New report questions Trans Mountain expansion’s ‘Asian markets’ rationale

A new study is questioning one of the central rationales for the Trans Mountain pipeline expansion project — that it would allow Canada to fetch a fair price for its oil.

Practically all of Canada’s oil exports, 98 per cent, go to the United States, and Prime Minister Justin Trudeau's government ministers have often said the Trans Mountain expansion (TMX) will ensure the country can get a “fair price” for its natural resources by opening up non-U.S. markets.

A report released Thursday by the Canadian Centre For Policy Alternatives’ B.C. office, as part of the Corporate Mapping Project, claims it is unlikely there will be any price premium selling the oilpatch’s heavy sulphur-rich crude oil to Asian nations — and, in fact, it may sell at a discount compared to sales to the United States.

Report author David Hughes said in an interview that he arrived at this conclusion by examining a comparable type of crude oil from Mexico, looking at what prices it has been getting in Asia compared to the U.S. as well as what the projected transportation costs would be from the Alberta oilpatch to either destination.

Putting these two factors together, Hughes calculated that Canadian producers would be taking a loss of US$4 to $6 per barrel if they sold to Asian refineries through TMX, compared to selling to U.S. refineries.

“What I’m trying to do is just process the data as they are, and as they have been over the past six or so years,” said Hughes, a retired research manager at the Geological Survey of Canada. “It looks like producers are going to lose money using TMX (to Asia).”

The report by Hughes adds to a growing sentiment that the changing dynamics of the fossil fuel industry are eating into the business case for TMX. The energy firm BP, the International Energy Agency and oil export group OPEC all recently slashed their oil demand forecasts, leading economists and policy experts to question the pipeline project's viability.

Canada Development Investment Corporation, the Crown corporation that owns and operates the Trans Mountain pipeline and its expansion project, said in a statement that it had not had an opportunity to review the details of the report and is “therefore not in a position to provide comments on the assertions being made.”

Oil to Asia ‘likely to command a lower price’

Hughes examined sales of a similar heavy crude from Mexico by the state-owned oil company to two regions: the “Far East” — which is not defined, but reportedly includes China, Japan, India and South Korea — and the United States.

The crude oil, called Maya, is similar both in density and sulphuric content to Western Canadian Select (WCS), the benchmark blend of oilsands bitumen. Maya is produced by Petróleos Mexicanos, better known as Pemex. WCS sold on the U.S. Gulf Coast or in Asia would get prices comparable to Maya, Hughes said.

Over the past six years, Hughes found that Pemex’s exports of Maya to Asia sold at an average discount of US$4.27 per barrel compared to exports to the U.S.

“The price data for Mexican Maya in recent years tells us that Canadian heavy oil exported to Asia is likely to command a lower price than if sold to the U.S.,” reads the report.

In addition to this discount, Hughes looked at pipeline tolls from Kinder Morgan, the pipeline’s former owner, and adjusted for the projected increase in the cost of the expansion project to $12.6 billion, as well as inflation, and also examined tanker transport costs.

The result was that projected costs from Alberta to south China are from US$1.88 to $3.52 per barrel more expensive than to the U.S. Gulf Coast, said Hughes, and US$5.90 to $7.92 per barrel more expensive than to the U.S. Midwest.

Historical pricing not always ‘best predictor’

Kevin Birn, vice-president of North American crude oil markets at IHS Markit, said global pricing was a complex topic, and while historical pricing “can be instructive, it may also not always be the best predictor of future value.”

The rationale for TMX providing new market options, and lowering Canada's reliance on the U.S. market, was not only related to fetching a “fair price” for oil but also providing price stability and certainty for producers, he said.

The drop in global availability of the kind of heavy sulphuric crude oil that the oilpatch produces is an example of how values are not fixed and may change over time.

“Once in a marine vessel, Canadian crude would be free to move to the highest price point globally; this could include Asia, but likely would also include competition from California” and elsewhere, said Birn.

“This competition will be what sets the price of Western Canadian crude oil in the Pacific against competitive and comparable source of supply.”

Carl Meyer / Local Journalism Initiative / Canada's National Observer