Oil Markets, Diesel, Canadian Heavy Discounts and Pipelines
This podcast is also available as a video on YouTube
In this week’s podcast, Peter and Jackie discuss global oil and diesel markets, the government’s role in major infrastructure projects, including the Pacific Link pipeline, and widening Canadian heavy oil discounts.
Escalating conflict in the Middle East has raised oil prices and renewed concerns over supply. Wars in the Middle East and Russia have also constrained refining capacity, tightening diesel supplies. With affordability and the US midterm elections in focus, Peter and Jackie discuss President Trump’s efforts to lower diesel prices. For now, the prospect of a US diesel export ban has receded. On October 15, the IEA announced plans to release 20 million barrels of diesel, while Trump agreed to purchase a relatively small volume of diesel from Russia, raising concerns about broader sanctions relief without concessions on the war in Ukraine.
Next, they discuss Peter’s article in The Hub, “Why Canada must put public dollars behind big infrastructure.” He argues that conventional financial analysis undervalues infrastructure’s generational benefits, including energy security, market access and economic sovereignty, which can extend over 50 to 100 years and may only be fully recognized by governments.
Finally, they examine the roughly US$26/B spot discount for WCS relative to WTI, driven by Western Canadian pipelines nearing capacity, Venezuelan competition in the US Gulf Coast (USGC), and high tanker rates that make re-exports of Canadian oil from the USGC costly. These discounts underscore the value of additional West Coast oil pipeline capacity.
Content referenced in this podcast:
- The IEA October 15 statement on releasing over 20 million barrels of diesel as soon as possible.
- Morningstar, “Surging Middle East Shipping Costs Widen Global Oil Price Gaps, Goldman Says” (Oct 13, 2026)
- The Hub, Peter Tertzakian, “Why Canada must put public dollars behind big infrastructure.” (October 9, 2026)
- Reuters, “Soaring freight rates threaten Asia’s appetite for US Crude” (October 8, 2026)
- Studio.Energy, “Latest Developments in Canada’s Market Hostage Situation” (October 9, 2026)
Please review our disclaimer at: https://www.arcenergyinstitute.com/disclaimer/
Check us out on social media:
X (Twitter): @arcenergyinst
LinkedIn: @ARC Energy Research Institute
Subscribe to ARC Energy Ideas Podcast
Apple Podcasts
Amazon Music
Spotify
YouTube
YouTube Music
Episode 341 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas Podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian, welcome back. Both Jackie and I are not in studio. As you can see, we have different backgrounds, but we’re happy to be with you. And from afar, we know that it is election day in Alberta. The vote is on a number of questions, including about whether or not people want Alberta to stay in Canada. Jackie, did you vote?
Jackie Forrest:
Of course I did, but I’m kind of happy I did the mail-in voting because the questions were very long and complex and it took me quite a while to read them and think about them. So I think the lineups are going to be long today. So that’s part of why I did the mail-in, but also because I knew I would be away.
Peter Tertzakian:
I think a lot of people did. I mean, I’m hearing numbers like over 40% of the people have already voted via mail-in and advanced voting. So that signals, in my opinion, a very big voter turnout, which is a good thing.
Jackie Forrest:
It is, yeah. So we’ll be talking more about the results of that next week. And I think the higher voter turnout is a great thing to see and be interesting to see. Because I think typically we get 60% of eligible voters voting in general. So this looks like it could be higher.
Peter Tertzakian:
I think it’s lower than that. And certainly for civic collections and things like that, I think it’s even lower than that. So 40% already is a big number. But anyway, what are we going to talk about today? Because we’ll talk about the results and the implications of the vote next week.
