Diversify Canadian oil sands exports

TORONTO—Canada’s oil and gas sector isn’t drilling into the billion-dollar potential in emerging markets, according to a recent analysis by the Scotiabank Group.

January’s Scotiabank Commodity Price Index says Canada’s oil sands exports are too US-focused and producers could be reaping higher prices from swelling demand in other economies.

West Texas Intermediate oil (WTI) is the standard North American pricing reference for oil.

Limited pipeline capability from Cushing, Oklahoma, to refining centres in the US Gulf region has created a supply glut, bringing the WTI far below the Brent crude index, which influences pricing on two-thirds of the world’s oil supply.

Brent prices are based on oil from the North Sea in Europe, where petroleum demand is surging due to production decreases there and a colder-than-normal winter.

By late January, the gap between the two pricing systems had widened to US$12 a barrel.

Patricia Mohr, Scotia’s vice-president of economics, says the discrepancy is costing Canada’s oil industry.

“It’s more than a billion dollars in lost value. We export about two-thirds of our oil production to the US—there’s really a lot of money involved here,” Mohr said.

TransCanada Corp. and Enbridge are proposing two respective pipeline projects—Keystone XL and the Monarch project—that would extend shipments to the Gulf, relieving some of the North American pricing depression.

But Mohr says it’ll be at least another couple years before the pipelines are built and in that time, wide price differentials could continue, with Canada at commercial risk from relying largely on just one export market.

“If you look at the lumber industry during the US housing market’s downturn, that was devastating for Canada’s exports, the bulk of which had been going to the US,” Mohr says.

That sector is just recuperating now, after spending the past several years diversifying exports to countries such as China, where rising demand is fueling higher prices.

She says Canada’s oil and gas industry could do the same.

Chinese oil consumption increased by 12 per cent last year and Scotia predicts demand will continue to climb this year as the country’s economy expands by 9.5 per cent.

Mohr adds, however, it’s going to take significant infrastructure investments to transport Canadian oil to the Pacific Rim.

“We have some access now,” says Travis Davies, media relations manager at the Canadian Association of Petroleum Producers.

Canada can ship between 80,000 and 100,000 barrels of oil a day to Asian markets off Vancouver’s inner port.

Davies says while diversifying exports, especially to Asia, is important, the US remains Canada’s most “natural” market.

“It’s close, it’s friendly and we already have the infrastructure in place.”

But those times are a changing, says Todd Crawford, an economist with the Conference Board of Canada’s national energy research, oil and natural gas extraction industries and the provinces of Alberta and Newfoundland-Labrador.

“Asia and India are going to be the driving force of demand over the next 35 years and it would benefit Canadian producers to secure that long-term market,” he says.

With Canadian oil production likely to hit 2.9-million barrels a day by 2020, Crawford says logistics investments would pay off.

Despite potential gains, the issue of transporting oil has been a “polarizing” subject in Western Canada, says Will Kimber, vice-president of research with Canada West Foundation.

“There are very strong views both for and against increasing our oil sands trade with China and India, in part because of what it’d mean for pipelines and tanker traffic here,” Kimber says.

Enbridge is planning a $5.5-billion pipeline system to transport oil from Edmonton to a new marine terminal in Kitimat, B.C. for shipping to overseas markets.

The proposed Northern Gateway pipeline has been met with opposition from many environmental, research and First Nations groups.

On top of environmental concerns, there are economic risks to weigh as well, especially in Alberta where 40 per cent of the economy is driven by the oil and gas sector.

“Any swings in global commodity markets and we’re going to be very deeply impacted.”

Kimber says these are the kinds of issues that highlight the need for a national energy strategy.

“There are huge economic opportunities here that can’t be ignored and we have to figure out how best to position Canada to take advantage of them.”