own refineries, contract pipe to the Gulf Coast and continued expanded use of rail ... As I look to the second half of the year, I expect that we will be using more of it (rail), notionally targeting something in the 125,000 barrels a day of the roughly 210,000 barrel a day capacity of the facility (Kearl). Here again, it is allowing us to cost effectively, through the use of unit trains and our existing ownership in this facility, compete on a netback basis with pipe alternatives to get to markets. Again, primarily Texas, Louisiana, Gulf Coast and get the highest realization for our production."

There are even more protection strategies from volatile spot market pricing. When crude oil producers enter into long-term contracts for space on pipelines such as Keystone and Express, they protect themselves with long term supply contracts with refiners. Producers will also enter into long-term supply contracts with refiners even when they rely on spot capacity for pipelines such as Enbridge mainline and Trans Mountain. The mid-west U.S. is the most significant market for western Canadian crude and many of the refineries rely on such arrangements with oil suppliers.

When Canadian oil producers supply crude to their own refineries in the U.S., they also keep the benefit. Cenovus has invested in two refineries south of the border rather than investing in value added in Canada. This protects many of the barrels they produce from an abnormal discount. Integrated U.S. refinery protection, along with long-term contracts and access to rail is why Cenovus can report to its shareholders that its exposure to the wider differential is mitigated for 55-60 per cent of the heavy barrels that the company produces.

How few barrels are actually exposed?
It is difficult to get an accurate estimate of the number of barrels that are exposed to the light-heavy differential. Suncor, Husky and Imperial are effectively not exposed, while Cenovus and Canadian Natural Resources are partially exposed. These five companies represent close to 80 per cent of heavy oil exported. Evaluating oilsands players individually and incorporating the strategies even the smaller players rely on to protect their exposure including long-term supply arrangements, hedging and access to rail, suggests that in aggregate no more than 400,000 barrels a day - or about 20 per cent - of oilsands supply is affected by the light-heavy differential.

The volume of supply exposed to the differential can vary depending on markets and other conditions. For example, when Keystone sprung a leak a year ago and was shut down, barrels under long term contract on that pipeline suddenly hit the spot market widening the differential significantly. The differential widened not because of a lack of pipeline capacity but because of a lack of pipeline integrity.

Keystone capacity came back on stream pretty quickly and the differential narrowed. But then it began to widen once again. Pipelines were not full, but capacity was becoming constrained. Oil producers continued to increase production into a transportation-constrained market. Oil producers brought a deeper discount on themselves. For many of the big players, the net impact would be beneficial. Reality check on the need for new pipelines

The second part of the misleading narrative around the deep discount says the abnormally wide differential is due to one factor - a lack of pipeline capacity. Therefore, the spread can only be narrowed to its normal range by building Trans Mountain's expansion. The problem is, other factors are driving the steep discount and excess pipeline capacity will be available long before Trans Mountain is ever built.

Earlier this year producers became more concerned about access to pipeline capacity. They began to nominate for pipeline space not only based on barrels they had available to ship, but for barrels they didn't have. The industry has a term for these imaginary barrels - they call them "air barrels."

The idea is that, if they over-nominate for pipeline capacity and the pipeline operator apportions the space, they will get all the space they could possibly need. The problem is, exaggerating the barrels they have available comes at a cost to the system and the Canadian economy. Over-nomination leads to unused capacity.

Pipeline space runs idle when oil producers abuse the system by nominating barrels they don't have because Enbridge plans the batches as efficiently as possible at the beginning of the month, based on what the company was told. When those barrels don't materialize, Enbridge is unable to replace them.

Enbridge Executive vice president, Guy Jarvis, explains the air barrel problem this way: "We find ourselves, mid-month, falling short on crude ... we've got to ... make sure that those barrels that are nominated and granted space are real so that we can move them ... what we're seeing is that the throughput at the end of the month versus what we accepted for nominations is not matching up."

Enbridge is reluctant to say how much space runs idle. Canadian Natural Resources estimated last spring that as much as 125,000 barrels a day of capacity on Enbridge Mainline is running empty because of air barrel nominations. Recent throughput statistics on Enbridge's system suggest it could be closer to 150,000 barrels a day.

Enbridge's inefficient use of its pipeline capacity is significant. It produces a serious widening of the differential because it takes relatively few barrels in the spot market to do so. If Enbridge were able to run its pipeline at a higher rate of throughput, the discount would narrow to a more natural range based on quality and transportation costs. What's stopping Enbridge from using its excess pipeline capacity?