Jackie Forrest:
Right. Well, hey, first thing I want to talk about is that maybe some of our listeners don’t know, but you can watch us on video now. So we’ve had about four episodes on video. You can see video on Apple, on Spotify, and on YouTube. So check that out. But in terms of the topics we’re going to cover today, we’re going to quickly talk about oil markets. Of course, continued uncertainty there, this whole diesel shortage. Then we want to talk about Canadian issues. Peter, you had a great article in the Hub that we want to talk about around why Canada must put public dollars behind the big infrastructure. And then these large discounts for Canadian heavy oil. There hasn’t been a lot of reporting on them, although I’ve noticed in the last three or four days there’s been a few more articles, but we want to talk about that as well.
Peter Tertzakian:
Yeah, we do. I mean the differential, I don’t know what it is this morning because I didn’t check, but it’s $25 when it should be normally $12 or $13. So I mean, these are big dollar numbers in terms of the impact on the heavy oil producers in Alberta. So we will talk about that. But first, let’s just talk about the global energy markets. The price of oil I think is hovering for WTI somewhere around $100. The Brent and international prices are particularly higher. It is an unusual global market because some parts of the world, the price of oil is probably even touching up to $120 a barrel, which is significant. What’s going on in the strait of Hormuz?
Jackie Forrest:
Well, it’s changing all the time, but the latest news over the weekend is why prices have gone from more moderate in the $90s to near $100 because it seems like although a lot of oil was flowing through the strait through these dark transits, and if you go back two weeks ago, September transits were not that far down, maybe they were 70% of normal in terms of how much oil was leaving the Middle East between these dark transits and the pipelines that were workarounds, the East-West Pipeline and the ADNOC pipeline. But things have changed. There’s a lot more going on in terms of ships being taken out at the strait by Iran. And then of course the proxy of Iran, the Houthis, are hitting a lot of important infrastructure in Saudi Arabia as well. And so last I heard, I’ve got data that potentially we’ve got in the last few days, transits maybe half of what they were in September or a little more than that.
Peter Tertzakian:
I think this term dark transit needs some elaboration. I mean, much as the name implies these transits through the strait happen at night, but it’s also implies some sort of cloak and dagger operation, which it really is because a lot of the dark transits are tankers that are being shuttled through the Strait of Hormuz with the US military escort. And then the tankers are transferring to other tankers outside, once it gets outside the strait. And this is particularly important when we talk about why the differential in Canada is wide, because there’s a real premium on tankers because so many tankers are now involved in these operations that the price of hiring a tanker has just gone through the roof. And ultimately that affects the net back of the producer and that’s in part why some of the prices are so low. But we’ll get to that.
Jackie Forrest:
Well, and I want to say one other thing too. It’s not only the tanker rates that you have to think about because Goldman Sachs estimates the average rate on Middle Eastern crude is up about $35 a barrel. I think a lot of that would be absorbed by the Middle East producers.
Peter Tertzakian:
A barrel.
Jackie Forrest:
Yeah, it’s crazy. But that’s not even counting the cost of this military situation. The US is spending a lot of money helping getting these tankers out. So it’s really not the full cost. And if we go back a couple weeks ago, there was this narrative that, well, we’re getting lots of oil out, this is all working, but there’s a real cost to it. And is it sustainable from the fact that the tanker rates are high and these long transit routes are costing more, but also the cost to the US military, is that sustainable in the long term?
Peter Tertzakian:
Yeah, no, it’s not. I mean, just to put it in perspective, I believe the rule of thumb is once you get your oil on a tanker to ship it anywhere in the world is a few dollars a barrel. So $35 a barrel is just through the roof prices and it’s really impeding the prices that are actually realized by the producers, in other words, the net back.
Jackie Forrest:
Exactly. And so I think a lot of that has been absorbed by those Middle East producers, but then it gets to the point where how much money are they actually making and is it really worth doing? So that’s kind of an update. Obviously it continues to be highly uncertain. I will say that the IEA put out some data around the inventories, the global observed inventories. This is all oil, including what sands strategic reserves, on water, off water. And we are getting to the lower end of the historical range for the last five years.
