Thursday, April 21, 2016

New Pipelines Don't Make Sense

 "Tidewater." For the oil industry, that's Nirvana. Get Canadian oil to tidewater, the barons say, and our economic future will be rosy. But that argument no longer holds water -- or oil. Eugene Kung writes:

A number of years ago this argument may have been true, especially when you ignore the economic, environmental and social costs not captured by market prices (which economists call "externalities").

But we live in a different world today. Oil prices have plummeted and are forecasted to stay low for some time. The U.S. is now a major producer of oil that is cheaper than that from the oil sands, and it recently lifted its 40-year ban on exporting oil. In addition, solar and wind power are now "crushing" fossil fuels, with investment nearly double that of oil and coal combined in 2015. And finally, the world came together in Paris and agreed to aim to hold global temperature increase to 1.5 C, which necessarily requires a decarbonization of the global economy.

All of these factors mean that the economic case for getting oil to tidewater by pipeline in Canada has evaporated.

Even some of the oil barons are beginning to sing a different tune:

Last month, a brief from Oil Change International debunked the economic myth of tidewater access and concluded that producers of Canadian oil are already getting the best possible price through existing pipelines to the U.S., which access the largest heavy oil market in the world.

The brief discusses why Western Canadian Select (WCS) -- the key Canadian benchmark for heavy oil -- trades at a discount to other benchmarks such as West Texas Intermediate (WTI), the primary benchmark for U.S. Gulf Coast and Midwest oil. The two key factors are quality and geography: WCS trades for less than WTI because it is lower quality crude that is more expensive to refine, and it must travel longer distances to refineries.

Economics has caught up with the oil sands. And Alberta is in for a rough ride. But the sooner everyone gets used to the idea that there will be no new pipelines, we can move forward.



Anonymous said...

Once in Europe or Asia are there refineries there that can handle the heavy sour Alberta tar sands crude?

Owen Gray said...

Good question, Anon. I confess I don't know the answer to that question. Perhaps another reader does.

Steve said...

We should have had the NEP and now we need to think outside the box with tar sands, I say make ashpalt. I also wonder why you just dont throw the whole mess in a cracker to make petro products. All that would be left is the sand, and you avoid heating the crap up several times before refining.

Its also obvious that pipelines are not economicly viable even in a non global warming context. Its pure manipulation.

Owen Gray said...

Those who adapt survive, Steve. That's what thinking outside the box means.

ron wilton said...

Much of the dilbit being 'upgraded' in Alberta is from plays owned by the infamous Koch brothers, under a variety of names, as are the special refineries in the Texas Foreign Free Trade Zone (where no value added tax is charged if the refined product is not sold in the U.S.), also owned by the brothers.

They are currently receiving heavy crude by ship from Mexico and Venezuela but if they could get the Albertabit instead they would improve their bottom line by another $2 billion annually.

KXL would be their preferred access route but they will use ships out of BC or Nova Scotia if necessary.

Pipelines may not make sense but they do make cents for their owners as they currently charge $6-8 U.S. per barrel and if you do the math at several million barrels being shipped daily 24/7 it will come as no surprise the the CEO of Enbridge 'earns' about $40 thousand a day in 'salary' alone, which makes the $17 over twenty years he has offered to First Nations along the Gateway route seems mitey generous.

Owen Gray said...

More evidence, ron, that the game has been rigged.