In June of this year Enbridge attempted to stop the inappropriate nominations for space on its system. This prompted BP to file a complaint with the National Energy Board which triggered a flurry of letters from industry players. A review of the correspondence makes it clear that when Enbridge attempted to verify nominations under a new regime it created winners and losers. The winners under the old system were not interested in changing the setup.

If there were a genuine concern on the part of industry about a lack of capacity and harm from the discount, Enbridge's flawed nomination process would have been corrected long ago. When this situation is more clearly understood, it makes Notley's ad campaign and appointment of a special envoy to dig into the discount look cartoonish.

At Justin Trudeau's press conference at the Alberta Chamber of Commerce in Calgary last Thursday, the prime minister picked up the $80 million a day figure and stated that oil producers "are forced to sell our oil at a discount."

There is no forcing here. Nobody is making huge oil companies do anything. These companies are making Alberta and Ottawa do their bidding. Trudeau overpaid for an aging pipeline and the right to expand it so irresponsible producers can continue to exploit fossil fuels without constraint at a time when the world marketplace and global ecosystem is signaling it's time to stop.

There are few barrels affected by the deep discount, and for those barrels that are, the deep discount is being driven by a flawed nomination process and industry players that refuse to figure out a way to fix it.

Even if Enbridge were able to stop the nomination of air barrels and efficiently use the capacity it has, expansion of oilsands production currently underway would see a return of constrained capacity. However, as the oil producers themselves tell us, this will be addressed by capacity expansions expected within the year.

Enbridge's Line 3 Replacement project will be complete in the fall of 2019 bringing 370,000 barrels a day of capacity on stream. With other enhancements the company has announced, a further 400,000 barrels a day can be made available. Expanded capacity of close to 800,000 barrels a day means - under the current outlook for crude oil production into the next decade - Trans Mountain's capacity is not needed.

Not only is Notley's - and now Trudeau's - $80 million a day deep discount narrative fundamentally flawed, the claim that only Trans Mountain's expansion can solve it is also simply untrue.

#6401 - 2018.12.06 Andrew Nikiforuk - More pipelines won't change quality or value of diluted bitumen
You've got it right. About 60 percent of heavy oil is being produced by three big players: Husky, Imperial and Suncor. None are losing money. They upgrade and refine. They add value. They hedge. They have long-term pipeline contracts.

The Scotia Bank report on so called "lost millions" and even Kinder Morgan's economic rationale for Trans Mountain are both based on one singular falsehood-that all heavy oil is subject to a major discount compared to WTI and that's just not the case.

The so-called bitumen discount always gets worse in the fall when refineries do their maintenance. And it always gets worse when oil prices generally fall-it is cheap refinery feedstock after all.

All the pipelines in the world won't change the quality or value of diluted bitumen. They may provide market access but they won't improve prices. Oversupply, however, can only drive global prices down further. The best prices for bitumen are fetched at US Gulf Coast refineries. Not Asia.

Here's a recent piece in The Tyee: Alberta's Problem isn't Pipelines - It's Bad Policy Decisions

#6399 - 2018.12.04 Robin Tivy - Notley cuts production, Trudeau afraid to tell the facts
The truth emerges slowly amid false industry narratives. As you may have seen, today Premier Notley of Alberta instituted a mandatory production cut of 8.7%. And the spot price you can get for a barrel of oil from the oil sands increased. This event further illuminates how things really work.

As you know, the industry narrative which Notley has been echoing in her speeches, has been that we are "losing" 80 million/day due to pipeline constraints. Although there are enough articles available to allow you to see how fictional that number is, it is difficult to quickly shut down people spouting the industry narrative about the pipeline constraints. The key is to explain how the system really works, and lay hands on the right facts. It is difficult when you are up against the false analysis promoted by the industry. So the tendency is to let them do our thinking. But with the latest events, more facts emerge, and I'll try again to arrange the facts in a manner you and I can understand: I'm not sure I've got all the details exactly right, but I'm fairly confident of the main facts.

Here's how it works: the oil sands production was expanding and expanding, hoping for additional pipelines to keep up with the expansion. A large number of peoples jobs in Alberta depend on expansion and expansion, because they are tied to construction. So they expanded faster than they had means to get the product to tidewater. The strategy then was to scream for pipeline expansion. Pipelines didn't happen fast enough. At the same time, they failed to sign sufficient contracts with railways to justify huge expenditures in tank car capacity and trains. So the expanded production started to go into huge storage tanks. And the industry just kept expanding.

