Allan: The discount for Alberta oil isn't always that steep

Robyn Allan

Re: “Pipeline woes have cost Canadians a whopping $117B, says TD’s McKenna,” Chris Varcoe, Opinion, Feb. 17.

Feb 24, 2018 - Frank McKenna’s statements are packed with strong conclusions in defence of Canada’s economy. Regrettably, facts tell us he is wrong. 

McKenna laments the discount between the U.S. light oil benchmark, West Texas Intermediate (WTI), and Western Canadian Select (WCS), Alberta’s oilsands benchmark. He says, “this is a colossal amount of money for Canadians to lose, simply because they don’t have access to competitive markets.”

Until TransCanada’s Keystone pipeline sprang a leak in South Dakota on Nov. 16, 2017, there was sufficient pipeline capacity to the most lucrative heavy oil markets in the world — the U.S. Midwest and Gulf Coast.

Market access to the south at better prices is why tidewater access on Trans Mountain’s system is barely used. Less than 30 per cent of the guaranteed access at Westridge dock in Burnaby, B.C., was taken up in 2016, with only slightly more crude delivered to the dock in 2017. If offshore markets promise higher prices, any reasonable businessperson would expect Alberta’s producers would have used it. They didn’t. 

There is always a discount price for WCS against WTI. Bitumen is an ultra-heavy hydrocarbon full of complex molecules that cost more to upgrade and refine. Diluted bitumen costs more to transport than light oil, too. It moves more slowly down the pipe and travels further to market.

According to the National Energy Board, the expected WCS discount is US$15 to $20 per barrel. When figures like a gap of “US$40 a barrel back in December 2013 and $11 last fall” are cited, they must be considered within the context of the expected discount for quality and transportation, otherwise they are misleading and inflammatory. 

For the past seven years — but for 2012 and 2013 — WCS was selling within its expected range, and at times, at a premium. Last fall, that premium was around US$4 to $9 a barrel — not a “loss.” 

Then Keystone failed and was shut down for 11 days. About six million barrels of crude backed up into the Alberta market. Keystone reopened under 20 per cent pressure restrictions, meaning about 120,000 barrels a day of export capacity remains off line. That’s why the discount began to widen — Keystone’s integrity issues. 

Chris Varcoe noted that McKenna is on the board of Canadian Natural Resources Ltd. CNRL is a shipper with a 20-year take or pay contract for capacity on Trans Mountain’s expansion. That is not McKenna’s most significant conflict. He is also deputy chair of TD Bank.

TD has significant exposure to Kinder Morgan Inc. (KMI) and Kinder Morgan Canada Ltd. (KML). When KML went public in May 2017, TD bought 18.1 per cent of the share issue. TD’s $317 million commitment was the largest single obligation of all 14 underwriters on the issue. TD is also a lead banker on KML’s $5.5-billion debt financing facility, with $415 million at stake. Last fall, when KML raised $550 million in preferred shares, TD was front and centre there, too.

And then there’s TD’s exposure to KMI. TD plays a big role in KMI’s financing program, including a US$137 million commitment as part of KMI’s revolving line of credit. Trans Mountain’s expansion is important if TD’s exposure to the U.S. company is to be protected.

When KML went public, KMI retained 70 per cent. Ongoing delay or project cancellation will compromise KMI’s and KML’s credit ratings. Downgrades are never good for lenders, particularly if covenants in lending agreements trigger repayment clauses.

Premier Rachel Notley’s task force mandate was clear. Members such as McKenna “are required to fulfil the duties of their appointment in a professional, ethical and competent manner and avoid any real or perceived conflict of interest.”

McKenna’s inflammatory and unsubstantiated comments not only smack of unprofessionalism, he has conflict-of-interest reasons for making them. 

Robyn Allan is an economist with expertise in energy and finance and the former CEO of the Insurance Corporation of B.C.