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The Case for Customer Diversification for Canadian Crude

It is widely known that Canada has an almost exclusive partnership with the United States in terms of crude sales.  But what does this mean exactly for Canada in their negotiating power for crude pricing?  Not much.

Historically, Canada has priced their bitumen against West Texas Intermediate (WTI) prices due to necessity and customer standards.  This raises the question of what the economic impact is for basing bitumen pricing on a more volatile product instead of the European equivalent – Brent.  Historically, Brent price benchmarks have been far more stable than WTI.  During times of price volatility, WTI swings are reflected in Western Canadian Select (WCS) prices, whereas Brent prices remain stable.

Of course, there is a considerable amount of other factors that will affect the pricing of crude, but for this illustration these factors will be assumed to be constant.

By increasing the number of customers to include Europe, SEA, China, and other countries with high crude demand, Canada could effectively adjust pricing of WCS and allow it to become more stable.  With increased stability in pricing, an overall economic benefit can be seen.

So what outcomes would that have had on the Canadian economy in 2013?

Using the Western Canadian Heavy oil production volume of approximately 1.98 mmbbl/d, an overall economic loss can be estimated between the two pricing methods, current and Brent adjusted. The overall economic loss for 2013 is estimated at USD$6.84 billion, or around USD$18.7 million per day, purely from the pricing of Canadian heavy oil sands.  Just imagine where that extra revenue could have been used.

By: Anonymous