Now here's a key fact: The price quoted for Western Canada Select (WCS) is the price a producer gets at Hardisty, Alberta. Not the price you'd get at a refinery. Furthermore, it is not equivalent product to WTI. It is a a barrel of bitumen (tar and sand) thinned out with diluent (like paint thinner) so it would flow through a pipeline. It should be obvious that a barrel of this stuff is never going to be worth as much as a barrel of pure undiluted sweet WTI. And even if it was, a barrel at Hardisty is not going to fetch the same price as a barrel in Cushing, Oklahoma, right next to the refineries. Yet they continue to quote the "price differential" between WTI and WCS and quite calculate fictional "losses" because of this discount.

Some pipeline fans now admit there will always be a "natural" discount between heavy oil versus WTI. The natural discount I've heard is about $15/barrel. The discount they argue is unnatural is the transporation discount. But in order to erase that discount, you'd need free transporation from here to Cushing Okloholma, home of the WTI barrels. So they dream about Asia markets such that the oil would come to the Vancouver coast via Trans Mountain pipeline, and then tanker to Asia.

From the point of view of the typical heavy crude refinery on the US Gulf coast (where the alberta oil goes), there must always be a discount due to the distance differential. If you look at a pipeline map, the shortest route to the Gulf coast from Hardisty goes right through Cushing, Oklaholma, and only then to the coast. So your typical refinery would pay less even for a barrel of sweet crude from Hardisty, let alone the WCS heavy oil blend. The buyer has to pay the storage, transportation and upgrading.

So what would you pay, knowing you have to first pay for storage, and second come up with short term tank cars to move it by rail? The answer was the extreme discount of $50/barrel when compared with the West Texas price. This extreme discount only applies to less than 10% of the capacity of the pipeline, according to economist Robyn Allan. Read and digest Debunking the $15 billion benefit myth around the trans Mountain pipeline expansion.

Robyn Allen points out that 90% of the oil shipped via the pipeline was NOT subject to the big discount because they had strategies to "insulate" themselves from the spot price. They own refineries, and they have pipeline allocations. So they only pay the natural discount, not the extra discount of $50/barrel that applies to people with no way to ship the stuff. The companies that just kept ramping up production while screaming for the government to allow more pipelines.

Alberta Premier Rachel Notley, who was also in Calgary, said the oil price gap was costing the Canadian economy $80 million a day.

Now that you know how it works, let us examine the fictional number that the lack of pipeline capacity is costing us $80 million per day. It is astonishingly wrong. It is amazing that it just keeps getting repeated, and nobody corrects it. It was obtained by multiplying the entire capacity of the trans mountain pipeline times the highest spot price paid by a very small number of buyers. There is no 80 million dollars a day we would suddenly get on our existing production if we only had more pipelines. Rachel Notley should know that. She comes across as someone who can't think her way out of a wet paper bag.

The industry is much smarter, and they have all the facts. What the industry wants is more low cost pipelines, so they can continue to expand and expand, regardless of price. So they constructed this false story about how we were "losing" $80/day because we couldn't sell to Asia. The guy on the street thinks there is $80 million a day we'd get on the existing export volume, if only we had more pipelines. The industry story ignores any facts not convenient to their narrative. For example, the fact that a few tankers were actually going to Asia from Vancouver. Why don't all the tankers leaving Vancouver go to Asia if this fictional market exists? Even if a new pipeline was built, the industry analysts know we will be selling to the USA anyway. Building a new pipeline doesn't open up any market that is not already there.

But it's easier to just scream that the government should "do something". So when Justin Trudeau came to Calgary last week, the industry was able to mobilize thousands of pro pipeline protesters to scream about the "crisis", and that the government must "do something". What do they expect? Justin's father, Pierre Elliot Trudeau would have perhaps told them the truth and enraged the mob. But Justin is so polite he just wrung his hands and gave them sympathy. The people in the industry don't want sympathy, they want action. I suppose they think the federal government should invoke the war measures act, and override the supreme court and those pesky environmentalists and first nations, and push the pipeline through, because it's a national emergency. A national crisis that the tar sands can't keep expanding at the rate it is.

But Trudeau did nothing. So Premier Notley came to the rescue a day later, and announced that the Alberta government would buy 7000 tank cars for them, which will cost almost a billion dollars. One might ask "Isn't that a subsidy". Why can't the producers themselves arrange to pay for their own transportation? I'm waiting every day for the post media papers like Calgary Herald and Vancouver Sun to point out that having the government buy 7000 tank cars is what we used to call a government "subsidy". But that's not a convenient narrative, so don't hold your breath for the word "subsidy" to appear in the paper.

