Alberta needs diversification—of oil transport capacity

If it wasn’t already clear why Alberta needs a broader customer base and more highly diversified oil transportation capacity, recent events should make it painfully obvious.

First, despite today’s dip, oil prices for West Texas Intermediate oil (a light, non-sulfurous oil) rose substantially this month, which is great for U.S. producers. Unfortunately, Canadians are not sharing the joy. Western Canadian Select oil has always traded at a price below than WTI due to the need for more extensive refining and long transportation distances. But the current discount is well beyond the traditional discount reflecting quality and distance to market.

As my colleagues Elmira Aliakbari and Ashley Stedman observe, from 2009-2012, that discount was roughly 13 per cent of the U.S. price. On September 26, Western Canada Select was trading at a discount of US$34.50 per barrel, nearing the record in November 2013 when the discount reached US$42 per barrel. That’s a discount of nearly 60 per cent on the per-barrel WTI price.

Rory Johnston, a commodity analyst at Scotiabank, told Geoffrey Morgan of the Financial Post that “brokers in Calgary are talking about Canadian heavy oil futures trading hands at all-time high discounts of more than US$40 per barrel under WTI.”

Johnston notes the bottlenecks in Canada’s pipeline transport capability, not only for bitumen but for lighter grades of oil and synthetic oils, “reflecting increasingly tight takeaway capacity across all crude grades.” The discount is expected to ease somewhat over the remainder of 2018 as several refineries conclude maintenance programs and as oil-by-rail capacity increases.

Premier Rachel Notley likes to talk about diversifying the industrial and commercial bases in Alberta, and if that happens through market forces, that would be a fine thing. But she’s failing to deliver diversification of oil transport capacity to reach world markets, where Canada could receive a better price for its oil and be moreuser resilient in the face of a U.S. oil boom.