Scotiabank's oil report a work of fiction

March 4, 2018

Has Big Oil exposed itself to billions in losses from a widening price differential between light (West Texas Intermediate, or WTI) and heavy (Western Canadian Select, or WCS) oil?

That’s the hypothesis in a report by Scotiabank as reported in The Vancouver Sun on Feb. 20 (Pipeline delays impose demonstrable cost ($10.7 billion) to Canada’s economy: Scotiabank).

But Big Oil isn’t stupid. Scotiabank didn’t ask the obvious question: How much Canadian crude sells at a price subjected to the light to heavy differential? If it had, it would know it’s only about 10 per cent. 

Suncor is one of Canada’s largest bitumen producers. CEO,Steve Williams recently said: “We have virtually no exposure to the light/heavy differential.” Canvassing Canadian Natural Resources Ltd., Cenovus, Imperial Oil, and Husky reveals similar information. Here’s why:

Canada produces about 4.2 million barrels a day of crude, including three million barrels a day of heavy oil, with bitumen representing nine out of every 10 barrels of heavy produced. Forty per cent of the bitumen produced is upgraded to Synthetic Crude Oil (SCO) in local facilities owned by oilsands producers. SCO has been selling at a premium to WTI, not a discount.

A further 15 per cent of heavy is sold to integrated refinery operations in the U.S. Suncor delivers to its refinery in Colorado, Cenovus supplies its joint-venture facilities in Illinois and Texas, Husky delivers to three of its mid-west U.S. refineries, and Imperial directly to its parent’s (ExxonMobile) refineries.

About 15 per cent of Alberta’s heavy makes its way to the U.S. Gulf Coast. Suncor says these deliveries are not hit by a discount. The Gulf is a “global market … where (diluted bitumen) attracts a Maya (Mexican heavy oil) differential”. Once diluted bitumen reaches tidewater access in the Gulf, the WTI to WCS differential becomes irrelevant.

Spot market volatility protections are also imbedded in long-term supply contracts and there are hedging activities that oilsands players engage in, such as price discount swaps.

The structure of the oil sector reveals that relatively few barrels are vulnerable to the WTI-WCS differential — something closer to 400,000 barrels a day, or about 10 per cent of all Canadian oil produced. Four hundred thousand barrels is a long way from the 2.1 million barrels a day of heavy crude Scotiabank relied on. 

There’s more. Scotiabank overstates the differential it used to estimate “cost”. Correcting for Scotiabank’s errors takes its $10.7 billion figure — $30 million a day — to less than a million dollars a day. This is not due to a lack of pipeline capacity, it’s due to TransCanada’s Keystone pipeline failure last November. Until Keystone sprung a leak, there was sufficient pipeline takeaway capacity to deliver Western Canadian oil to market. The recent spike in differentials is due to a lack of pipeline safety, not a lack of pipelines.

Why would Scotiabank mislead the public? A potential answer may lie in the bank’s serious conflict of interest from its exposure to Trans Mountain’s expansion.

When Kinder Morgan Canada (KML) went public last May, Scotiabank was a major underwriter, buying $224 million in shares. The bank is a lead on KML’s $5.5-billion construction credit facility with $415 million at risk. Then there’s the $246-million US exposure Scotiabank has to U.S.-based Kinder Morgan Inc. (KMI), KML’s 70 per cent owner. KMI stands to be severely impacted if Trans Mountain’s expansion does not go through.

Scotiabank concocted a narrative that does not exist. In so doing, the bank promoted its self-interest while betraying the public’s trust.

Robyn Allan is an independent economist who has held executive positions in the private and public sectors, including president and CEO of the Insurance Corp. of British Columbia and senior economist for the B.C. Central Credit Union. 

[Photo caption: Western Canadian oil prices are being hit by a lack of pipeline safety, not a lack of pipelines. BLOOMBERG]