How Big is Canada’s Oil Subsidy to the US?

Posted by Jeff Rubin on January 7th, 2013 under SmallerWorldTags: , ,  • 20 Comments

Consider the tale of Suncor and Canadian Natural Resources, two of the largest oil sands producers in Alberta. Outwardly, they may appear quite similar. Each produces hundreds of thousands of barrels a day from the oil sands. And most of that oil eventually ends up in the same place—gas tanks across the continent. The path it takes to get there, however, is another story. The difference is a microcosm of the predicament Canada’s energy industry currently faces.

Over the last few years, Suncor’s emphasis has shifted from exponential production growth to milking the full value of what it digs out of the ground. Fortunately for Suncor, it processes nearly all of the bitumen it pulls from the oil sands in its own refineries.

On the other hand, CNRL, like most oil sands producers, exports raw bitumen to the United States. In so doing, however, the company also transfers an enormous amount of wealth from its Canadian operations to American refiners in the Midwest.

In the refining business, the difference between what a refinery pays for its inputs (like crude or bitumen) and the price it gets for finished products (like gasoline or diesel) is known as a crack spread. The glut of oil coming from Canadian producers means Midwest refineries are enjoying crack spreads up to five times larger than those seen by American coastal refineries, which pay world prices for their feedstock.

Investors have certainly noticed what such large crack spreads mean for the bottom line. CNRL, which lacks its own refineries, is forced to sell its raw product at a heavy discount, thereby missing out on those juicy refining margins. Suncor, on the other hand, is able to capture the huge crack spreads through its downstream refining operations. In 2012, CNRL’s stock fell more than 20 percent, while Suncor’s gained more than 10 percent.

The issue is writ large in the price differential between West Texas Intermediate (WTI) and Brent crude. Although WTI is often quoted in North America as the price of oil, Brent is actually the global benchmark for crude. Unfortunately for Canadian producers, lately the spot price of Brent has been as much as $25 a barrel higher than that of WTI.

While Canadian oil sands producers are the main victims of this price gap, they’re also, somewhat ironically, its principal cause. Without more pipeline infrastructure to offload oil to other markets, oil sands crude, as well as shale oil from the Bakken play in North Dakota, has no where else to go. More production from these places only boosts supply, further lowering the price of WTI.

Aside from a few hundred thousand barrels a day from wells offshore Newfoundland that get Brent prices, virtually all of Canada’s 2.4 million barrels a day are priced off WTI.

An even bigger concern for Canadian oil producers than the discount between WTI and Brent is the price differential between WTI and Western Canadian Select—the benchmark price for western Canadian oil exports to the US. It’s trading around $60 a barrel, a third less than WTI and 45 percent lower than Brent.

Do the math on some 2 million barrels a day of heavily discounted oil exports and suddenly you’re talking about an enormous wealth transfer from Canadian oil producers to American refineries. (Note, the subsidy is pocketed by US refiners, not motorists, who don’t see the Canadian discount when filling up at the pumps.) What if Canadian oil was getting world prices? At the current Brent-Western Canadian Select spread of roughly $50 a barrel, you’re in the neighbourhood of $100 million a day. That equates to foregone revenues of more than $35 billion over the course of a year.

It’s not just shareholders of companies like CNRL who are getting squeezed by this wealth transfer. The Alberta government loses royalties, while Ottawa (and the rest of Canada by extension) misses out on cash from corporate income taxes.

The rest of the oil sands industry may need to take a page from Suncor’s playbook. Before rushing ahead to double oil sands production to 3 million barrels a day—and sending billions more in de facto energy subsidies to US refiners—investors and the Canadian economy may be better off if producers figure out how to capture more value from what they’re already digging out of the ground.

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  • http://www.facebook.com/walter.haugen Walter Haugen

    I suspect the Chuck Hagel confirmation will entail a backroom “compromise” on Nebraska environmental concerns so the Keystone pipeline can be built. Then Christy Clark will have to quickly ram through the Enbridge pipeline so BC can get SOME royalties. Voila! Problem solved (except for the nasty environmental problems of course).

  • Calgary Gal

    Living and working in Calgary, I’ve wondered for years now why Canada doesn’t refine its own oil as a matter of course. I still don’t know – I suspect it has something to do with who actually owns the companies that are digging in Fort McMurray.

  • http://pulse.yahoo.com/_EU4PCOXIGPWWEBE2ENIFTXS54Y John

    It does seem that many of our local producers lack the vision to vertically grow their oil refining/services businesses to increase their margins and bring more downstream oil business to Western Canada.  Why?
    I have asked this very question in this forum in the past when Jeff has posted similar themed articles.  As in most things, I believe one must follow the money to see why it isnt being done or why making the change is not in their interests as it should be. 