And so while we had the situation earlier on in the year when we were using more oil than we were producing, it was okay because we had these very high storage levels. We’re kind of down to the bottom of the five-year average. So going forward, if we run into periods where oil is not getting out of the Middle East region, then we run the risk of having inventories go into a newer, lower range. And I do think the potential for higher oil prices, those ones that were predicted early on in this conflict, could come back as a risk.
Peter Tertzakian:
Yeah. The risk I think is biased still to the upside given also that the Saudis just canceled their big flagship investment conference because there’s almost daily air raid sirens and the risk of the Houthis attacking Saudi’s infrastructure, whether it’s civil infrastructure like airports or commercial industrial infrastructure like pipelines remains quite high. So this situation is far from over and the markets are jittery and could definitely go higher. So we’ll be watching it, as you say.
Jackie Forrest:
Yeah. So the other thing we’re watching is obviously the diesel markets. And I don’t think a day goes by, Peter, where you don’t hear people complaining about fuel prices. In fact, in Canada, the average diesel price is now $2.60 a liter. And for a typical diesel pickup truck with a 100 liter tank, we’re talking about $260 to fill your tank, if you can imagine. And of course those big semi-trucks that take goods across our country, they’re paying much more than that, like thousands of dollars to fill the tank. And so it’s starting to become an issue. We had high inflation numbers released today in Canada. So diesel’s obviously right in focus. And of course in the United States, Donald Trump is looking at ways to reduce diesel prices. And he’s put forward a plan a few weeks ago. There was talk of the ban of exports of diesel from the US that seems to have gone away for a while, but he’s got some other solutions or things he thinks will be solutions to try to reduce diesel prices.
Peter Tertzakian:
The solution set is very limited if there isn’t enough diesel, which is the bottom line. And again, overnight or in the last two days, the Ukrainians again bomb one of the biggest oil loading terminals and refineries. I don’t know the specifics, in St. Petersburg, but the attack on infrastructure that produces diesel, you’re the chemical engineer by background, Jackie. I mean, diesel is harder to refine or is more limited in the refining process than gasoline and jet fuel. So it’s more susceptible to these things.
Jackie Forrest:
Yeah. Well, just to back up in terms of why do we have this problem? A big part of it is Russia’s refining infrastructure that has been damaged and continues to be damaged. Approximately two million barrels a day of refining capacity has been damaged there. The Middle East, it’s not necessarily damaged, although early on in the war there was damage done to refineries, but mostly it’s because the Strait of Hormuz issue can’t get diesel out of the Middle East. The IEA expects that’s about two million barrels a day of refining capacity that’s impacted there. And then earlier on, we actually had China ban the export of refined products, and so that contributed to the inventories being lower.
But in terms of why is this impacting diesel more than gasoline, most refineries could be quite flexible in terms of their ability to make gasoline. Most refineries have conversion units to make gasoline and maximize gasoline if they have to, but diesel is less flexible. A lot of refineries are limited in the equipment they have to increase their yields of diesel. You need this heavy processing capacity that a lot of refineries don’t have. And so by these refineries being taken out of the mix, there’s less flexibility in the system to offset that for that particular product.
So the IA put out a report last week, their monthly oil market report, saying that if you look at year to date, overall about 10% less diesel is being made. In September, if you look at the same time last year, it’s around 14% less diesel. That doesn’t sound like a lot of lost diesel, but when you think about it every day of the year, that means 10% is coming out of inventory and eventually you get to the point where the tanks are dry and diesel prices have to go very high to get diesel demand to be lower. And the reality is, that’s another issue, is diesel is not very flexible. If gasoline prices go high, people can say, “I’m going to not do that summer vacation or that big drive.” But with diesel we’re moving, it’s agriculture, it’s moving food, it’s locomotives. It isn’t very flexible. People continue to do it even with high prices.
Peter Tertzakian:
Diesel is also equivalent to heating oil, isn’t it? As we head into the winter heating season and in northeastern United States, even in the Canadian Maritimes, there’s a lot of heating oil that’s used for heating.
