Economic benefits from Kinder Morgan pipeline expansion unfounded

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Mr. Oliver relied on CIBC for his figures and the Canada West Foundation relied on CERI. So despite the Chamber claiming there are four sources, at best, there are two—CIBC’s and CERI’s.

CERI’s study attempts to measure the impact of the Keystone XL, Trans Mountain’s twinning and Enbridge Northern Gateway (constructed in that order) as they access new markets. According to CERI, Keystone isn’t operational until 2016, and not fully utilized until 2018. Northern Gateway isn’t built until 2019. CERI is clear there is no current loss to the Canadian economy because of a lack of pipeline capacity.

It is reprehensible for the Canada West Foundation to suggest there is. They should have discussed CERI’s analysis with them before printing their report. I checked, and they didn’t, which is why the figure in the Foundation’s report is different than in their press release. What’s worse is the Chamber’s misrepresentation of both Canada West and CERI’s analysis.

So we are left with CIBC’s claim. Oil producers receive a price for their crude based on quality and cost of transport. The different qualities of oil result in benchmarks and differentials to those benchmarks. Brent and West Texas Intermediate (WTI) are benchmarks while the price for Synthetic Crude Oil (SCO) and Western Canadian Select (WCS) are measured as differentials to WTI.

In the March 20, 2012 CIBC’s Research Update titled “Differentials—The $18 billion Opportunity Cost” the reader is informed “Producers (are) Missing Out On $50 Million/Day at Current Differentials”. Differential figures are provided, but no explanation of how the analysis was undertaken.

To track the origin of the $50 million a day figure, I contacted CIBC. Its analyst, Mr. Potter was unwilling to provide price and volume figures. He said, “I don’t have that data anymore.” Potter is now a senior executive with Cenovus, a major oil sands producer with refinery operations in the US.

It turns out Potter elected to choose differentials from one day in February 2012 when they were at their widest and extrapolate them as if they lasted a year. For the difference between SCO, a light Alberta crude close in quality to WTI, the differential was $23.04.  On February 10, a week later it was $1.00.

If CIBC had elected to select the narrowest differential of WTI-SCO instead of the widest for its report, there would have been no SCO deep discount story for CIBC to tell. What a difference a day makes.

When it comes to the differential between WCS—a diluted bitumen blend—and WTI there is a historical gap of about $20 per barrel because of quality. Bitumen is dirty oil and needs to be upgraded before it can be refined.  WTI is a light, high quality crude which costs less to process. In 2012 the differentials were well within their historical, and expected range.

CIBC’s analysis also relies on what they call a double discount—the difference between WTI and Brent. But WTI and Brent are benchmarks in different markets and hence transportation costs of getting western Canadian oil to new markets must be taken into account. CIBC’s numbers exclude those costs. When included, the differentials all but disappear.

We’ll see if Kinder Morgan adjusts their video.

Robyn Allan is an economist and was an expert witness at the National Energy Board Hearings on Northern Gateway. Her report “Bitumen’s Deep Discount Deception and Canada’s Pipeline Mania can be found at www.robynallan.com.

 

 
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