Two other facts: First of all, you could ship much more iil through the existing pipeline if you upgraded it first, like Suncor, rather than increase its volume having to dilute the tar.

#6359 - 2018.10.19 Steve Grant - The "discount"
When the oil industry got serious about developing the tarsands, it was in the context of an expectation the world would run out of oil. We all remember that. The vast tarsands reserves promised Canada would make a fortune from the bitumen.

Two things changed. The first was that rising oil prices and expectation of shortages promoted exploration and technological advances. The major form of the latter was fracking. The shortage has now become a glut, especially in the US.

The second change was recognition of the role of fossil fuels in global warming. Suddenly there was significant and growing resistance to developing new fossil fuel sources. Especially the tarsands bitumen, as it is an inferior petrochemical that results in some of the highest climate impacts from production, transportation and refining. This is why it is called a "heavy" crude. These are called upstream and midstream emissions. Downstream emissions are pretty well the same, as the exhaust from a car is the same regardless of the form in which the gas originally came from the ground.

Alberta's tarsands are particularly vulnerable to these forces. The bitumen is expensive to produce and turn into useful products. Yes, it is handy for road asphalt and bunker fuel for ships. But new regulations will kneecap the ship fuel market for Alberta bitumen. The problem is that Alberta bitumen is high in sulphur content. This is what makes it "sour" crude. It costs money to deal with it.

So what we have is a perfect storm of factors opposing development of the tarsands, colliding with the interests of a few to make money off it no matter what it takes, and in the context of Alberta's populace who believe they will become rich from it.

Hopefully the banks will be smart enough to realize the tarsands are doomed and shift their loans to renewable energy. Eventually the governments the citizens elect will also wise up and stop subsidizing this madness.

Ok, that's the context. Turning to the "discount".

The word "discount" is being used for two different things.

One is the difference in price per barrel for West Texas Intermediate and Western Canadian Select crudes. Of course WTI is more highly valued because it is more easily made into most things oil is used for. "More easily" means "cheaper". Simpler refineries. Less sulphur to remove. WCS is a blend of things, but mostly Alberta bitumen. It will never be as valuable as the blend comprising WTI, which is largely fracked, sweet, light crude. Here is the official explanation of WCS: Western Canada Select Explained.

The second use of "discount" is simply a fraud. The shysters take the number of barrels we could be selling if this or that pipeline was built, and multiply that number by the difference between the WTI and WCS prices. This adds up to a huge dollar figure which causes many Albertans to become dizzy and lose their ability to think critically.

The problem is that WCS will never sell for anywhere near WTI prices. And increasing the volume of WCS will only lower the price for it and thereby increase the "discount" from WTI. Of course, selling more volume at whatever price means more income. Which leads us to the next fly in the ointment.

Alberta bitumen is not cheap to produce, prepare for sale, and ship to buyers. For example, it is too thick to be pumped through pipelines. So it has to be diluted 1/3 by volume. This requires an entire transportation system be built and operated for the diluent. The diluent itself has to be purchased. The main pipeline has to be 1/3 larger and 1/3 more volume has to be pumped.

WCS requires long pipelines, and when shipped out of Vancouver has to go in relatively small inefficient tankers. Kinder Morgan planned to charge twice as much to move products through the new Trans Mountain pipeline to the west coast.

All of this comes off whatever price is obtained for the bitumen. At some point the total cost of production and transportation exceeds the selling price. Whether the Alberta tarsands makes or loses money is a very precarious balance. And all this is without factoring in the cost of global warming.

The sooner Canadians, especially Albertans, and the banks, and the governments, and the industry take to come to their senses, the less climate damage will have been done, the less assets we will have stranded in tarsands infrastructure, the more shallow the carbon pit we need to dig ourselves out of, and the more capital we will have available to build the needed clean energy.

#6353 - 2018.10.17 Robin Tivy - Explaining Distressed Barrels $100 million daily
Todays Financial Post has an article which says "Oilpatch scrambles to ship 'distressed barrels' as industry loses $100 million in revenues daily." As usual, the article implies that if we had more pipelines, they would not "lose" $100 million a day.