Jackie Forrest:
It is. It’s the same product. And so typically the demand rises in October and November. That’s going to put more strain on it. Also, US hurricanes can be an issue. The US refining infrastructure is just going full out right now to create as many refined products and export as much as they can. But this is the time of year where we do start to get some disruption to their operations because of these hurricanes. So a warm winter is being predicted right now and that certainly could help out a lot. I hope we do get a warm winter.
Peter Tertzakian:
So that’s the super El Nino, as they’re predicting, could be at least a partial offset to the cold weather and the heating needs.
Jackie Forrest:
Exactly. Less of that heating oil will be demanded in that case. So we talk most about that when it comes to the natural gas markets, but it could affect this diesel situation as well. Warm winter would be a real blessing actually for Europe because they’re short gas too.
Peter Tertzakian:
Now, a couple weeks ago there was a big talk about the Trump administration introducing a diesel export ban. For the moment, that sort of chatter’s died down, but it could come back depending on what happens.
Jackie Forrest:
Yeah, it could come back. The IEA in their report said that this problem is probably not going to go away very quickly and that even with a rapid recovery, we could be looking at 2027 before we get back to what would be considered normal inventory levels and normal diesel markets. And so Donald Trump’s come up with what he thinks are some short-term fixes. I think there’s the potential that this issue comes back, and it’s relevant for Canadians because if the US were to ban exports of diesel, there’s a couple of things that would happen that affect Canada. One is that the refineries may eventually start reducing their runs of crude, how much crude they consume. So that would be negative in terms of less demand for Canadian oil, and we don’t have a lot of optionality other than to sell to the Americans.
The other issue is for Canadian consumers. If you were to ban exports of diesel, that would cause international prices to go up for diesel, and I think that would also cause Canadian prices to start to reflect those international prices. So that policy could affect us, if it comes back.
Peter Tertzakian:
I mean, one of the interesting things is that we really haven’t built a refinery, certainly in Canada and even in the United States and North America for a long, long time. I mean, there’s been upgrades to existing refineries and stuff, but incrementally, the capacity expansions have happened overseas, which means that leaves North America more vulnerable to the product side of the business, such as gasoline, diesel, jet fuel, et cetera.
Jackie Forrest:
Well, we certainly have shut down a lot of refineries, but at the same time that refineries have expanded and one refinery becomes bigger, another small one shuts down. We are still net long exporting refined products. So we’re a little bit better off that way, but certainly, I mean, one of the US administration’s ideas is to create more refining capacity, but that takes many, many years. Even if you do things as fast as possible, I think you’re five years away from having more refining capacity. And so there’s no quick fix here. Even if you were to end the wars in the Middle East and Russia, I think it would take some time to bring that refining capacity back online. That’s the quickest fix though.
Peter Tertzakian:
So we’re here on Monday, October 19th. It’s election day in Alberta. So it was on October 15th, four days ago, so I guess about Thursday, that the IEA talked about releasing more barrels as soon as possible, try and help the situation again. So we continually dip into these strategic petroleum reserves.
Jackie Forrest:
Yes, we are. And they agreed to release 100 million barrels of reserves. These are things they committed before, like back in March that weren’t released. But interestingly enough, there was announcement on October 15th about 20 million of diesel specifically. But it’s as soon as possible, but the timing is really unconfirmed. Let’s say it was over three weeks they could release that.
And I have no idea if that’s possible, because there’s some limits in terms of how fast you can pull these reserves out. There’s pumps and ships and there’s only so much capacity that can move out. That would be about 950,000 barrels a day over three weeks. Right now, the shortage is around 700,000 barrels. So you could argue over three weeks that could make some difference, if they could actually move it out right away over that kind of time period. So it’s possible that that could help Donald Trump. As a reminder, these midterm election is November 3rd, so maybe that could help if it really could be done quickly. That is probably the most meaningful thing that could solve the problem short term. Of course, the other solution is Donald Trump making a deal to buy Russian diesel. That’s made a lot of news.
