• Relative windfall shrinks along with WTI price gap, memo says
  • TransCanada pipeline would still broaden market beyond U.S.

TransCanada Corp.’s Energy East pipeline could provide a smaller windfall to Alberta oil producers than when the conduit was first proposed, a report by Canada’s Finance Department shows.

The document outlines scenarios for how much Alberta’s oil could fetch in 2020 if Energy East is built. The pipeline would transport western crude to refineries in the east and to the Atlantic coast for export, netting producers higher prices linked to the global benchmark, Brent. That compares to prices fetched for most of the Alberta oil that’s currently piped to the U.S. Midwest and priced off the main North American grade, West Texas Intermediate, or carried by rail across the continent.

The Finance Department said the premium of Brent over WTI could narrow to $4.08 a barrel by 2020, according to a December 2015 memo obtained by Bloomberg through a freedom of information request. In 2011 and 2012, however, the premium reached more than $25. The U.S. lifted a ban on exporting its crude last year, allowing vast supplies from shale to be sent overseas and prompting forecasts the price differential between WTI and Brent will be closer to parity going forward.

“The benefits of building the pipeline would be greater if the price between WTI and Brent would be as large as that observed in 2011 and 2012,” said the document, which is dated Dec. 10 and marked secret.

Project Benefits

TransCanada, based in Calgary, secured customers for Energy East in 2013 saying the project would open markets for western Canadian oil and replace foreign imports by refineries in the east. The C$15.7 billion ($12.1 billion) project would take as much as 1.1 million barrels a day over 4,500 kilometers (2,800 miles). It needs federal approval and Prime Minister Justin Trudeau’s government has said there is a greater burden on companies to show big projects benefit the economy while safeguarding the environment.

Without the large premium for Brent over WTI, the main value of Energy East would come from cutting the cost of transportation to $8 a barrel by pipeline from $14 a barrel by train, the report showed. The combined benefit of higher prices and lower transport costs would range in 2020 from $1.48 to $6 a barrel. The report’s calculations were based on forecasts from the government regulator and commercial researchers.

“Energy East is supported by our shippers through firm, long-term contracts which demonstrates the need for increased and diversified market access,” TransCanada spokesman Tim Duboyce said by e-mail. “In addition, market access for western Canadian crude oil both domestically and on international markets should lower the discount Alberta producers are subject to.”

‘Distant Markets’

While some of Alberta’s thick oil-sands bitumen is processed into light, synthetic crude, much of it is sold as a heavier grade known as Western Canadian Select. Producers can benefit from Energy East even if the Brent-WTI price difference is narrow because they would access markets outside the U.S., said Robert Johnston, chief executive officer and director of global energy and natural resources of Eurasia Group, a Washington-based research and consulting firm. “Energy East is about moving heavy barrels offshore -- not to the U.S. but to Europe, to India, to more distant markets,” Johnston said in an interview in Calgary.

Whatever the business case, Trudeau may have a harder time finding political support to approve Energy East because his Liberal Party has a base of support in Quebec, where the competing New Democratic Party and Bloc Quebecois have tapped into environmental opposition to the project. “The Trudeau people will be concerned about the NDP or the Bloc, or both, using the pipeline as a wedge to really undermine the Liberals in the province,” Johnston said.

The Finance Department’s report had several passages redacted including most of the environmental discussion. It was sent by Jean-Francois Perrault -- a departmental and central bank veteran who is now chief economist at Bank of Nova Scotia -- to Deputy Minister Paul Rochon, the highest official in the department. There is no indication it was shared with Finance Minister Bill Morneau or any other cabinet ministers studying the project.

“The government of Canada will make its decision on the Energy East pipeline project after considering a variety of information,” Jack Aubry, a spokesman for the Finance Department, said by e-mail.

Costs and Delays

Energy East has faced delays and rising costs as TransCanada made changes to the project’s route and design to address environmental concerns, including scrapping a marine export terminal in Quebec. The company applied to build the line with the National Energy Board in 2014 and this month refiled a consolidated version. When it originally signed up customers, TransCanada had hoped to have it running in 2017. It now expects the line to start operating in 2021, with delays also tied to the Trudeau government adding another six months to the review.

It’s not just Energy East facing more scrutiny. Three other major projects -- Keystone XL, Enbridge Inc.’s Northern Gateway and Kinder Morgan Inc.’s Trans Mountain expansion -- are all facing opposition and added regulatory hurdles.

The crude benchmarks are now even closer in line than the department’s original memo. Brent traded for $49.82 a barrel on Tuesday morning in New York compared to $49.88 for West Texas Intermediate.

Price Volatility

The slump in oil prices has diminished the need for Energy East to ease a gridlock in shipments, the finance memo suggested. “The low price environment has led to oil production forecasts being revised downward; meaning that sufficient capacity (from both rail and pipelines) is projected to exist to transport oil until at least 2025.”

Brent’s “excessive” premiums over WTI between 2010 and 2014 were linked to strong Chinese demand, restricted production from the Organization of Petroleum Exporting Countries and U.S. oil export restrictions, the report said.

Over the long term, volatility in global oil markets will provide chances to make money from the price difference between crude grades, said Reynold Tetzlaff, national energy leader for Canada at PricewaterhouseCoopers LLP.

“The pipeline lasts 50, 60, 70 years, so over that term with the volatility you’re going to be able to capture a lot of the value,” Tetzlaff said in an interview in Calgary.

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