Thank you.
The problem of market diversification is, in my opinion, a mis-specification of the issue. The issue is not to find new markets. The issue is to get paid for what we're taking out of the ground, and that's something we haven't been able to do.
Western Canadian Select, which is the benchmark export price for Alberta oil to the U.S., has traded at anywhere from a 20% to a 50% discount to world oil prices, which is the Brent crude price. When you consider that we export two million barrels a day, at that kind of discount we're talking anywhere from a $10-billion to $30-billion annual subsidy to our U.S. customers.
Of course, I could add parenthetically that U.S. motorists never see that discount. U.S. motorists pay the same for their gasoline whether the feedstock is West Texas Intermediate, whether the feedstock is coming from Saudi Arabia, or whether the feedstock is coming from Alberta bitumen.
Who captures that margin? The refineries. Crack spreads in the Midwest—by “crack spreads” I mean the petroleum refinery margin, the difference between the input and the output, which typically is gasoline or diesel—can be as much as four to five times as great as it is on the gulf coast, where refineries pay Light Louisiana Sweet, which is a Brent derivative.
The issue, really, is not to get to another country. This issue is the way we supply the U.S. market, because we supply the U.S. market quite differently from how other people supply the U.S. market. We supply the U.S. market through pipelines. Other people export their oil to refineries on the coast.
You don't have to go to China to get Brent. You just have to get to an ocean to get Brent. It doesn't matter if it's the Pacific; it doesn't matter if it's the Atlantic; it doesn't even matter if it's Hudson Bay, because once you get it to an ocean, you can take it to any refinery on the Atlantic coast or the Pacific coast or the Gulf of Mexico and get that Brent equivalent.
When you combine the fact that Canadian producers are being saddled with a 20% to 50% discount to world oil prices and have one of the highest cost structures in the world, it makes the resource kind of problematic. I think we're finding that in the inability of Canadian producers to expand production and to finance expansion. The economics of the tar sands is now challenged by two pinchers: the rising cost curve, and the fact that we're getting a 20% to 50% discount from world oil prices.
How do you get there? You get there by building pipelines. But people don't like pipelines. You might say that Keystone XL is a pretty circuitous way to get to the ocean if you're starting off in Hardisty, Alberta. You might think that a much easier way would be to go over British Columbia, and of course there are proposals to do that: Kinder Morgan's Trans Mountain, and Enbridge's Northern Gateway.
The only problem is that while it's very attractive for Alberta, picking up anywhere from $20 to $30 a barrel, what's in it for B.C. other than the cleanup costs? So it ain't going that way.
I think we're going to learn from the Keystone XL example that it's problematic to go through another country's territory, even a friend and ally, to get to world oil prices. That leaves one other route.
I think there is a cogent argument to take oil east. Eastern Canada imports about 600,000 barrels a day, ironically much of it Venezuelan heavy crude, which isn't that different from the product from our tar sands.
I will just point out—if I haven't exceeded my seven minutes—that yesterday I was speaking at the Williston Basin Petroleum Conference. The Williston Basin, also known as the Bakken, is probably the hottest oil play in North America. North Dakota has gone from nothing to producing 750,000 barrels. Even Saskatchewan, which gets a little tail of the Bakken, is now producing 70,000 barrels of shale oil, or tight oil.
They have exactly the same problem. Without pipelines, they're a stranded asset. Folks in North Dakota are loading it on rail. For $16 a barrel transport cost, you can go from Williston, North Dakota, to a refinery on the east coast or a refinery on the west coast.
That doesn't seem to be on anybody's radar screen as far as the environmental movement is concerned. While there is great opposition to pipelines, there doesn't seem to be any opposition to moving oil by rail. I suspect, however, when three to four million barrels of oil a day start getting railed around North America, the laws of probability suggest we're going to see a spill and we're going to see that get on people's radar screens.
The bottom line here is that without pipeline access—and this is not just true of the tar sands; this is also true of the Bakken, or Eagle Ford in Texas—it's a stranded resource. That means we're not going to see the kind of development production-wise that people like the International Energy Agency or the Energy Information Administration in the U.S. are predicting.
We're not going to see the tar sands go from 1.7 million to four million barrels. We are going to see the tar sands continue to produce. I'd say before worrying about getting three million barrels a day out of the ground, let's get paid for the 1.7 million we're digging out.
Thanks very much.