Peter Tertzakian:
Yeah. I’m not steeped in the details, but basically the sanctions that were supposed to come into play are not coming into play, at least on the diesel. So this is quite surprising to many and quite unpalatable to many, including some of the Republicans that the White House is making deals with the Russians. I mean, the whole world is upside down in many ways, and so this is an interesting deal. Having said that, the Ukrainians continue to bomb Russian refineries. As mentioned earlier, they just bombed that one in St. Petersburg, which was a very large one. I’m sure there’s more to come because the Ukrainians are incensed by the whole deal themselves. It’s just frankly a mess, the whole thing.
Jackie Forrest:
To me, this is a broader strategy of Donald Trump with Russia, because this is not going to solve the problem in the diesel markets. Remember I said we’re 700,000 barrels a day or so short, and this deal is expected to supply 100,000 barrels a day in October and rising to maybe 240,000 barrels a day in December. So it doesn’t solve the problem. And just to put it in perspective, before this deal, Russia was exporting about 125,000 barrels a day. This is one 10th of what they used to export. So it’s kind of like doing what they always did. So it’s really puzzling in terms of why would Donald Trump make a deal with them for such a small amount of diesel that really isn’t going to move the dial on the problem.
Peter Tertzakian:
Yeah. I mean, 240,000 barrels is half a large mid-sized tanker a day.
Jackie Forrest:
And by the way, that’s in November, if they could do it, because they haven’t been able to export that much. So I think it’s probably more like 125,000 barrels a day, which was the deal for October and November. It’s just not anything.
Peter Tertzakian:
It’s a small tanker. It’s a small product tanker. It’s really small.
Jackie Forrest:
And it’s what they were doing anyway. It’s really puzzling. And of course, as you say, this has created this worrying concern that the US is changing their relationship with Russia. This deal is small, but is Trump pivoting towards Russia? And what does this mean in terms of the war? I mean, he’s doing this without asking for any concessions from Russia.
Peter Tertzakian:
We’ll just have to wait and see. I mean, there’s so many things… You hate to say, because we’ve been saying it for so long, the next three weeks are pivotal or the next month is pivotal. It seems like every month is pivotal. But truly, I mean, we’ve got the midterm elections coming up. We’ve got the winter coming in with rising heating oil and diesel demand, and of course the very sensitive situation in the Middle East with Saudi Arabia and that whole region. It’s going to be full of some surprises, I am sure, in the lead up to these midterm elections. When are they? They’re like November 3rd or something like that?
Jackie Forrest:
November 3rd, yeah. And so I do think that possibly the diesel issue is sort of assuming that 20 million barrels can get out into the market, it may be softened here in the next three weeks, but like you say, oil prices could go higher on us. I think this issue will come back potentially again. Maybe after November, maybe the US starts talking about export bans, and I don’t know the day, we’ll have to just kind of keep going, but I think the chances of political intervention in the oil markets remain high.
Peter Tertzakian:
Well, speaking of political intervention or government intervention, you want to talk about state capitalism and Canada?
Jackie Forrest:
I do. And I’m going to highlight your Hub article. We will put a link to it, titled: Why Canada Must Put Public Dollars Behind Big Infrastructure. And appreciate that you wrote this, Peter, because there continues to be debate about this oil pipeline, now called the Pacific Link, and why government should put money into it. And so you argue that a lot of private capital uses the wrong metrics in terms of looking at these long life infrastructure and that it makes a lot of sense to invest in this as the Canadian government because they look at it differently. Maybe explain your arguments there.
Peter Tertzakian:
Well, yeah, I mean, I think there is an intersection between industry and government in terms of aligned interests and seeing infrastructure built. But in terms of the analytic tools that are used, the government uses more of a policy set of metrics, whereas industry uses typical time value of money type metrics, like internal rate of return or other types of net asset value, et cetera, et cetera. The financial metrics that are baked into spreadsheets do not include returns on things like return on sovereignty or return on energy security, return on economic resilience, all the things we’ve been spending the last half hour talking about in terms of things that are going on in the world.
