Copyright of the Daily Oil Bulletin 2018
Analysis: Alberta’s Export Ban A Bad Idea
It was an interesting weekend.
Several people I know contacted me surprised that I thought Alberta should step aside and let the federal government lead on the Trans Mountain dispute with British Columbia (Alberta Should Let Feds Lead on TMX Ultimatum). They were especially surprised that I thought Alberta should shelve its potential ban on crude, natural gas and petroleum product exports to B.C.
I'm a hardcore Albertan — heck, I even moved back from New York to raise my kids here — and a big fan of former Alberta Premier Peter Lougheed. The crude and natural gas export ban worked during Lougheed’s epic battle over the National Energy Program in the early 1980s, they argued, so why shouldn’t one work against B.C. now?
What I had to explain was things are different this time around, some of which I mentioned in last week’s article, some of which I implied, and some of which I simply did not have space to discuss. It's different this time around because Kinder Morgan is facing a potentially massive civil disobedience movement — which I discussed in detail in that article, and as a result will simply brush over here — over the $7.4 billion Trans Mountain oil pipeline expansion project (TMX).
The Preserving Canada’s Economic Prosperity Act, or Bill 12, would allow Alberta to implement a total or partial ban on crude and refined product exports to B.C. after May 31 if the B.C. government continues to obstruct construction of the TMX, causing short-term shortages and price spikes in B.C.
For example, analysts have forecast gasoline prices would jump above $2 per litre based on a total ban, compared to around $1.50 currently, with the Trans Mountain pipeline providing 70,000 bbls/d of light crude to the Burnaby refinery — all its crude feedstock — and 42,000 b/d of petroleum products to B.C. as a whole. Bullying tactics such as the ban — Saskatchewan has since introduced similar legislation — could easily backfire, alienating B.C. residents currently supportive of the pipeline expansion, and further radicalize its opponents, making it even less likely it will be built.
At the same time, a total or partial ban is less likely to work this time because B.C., being on the coast and neighbouring Washington State, has relatively ready access to refined products from alternative suppliers — implied in last week’s article — whereas Ontario was a captive market for Alberta crude and natural gas in Lougheed’s day as it was landlocked and reliant on pipelines from our province.
Based on an oil industry analysis, B.C. would be hardest hit in the second to sixth week of a total crude and product ban, but shortages would subside as Washington State refiners sourced lost volumes from the Trans Mountain pipeline — 165,000 b/d of light crude in 2017 — from elsewhere and enterprising arbitragers found ways to profitably move petroleum products from wherever to B.C., mostly through Washington State. By the seventh week of the ban, B.C. residents would likely be paying less than 10 cents per litre more for gasoline, primarily reflecting the higher cost of transportation.
In contrast, the B.C. ban would leave Alberta with a greater amount of crude oil without pipeline capacity to move to market, and a surplus of refined products as well, leading to even lower crude and product prices for our producers and refiners, respectively.
For example, the loss of the B.C. market, representing roughly 10 per cent of Alberta’s crude exports, would cause discounts for western Canadian crude to increase by as much as $10 per bbl, according to the industry analysis, as this oil would have to rely on rail — once sufficient rail capacity is available — to get it to alternate markets given insufficient pipeline capacity out of the region.
Ironically, after the initial shortages and price spikes, B.C. would have Alberta over the proverbial barrel — assuming B.C. residents are willing to bear an extra 10 cents per litre — not the other way around, as we need their market more than they need our crude and refined products.