Oilpatch Scrambles to ship Distressed Barrels as industry loses $100 million per day - Financial Post October 16

I confess that I had to read the article a couple of times on different days before I could understand the true situation. The thing I learned from the article is that the "differential" is not on all production. In this case they are talking only about "distressed" barrels. The vast majority of production covered by contracts, which have a much lower differential. I hadn't previously realized that the "differential" did not apply to the majority of production. This article is about "Spot barrels". Spot barrels are extra production which they have no contract to ship or sell. I assume that the stranded barrels are a result of production being expanded beyond what they can sell. The industry is producing more than they can ship or sell. When they can't sell it at a hypothetical full price, they say they are "losing money". More on that later. First, here's two exact quotes from the article.

"Enbridges mainline was moving 1.8 million barrels per day of heavy Canadian crude in the summer, but that doesn't necessarily mean they are all subject to the record setting discounts. Some of those volumes are moving on firm, committed contracts, getting prices closer to the U.S.

"Roughly 80 per cent of Suncor Energy Inc.'s bitumen production is fully insulated from the differentials, spokesperson Erin Rees said in an email."

So here's how I interpret the situation: The industry continues to expand production, and are producing more than they have contracts to ship or sell. Some of this production is for barrels that they hoped they might sell on the "spot" market, and hoped that Enbridge would have extra capacity to sell them. But you don't always get cheap shipping or good prices on the spot market. So they are forced to try and ship and sell it at a discount. So then they say they are "losing" $100 million revenues daily.

In the dictionary, "losing" means "be deprived of or cease to have or retain something". It is a misleading word in this case because they never "had" the thing they claim they have "lost". You can't "lose" something you never had. What they really mean is as follows: "If there was excess pipeline or rail capacity, such that the shipping was cheaper, then they might be able to sell spot barrels at a higher price".

"Losing out" is less misleading than "losing". Eg: "losing out on possible $100 million in revenues"

Furthermore, I just realized the $100 million is totally wrong. I don't know where they got that number. That exact same article says the entire Enbridge flow is 1.8 million barrels per day. So even if every one of those barrels was discounted by 50 percent, that multiplies out to only 90 million dollars per day. They must have rounded that number up to 100 million. But right in the article they admit that over 80% of those barrels are long term contracts which are NOT subject to that $50.00 discount. So the number is clearly wrong. (If I have made an error, please inform me)

I also checked the 1.8 million barrels per day number from other sources. Andrew Weaver's website says that Enbridge total flow is only 300,000 barrels per day. That works out to a maximum of 15 million dollars per day.

#6351 - 2018.10.16 Robin Tivy - How False Narratives work
The "wasteful discount" story is a classic example of what I call a "false narrative". A false narrative is an arrangement of facts which lead you to the wrong answer. Don't confuse this with "fake news". The discount is a real fact. It's just that the real facts are arranged in the wrong way. And certain real facts are hidden. False narratives are often created by somebody with a different adgenda. They assemble the facts in a way that you come to the wrong conclusions. Since you don't have time to figure out the whole subject by yourself, they provide a service of telling you what to think.

In this case, the narrative implies that if the new Enbridge pipeline to Vancouver was completed, then Canada would "save" billions of dollars. Note the word "save". False narratives often use key words to get you thinking in the right way. Saving is good. We would "stop wasting" 15 billion a year. Again note the word "wasting". The narrative implies that there is a higher price available, but only if we triple the supply. The price is only available if we have bigger volumes.

Now let me tell you another way of thinking about the situation. Another way to assemble the facts. The real reason why the industry is so keen on the pipeline expansion is to triple the rate at which they can sell off the tar sands. Their personal interest is tied to having an industry boom. They want a blowout sale, and are willing to take even deeper discounts on the higher volumes. Note the word "blowout". It is my word to get you thinking in the right way about what is happening. Even the industry knows the expanded production will be at an even greater per unit discount. They are not stupid. It's just that they have different interests. Doing the processing in Canada is not in their private interest. If you export the oil raw, a smaller number of people can make a larger amount of money than if the existing huge volumes of tar sands were actually processed in Canada.

With Kinder Morgan expansion, the "discount" per barrel would not disappear, in fact it would probably increase. The oil will still go to the USA. There will be no more "options" for offshore markets than there are today, just higher volumes. We are not "losing 50 million a day" on the oil we are selling. Note the word "losing" as if not being able to sell higher volumes is a loss.

If you understand supply and demand and have the time to sort through their bafflegab, you can see that the story that when you triple production, you get higher prices doesn't make sense. Those mythical Asian markets are available to us right now, so why isn't more of the existing supply being sold to them? The truth is that the Asian market will NOT pay more than the US, even if we could sell three times as much. They need a very low price, in order to offset transportation costs, and low quality.

