Crudely Put... important questions about Oil

Dec 5, 2018

Western Canada Select (WCS) Oil is important for Canada and the World Market.

The above statement has a caveat, a significance understood by Albertans, westerners, some federal politicians, and leaders of “Big Oil” (national and international). So, what is this caveat and why is it important in financial, political, military terms and even in how the average Canadian lives day to day? The caveat is that “WCS will succeed globally only if its oil has a market that can be reached in a timely, effective manner, and in sufficient quantity and quality.

Let’s go back to May 2018. All pricing referenced here will be in U.S. dollars per barrel (USDPB). WCS oil was selling at $52.73 while World Texas Intermediate crude (WTI) floated around $65. Today, WCS oil has dropped to $15.45 while WTI crude is priced at $53.66. What happened? Why the dramatic difference between WTI and WCS?

Alberta’s slide in oil price is all about the caveat. In short, reaching the world market! Currently, Canada is unable to fulfill the conditions needed to remain competitive in the marketplace – meaning, we get a much lower price for our oil.

Canadians might be surprised to learn that the Maritimes largely operates on Saudi Oil that gets refined in New Brunswick and Newfoundland. As for our Western Oil, Canada is either shipping its crude oil overseas on tankers, or literally “dragging” it to U.S. refineries and harbour trans-shipment facilities by train. Trains are the most expensive and least-safe method of transport for a world-wide market that is currently burdened with a short-term glut of unrefined oil. So, economic basics started the May 2018 WCS price drop.

Canada’s flawed Oil planning and regulation process has created a perception within the oil world that Canada is not a good place to do business. This given costly legal delays for the Trans Mountain Pipeline, around constitutional and safety concerns. In Eastern Canada, those same concerns and protests caused Trans Mountain to release a statement citing “existing and likely future delays resulting from the regulatory process, the associated cost implications, and the increasingly challenging issues and obstacles,” as reasons for the demise of Trans Mountain’s Energy East pipeline through Quebec into the Maritimes.

Additionally, our government seemed to be caught short by the Supreme Court ruling regarding Aboriginal rights and Trans Mountain West. Right or wrong, “perception” is of course reality especially in business.

A few years earlier, OPEC and some U.S. oil companies realized Canada was willing to sell its oil aggressively to China, India and the Far East. These markets were ripe for expansion given their population, shortage of oil resources, and a growing vehicle market. America and OPEC realized that by blunting Canada’s ability to move into Asia and China, they could move to solidify contracts and profits first, and did so. Canada was naive in failing to plan and prepare for a competitive market battle for delivering needed oil to India and Asia, while gaining independence from Saudi Oil in the Maritimes.

Evidence suggests funding was provided to some opponents of pipeline expansion across Canada.
Canadians need answers from both Government and Industry:

  • How long will it take to develop and implement Plan B (or even C) alternatives to the current status quo? How quickly can Canada maximize available opportunities at home and overseas?
  • How can Canada ensure adequate protection of Aboriginal and Landowners rights regarding oil transport?
  • How do we ensure oil and natural gas development is practiced with a view to protecting both our environment and the wildlife living within it (especially given the realities of climate change)?

On 2 December 2018, Alberta’s NDP Premier Rachel Notley announced that “Alberta will impose an 8.7 percent reduction in oil production commencing Jan 2019 until at least December 2019.” Her announcement will hurt Albertans, given that some jobs will be temporarily lost.
Alberta is gambling that production cuts and investments on new railcars will lead to an increase in the price for its oil and that customers with short or long-term contracts, will want WCS crude and pay more for it. Notley and the supporting opposition party leaders are standing together against a Liberal Government which hasn’t yet realized that Canada is locked in an economic and resources battle with our American neighbors and OPEC.

Crudely put, Premier Notley realizes the oil price battle runs along the 49th parallel. That dynamic needs to change – through improved pipeline safety and capacity, with the ability to provide crude or refined oil to a hungry marketplace.

Strange times indeed, when a Provincial government has a firmer grasp on the International and Regional market than its Federal counterpart.

– Tony Wyver is a freelance writer based in Calgary.