  • JB

    What would the US be willing to do to ensure that this $35 billion annual subsidy continues for the foreseable future?

    JB

  • http://peaksigns.org/ Peak Signs

     Regime change in Canada, perhaps…  ;-)

  • http://peaksigns.org/ Peak Signs

     You are probably right about the ownership being the issue.  Also, building a new refining complex is awfully expensive, takes many years to complete and then takes many more years after that to pay for itself. 

  • Cal48koho

    Perhaps Alberta playmakers and cnrl should be taking a page out of opec’s playbook. Cut production.  Maybe I should keep my mouth shut Gas here in wyoming is less than $2.40 a gallon thanks to the Canadians.

  • Formercorvguy

    Canadian government is not looking out for Canada’s best interest,  it is time for an export tax equal to the price differential from world oil, maybe with a promise to relax this once Keystone is approved.

  • EVHappy

    Shuuu! Don’t tell them that, Jeff. We need cheap oil here in the US just to keep afloat. We are already spending 1 trillion dollars over budget every year. 

    Reality is that the Canadian government knows full well who they are sleeping next to. That is a giant you just don’t want to slap in the face for snoring too loudly. They know it is better to shut up and enjoy the nice living while making sure that giant knows how important they are, like cooking the food, taking care of the kids, etc.

    If the giant feels the Canadians are not doing a good job, well, I think you can guess what would happen next – welcome to the state of Canada. 

    You all may laugh at that but what actions in American history shows that we are not willing to go all over the world, crush any country in our path to keep that oil flowing? This is serious stuff and people will start to starve and lose their civility very quickly as we continue our ride down the fossil fuel bell curve. 

    Just keep feeding the giant and keeping them happy. That way the whole family has peace and happiness. At least for now… 

    Think about it this way – US population: 310 million. Canadian population: 35 million. That gap is huge enough, even before you talk about the military spending gap (which is beyond outrageous).

    During the ride down the bell curve, we can expect a lot of country consolidation and reorganization, just like any company dealing with negative economic changes. 

  • EVHappy

    Sure, go ahead and propose that to the US government. I think that might go over very well. Good luck!

  • EVHappy

    Who are we kidding – full out war. Without affordable energy, the US will collapse. Collapsing societies do nasty things, especially one’s that spend 50% of the world’s military budget. 

    Do you want to be the country that is blamed for that problem? I wouldn’t.

  • EVHappy

    Here is the simple answer – squeeze someone’s balls and they start to feel uncomfortable. Squeeze a bit more and they start to complain a little bit. Keep on squeezing and you have their full attention. Go past that and you either kill them or they kill you. 

  • JB

    That sounds about right…

    How could the US discretely manage to organize a referendum in Alberta where the question would be: “Do you agree to become the 51st US state?”

    JB

  • EVHappy

    I would imagine it being backed up by an unimaginably massive land and air threat.

  • Energyecon

    Subsidy my @ss - some management is more focused on volumes than on margins and returns – additional investment in export infrastructure, processing capacity or some combination of both is needed. 

    Good headline for capturing eyeball, kudos!

  • Doug

    We hear about opposition to the Keystone pipeline from environmentalists, as well as property owners along the right of way. Could it be the biggest opponents are companies that own refineries, and make a lot of money on that big crack spread?

    with this big price difference between Brent and WTI crude, why isn’t there more emphasis on building more pipeline capacity from the west to eastern Canada and U.S., rather than shipping all that crude to Asian markets?

  • Canadian

    Mr.Rubin,
    I can see your insight in to the price of oil and energy in general and it’s effect on economies as well as the environment. So what is next is the price of oil going to drop because the economies are using less or is the price of oil going to increase? The interesting thing about oil is the amount of work that can be done using a relatively small amount of oil?

  • guest001

    the states are not unstoppable and frankly i think the world is tired of the states BS, it would be the straw that broke the camels back and the white house will burn….. again.

  • Harry

    Wakey Wakey:  American investment in Fort McMurray, a convenient application of Brent prices, there might be a Canadian flag flying over most operations in Fort Mac, but the objective has always been US Investment for lower Upstream extraction cost, to flow it to the US and garner profit at downstream.  These are Alberta resources and our current weak government allows this disproportionate extraction of our resources to our provincial detriment.

  • Petr Aardvark

    that would be a violation of Nafta, because unlike Mexico which kept oil of the table, Canada cannot charge the US more than it charges Canadians.. Which is why when I fill up in Vancouver it is $90 and $60 in Washington.