‘Take it from me’

By Aaron Wherry - Friday, September 28, 2012 at 10:04 AM - 0 Comments

Jim Prentice raises concerns about pipeline development on the West Coast.

The Calgary native told his hometown audience that Ottawa’s neglect of the aboriginal relations could doom proposed oil pipelines, including Enbridge Inc.’s Northern Gateway project and Kinder Morgan Inc.’s TransMountain pipeline expansion.

“The obligation to consult with and accommodate first nations … these are responsibilities of the federal government,” said Mr. Prentice, who held posts as minister of Indian affairs, industry, and environment before leaving government in 2010. “And take it from me as a former minister and former co-chair of the Indian Claims Commission of Canada, there will be no way forward on West Coast access without the central participation of the first nations of British Columbia.”

Jeff Rubin puzzles me

By Stephen Gordon - Thursday, September 6, 2012 at 7:27 PM - 0 Comments

I don’t understand this at all. As far as I can make out, this is Jeff Rubin‘s argument:

1. Refineries’ margins are paper-thin, and have been so for decades; that’s why North American oil companies stopped building them long ago and have been shutting them down. This is true.
2. The West Texas Intermediate (WTI) crude oil price set in Cushing, Oklahoma is currently trading at a significant discount from the Brent price set in the North Sea and which is used as the reference price everywhere where supplies are available by tanker, such as Eastern Canada. This is also true.
3. Refineries buying WTI oil are more profitable than those buying Brent oil. Market pressures being what they are in the market for gasoline, this is also true.

From this, Rubin concludes that the path to prosperity is for Canadians to get in on the business of refining WTI-priced oil – namely, the oil produced in Canada.

This makes no sense to me:

1. If refining WTI-priced crude was the path to long-term prosperity, oil companies would be building refineries without any encouragement from Ottawa (or Washington, come to that).
2. The WTI-Brent spread opened up sometime around January 2011. The economics of refining have been dodgy for decades.
3. The WTI-Brent spread is an opportunity for arbitrage: buying in the low-price market and selling in the high-price market. Ordinarily, arbitrage is a cheap and riskless way of making money. As long as the price differential exists, demand will increase in the low-price market, and supply will increase in the high-price market. The reason why the Brent-WTI differential has persisted is that it was difficult and costly to buy oil in Cushing and transport it to the Gulf Coast, where the Brent price prevails.
4. Unsurprisingly, the private sector is falling over itself to take advantage of this arbitrage opportunity. The Seaway pipeline reversal has already begun to ship oil from Cushing to Houston, and the southern part of the Keystone XL project is under way. It makes no sense at all to make policy based on the assumption that the WTI-Brent spread is an immutable constant.
5. It won’t be long — a few years — before the WTI-Brent spread is arbitraged away, and we’ll revert to a world where refining is everywhere a marginal business with razor-thin margins, and in which oil production is lucrative – which probably explains why the private sector doesn’t see much point in investing in Jeff Rubin’s business plan.

Diverting capital and labour away from a lucrative industry towards a marginal one isn’t creating “value-added.” It’s creating value subtraction.

Pipelines and battle lines

By Alex Ballingall - Friday, January 13, 2012 at 7:15 AM - 0 Comments

After the U.S. delayed its decision on whether to approve the controversial Keystone XL pipeline that would carry oil sands bitumen from Alberta to the Gulf of Mexico, Prime Minister Stephen Harper was quick to stress his government’s renewed enthusiasm for exporting more oil to Asia. He called it “an important priority” for Ottawa.

With those words, the heated pipeline fight shifted from Keystone to the Northern Gateway project in British Columbia, where Calgary-based Enbridge Inc., hopes to lay a 1,172-km oil sands pipeline to the port town of Kitimat. For environmentalists, the economic benefits—estimated by Enbridge to add $270 billion to Canada’s GDP over 30 years—don’t outweigh the risk of an oil spill, something Enbridge experienced with much publicity in July 2010, when one of its pipes burst into Michigan’s Kalamazoo River. Nathan Lemphers, a Pembina Institute analyst, says Northern Gateway’s route leaves it vulnerable to landslides and avalanches, increasing odds of a rupture. He also points to the B.C. coastline, where an oil tanker spill could devastate salmon stocks and wipe out the region’s orcas, according to a 2010 report by the Raincoast Conservation Society. Alongside such disquiet are concerns over Aboriginal land rights. Continue…

Explaining Canada’s hurry to build pipelines in the U.S.

By Andrew Leach - Monday, November 21, 2011 at 4:20 PM - 47 Comments

Washington’s decision to temporarily shelve the Keystone XL project has Canadian companies rushing to redraw the pipeline map. Enbridge announced plans to reverse the direction in which crude oil flows in the Seaway pipeline connecting Oklahoma to Texas in order to send more oil from Midwestern refineries to those on the U.S. Gulf Coast. Keystone godfather TransCanada, on the other hand, wants to start building the southern leg of the pipeline, also linking Oklahoma to Texas. Both projects aim to reduce the pressure on a bottleneck of crude in the U.S. Midwest that’s been building up for a year. Why are Canada’s majors so eager to build pipelines to the Gulf? Andrew Leach, a professor of natural resources, energy, and environment at the University of Alberta’s Alberta School of Business, explains.  

Why is there a buildup of crude oil, including Canadian crude, at refineries in the U.S. Midwest?

It’s a simple case of supply and demand in a local market. We’re often told the market for oil is global, but in truth it’s more of an integrated web of regional markets and the U.S. Midwest is one of those regions (in the graphs, you’ll see it referred to as PADD 2). This regional market has pipelines running both in and out of it, and oil is used by refineries within the region to produce gasoline, diesel fuel and other products. There are essentially two ways in which crude oil gets out of the Midwest–either it’s refined or it’s transported to another region by pipeline, rail, barge, or truck. On the demand side, use of crude oil by Midwest refineries has been decreasing since the year 2000, as shown in the figure below: Continue…