This week we are in the throes of growing panic as oil prices plummet and General Motors announces the closure of the GM plant in Oshawa.
No one would minimize the deep distress of workers losing their jobs in Oshawa. But the idea that the jobs must be saved because we must keep making the internal combustion engine is as tone deaf to global reality as deciding we have to buy a pipeline because oil prices are low.
It is clear that the basic elements of oil pricing are not understood by pipeline boosters. The constant repetition of claims that we lose $40 million per day, based on a Scotiabank report, has lately been boosted to claims of losing $100 million per day. The claims are absurd. Yet they are repeated by national media as a received wisdom.
The initial claim from the Scotiabank report was easily dismantled by B.C. economist Robyn Allan. Her detailed analysis was published in the Vancouver Sun on March 4: “Scotiabank's oil report a work of fiction.” Allan did something that seems beyond the reach of anyone in our mainstream press. She checked the facts.
The Scotiabank claim of daily losses was buttressed by a simple calculation. What is the price of oil globally, described as West Texas Intermediate, (WTI) versus Alberta bitumen described as heavy (Western Canadian Select, or WCS)? Then Scotiabank multiplied that differential by the total number of barrels produced in the oilsands. This was not only a simple calculation, it was simplistic and wrong.
Allan went through the production numbers and quickly disproved the claim. It's worth quoting at length:
“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 oil sands producers. SCO has been selling at a premium to WTI, not a discount.
“Another 15 per cent of heavy goes directly to domestic refineries for processing into petroleum products. A quick look at the pumps tells us Canadian refiners charge at retail as if they paid world prices based on North Sea Brent. No loss there.
We are subsidizing whale oil and buggy whips to delay the inevitable. And in that delay, we may lose our future.
“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.”
Of course, Scotiabank did not disclose its own conflict of interest as a bank that had decided to loan Kinder Morgan billions, but only if it could raise $2 billion in capital. Those who rely on the Scotiabank numbers never seem to notice that motivation to boost the project either. I was so disgusted with Scotiabank that I finally did what I had been meaning to do for years: shifted all my banking to my local credit union.
As I have written before in the National Observer, the sensible plan for Alberta’s economy would have been to keep investing in upgraders and refineries. That had been Peter Lougheed’s plan, but it was jettisoned, along with the Heritage Fund, by Ralph Klein. Why Rachel Notley preferred to pursue Klein’s plan and ignore Lougheed’s is something for NDP members to ponder. When she was in opposition, she knew Alberta needed more refining, just as she knew that having the lowest royalty rates in the world was folly.
A commitment to ship out raw bitumen for refineries in other countries manages to be simultaneously dangerous for the climate and poor economics. The stuff is simply low value in the market, yet very costly to produce. It will never — whether it reaches magical tidewater or not — fetch the same price as oil that is ready for refining without the additional costs of upgrading. Meanwhile, those oil producers who do upgrade bitumen and then sell it are reaping a premium, just as Allan reported.
Andrew Nikiforuk noted this reality about pricing on November 23 in The Tyee: “Alberta’s Problem Isn’t Pipelines; It’s Bad Policy Decisions.”
In a detailed analysis, Nikiforuk pointed out that an internal Alberta government report had warned of the risk of over-producing low-value bitumen and counting on exports.
Meanwhile, the major producers Suncor, Husky and Imperial, have all had very good years, benefiting from the premium received for synthetic crude. Nikiforuk concludes that, “All three firms have succeeded this year because they own upgraders and refineries in Canada or the U.S. Midwest that can process the cheap bitumen or heavy oil into higher value petroleum products.”
But what should really be our focus — shutting down fossil fuels in order to keep planet Earth liveable — is being sacrificed in the quixotic pursuit of votes in Alberta.
The idea that Rachel Notley has adopted a useful carbon goal is laughable. The Alberta plan is to boost its greenhouse gas emissions from 70 megatonnes a year to 100 MT. Alberta’s plan to shut down coal by 2030 could result in a dramatic reduction in GHGs since coal-fired electricity in Alberta produces 70 megatonnes per year. But Alberta plans to replace coal plants with natural gas plants. And the plants are not required to meet best technology for efficiency. Since the source of natural gas is likely to be fracked gas, the GHG benefits of this fuel change will be negligible.
What we need is a rapid end to fossil fuel dependence. If we are to take the October 8 report from the IPCC seriously, we need it fast.
Historically, we have seen one energy source displace another. The driver is usually a disruptive technology. One example was the end of whale oil as a source of lighting. It was used almost universally in the mid-1800s. The invention of kerosene by Nova Scotian Abraham Gesner changed everything. We did not stop hunting and slaughtering whales because we suddenly cared about whales, but because kerosene burned more cleanly and was cheaper.
Fast forward to today. We are acting as though propping up whale oil to keep kerosene out of the market would be a shrewd move. If the Canadian policy-makers of today had been around in the 1920s, they would have poured money into the horse and buggy industry to try to keep the Model T at bay.
The handwriting is on the wall – the era of fossil fuels is over – but we keep erasing the writing.
We must get a fair and independent assessment of the economics of pursuing the pipeline expansion, previously owned by Kinder Morgan. We must not spend a single penny toward the $10-13 billion project to build an additional pipeline to ship diluted bitumen (dilbit) by tanker, primarily to the U.S.A..
The economic goal of building more pipeline capacity is to boost bitumen production, driving up GHGs. The only way to cut GHGs is to start with the obvious commitment to reject any expansion of fossil fuel supply. Refining at current levels of production can replace foreign imported oil. We can charge more for it, but gain the economic benefit of paychecks to Canadian workers.
We must develop robust programs for worker retraining. “Just transition” strategies are part of the Paris Accord. So, as we move to assure our children a world no more than 1.5 degrees hotter, we must do so in ways that provide workers with meaningful jobs in related fields.
But for now, we are subsidizing whale oil and buggy whips to delay the inevitable. And in that delay, we may lose our future.