So how did the story about the 15 billion "loss" survive so long? After all, many people know basic supply and demand economics. Isn't it obvious? The answer is that we all rely on other people to sometimes tell us what to think. It's difficult to do your own thinking when a vast array of industry "experts" and sponsored professors, and compromised newspapers spew out a false narrative. I have to admit that I thought I must have something wrong. After all, how could all those experts be wrong? Just last week an associate of mine contradicted a small speech I was giving on the subject, and murmured some sort of story about the need for higher volumes. And who was I to contradict him? Who has time to sort through all this stuff? Of course I couldn't understand what he was saying, but I quieted down. That is how powerful false narratives can be.

#6350 - 2018.10.15 Steve Grant - Two questions
If Canada is practically giving away our crude, why are other producing countries not furious with us for undermining their prices and income? Why are customers not beating down our doors to buy our cheapo crude?

#6349 - 2018.10.15 Steve Grant - More on the subject
As you know there is a lot to this.

To begin with, the discounted product isn't just tar sands crude. It is "Western Canadian Select" (WCS). To quote from Wikipedia: "Western Canadian Select is one of North America's largest heavy crude oil streams. It is a heavy blended crude oil, composed mostly of bitumen blended with sweet synthetic and condensate diluents and 25 existing streams of both conventional and unconventional Alberta heavy crude oils at the large Husky terminal in Hardisty, Alberta."

The easiest way to refute the whole discount claim is to point out that dilbit, which is tar sands bitumen diluted with lighter petrochemicals, is already arriving at the coast. The existing Trans Mountain pipeline is an unusual pipeline that can carry different products from gasoline to dilbit, in batches. Roughly half of what it carries is dilbit. About half of that half is loaded into tankers at the Westridge Marine Terminal in Burnaby. Almost every one of these tankers then goes to refineries on the US west coast. Occasionally one goes to Asia. Two or three in the last few years.

Now, if Asia is hungry for this crude and is happy to pay twice as much as the Americans for it, why are the owners of the crude selling it to the US? Are they insane? No, the fact is the crude is getting exactly the price it can get.

A thorough demolishing if the discount myth was written by economist Robyn Allan, and can be found here: Robyn Allan - Debunking the 15 billion benefit around the trans mountain pipeline - May 30,2018 (Vancouver Sun)
 In this article, the author traced the $15 billion discount number quoted by Trudeau and Notley to be from a flawed Scotiabank report.

Another article from the Globe and Mail in May says the Canadian Government money spent to buy the Kinder Morgan pipeline would have been better spent buying or building refineries. Globe and Mail - Morneau had better options. This article also contains fact that almost all the existing oil is shipped to USA refineries because they pay a higher price than is available in Asia. Asia has very little appetite for the tar sands oil unless at a high discount.

If new pipelines increased the supply of WCS, obviously the price per unit of volume would go down. On top of this, Kinder Morgan intended to double the cost of moving products in both the old and new Trans Mountain pipelines, to pay for the new one. This would have raised gas and diesel prices in BC, besides cut into the profit from the dilbit. So if you take oil prices that are weak to begin with due to a glut of US light sweet crude, higher pipeline tariffs, and prices pushed down by increased supply, the discount actually increases and the profit margin approaches and may go below the cost of production.

There's already been an example of another nail in the coastal pipeline's economic coffin. Northeast BC coal. BC' government cooked up fantasies of vast riches flowing from digging up northeast coal and selling it to China. China said they would pay lots for it. So BC spent billions on infrastructure. China then said it maybe didn't need our coal so badly after all. There are lots of other suppliers. China negotiated the coal prices down, and down and down. BC had to go along with it or there would be no way to pay for the infrastructure. The end result is that the coal sells for nearly the same as it costs to produce it.

So of course Asia says they need our oil and we should build the pipeline. IF it MUST be built, it should not be built until there are very long term contracts with fixed prices and almost-equal penalties for not taking the product. Banks won't lend the money to fund construction because they need the contracts to ensure their shareholders that the massive loans will be repaid.

So what happened in this case? The Canadian government has in effect bought the first phase of the project. Kinder Morgan was happy to sell it because they knew it was not financially viable. The Canadian government doesn't have to go to banks and meet the test of the markets to fund completion of the pipeline expansion. We taxpayers have become the shareholders and our only control is by elections.

The fact this discount narrative is so deeply embedded in the pipeline debate, and that it is utter nonsense, makes me despair that these issues can be resolved in a sensible and constructive manner when so many citizens believe so strongly in that nonsense. And that is why the truth has to be publicized with more force than the lies.