And so if you want to build projects that really re-pipe, rewire and recreate Canadian export, whether it’s for oil and gas or for any other kind of projects, which is what the government is doing through the Major Projects Office, you have to use a different set of metrics. And I think it’s a legitimate preliminary argument would say, well, government should not be involved in subsidizing infrastructure. They should not be involved in picking winners and losers and so on and so forth. Okay. I agree that government involvement in picking winners and losers of say specific companies and so on, but when it comes to infrastructure projects, I think we have to think differently, very differently. And this is the world that we’re in right now. And so the article basically says we have to acknowledge that the rest of the world is practicing this idea of state capitalism where the state and industry work together to build infrastructure and that we should acknowledge, much as the prime minister has acknowledged, that the Canadian taxpayer has to help reconfigure our economy for the future.
Jackie Forrest:
Okay, Peter. So I looked at the comments to the article, which by the way, when I write an op-ed, I never look at the comments because it can be quite hard to see what harsh things people say.
Peter Tertzakian:
I do.
Jackie Forrest:
But one of the arguments, and I’ve heard this from other people in the industry is, well, the government is less good at building these things and they’re going to do it poorly and it’s going to be really high cost. And if it was private capital, it would be a lot cheaper. And that argument exists even for doing the West Coast pipeline, private could do it cheaper, but also it’s a lot cheaper just to go to the US. We could probably build that pipeline to go to the US a lot cheaper. Why don’t we do the cheapest thing, which has the lowest tools?
Peter Tertzakian:
Well, I think we’re seeing in real time doing the cheapest thing. We’re back up to a $25 differential. The $10 a barrel, $12 a barrel price discount we’re getting adds up to billions of dollars a year. We’ve already forfeited, and we’ve done the calculations, $49 billion US dollars because we’ve sold at a discount to American markets. It’s time that we put an end to that because we commensurately lose royalties and taxes as owners of the resource.
So I think that we need to think differently about this. I agree that the private sector is very good at building things, but we’re not even at the building stage. We’re at the point of deciding whether or not to build a project to the West Coast. And I say that if you use the standard spreadsheet, you’re not going to justify building a pipeline, for example, to the West Coast and probably not even a whole bunch of other types of infrastructure that we need to build. So in actual fact, I’m agreeing with the people that are writing it. But if we have to place increased emphasis on sovereignty, resilience, security, shielding ourselves from economic warfare, which we’re in, and being defensive and also somewhat offensive in terms of being able to take market share from others, we have to think very differently to set the country up for the next generations of prosperity.
Jackie Forrest:
Yeah. And one of the points you make is that these returns accrue over 50 to 100 years. And if you look at a net present value calculation, the economic benefit 50 years from now is worth zero, right? Because time value and money means you discount that. But 50 years from now, the government is still going to be making a lot of money in that asset, just like big hydro dams or Enbridge Mainline, by the way, which has been operating for decades and still provides so much value to the country today is certainly worth a lot. And if you discounted it 50 years ago, today’s value would’ve been worth nothing, right?
Peter Tertzakian:
Right. And from a cash flow perspective, the government both federally and provincially stand to make a lot of money off these things, which ultimately are important for reducing the deficit and funding all sorts of things that we need in this country.
Jackie Forrest:
And the heavy oil discount, let’s talk about that in a bit more detail, because this is really highlighting why you need this optionality. But as you said, $26 a barrel differential. I actually went and plotted the differential, back to what I have here, 2017. And we’re at the level that’s near… We had that big blowout the end of 2018, the awful blowout where it got up to $40 discount, but $25 is really up there. Other than that episode, that’s kind of as high as it’s ever gotten. It’s costing us a lot. It’s surprising to me up until the last few days we didn’t see a lot written about it. I think it was because the price is still actually pretty strong because we have such a high WTI price. And also, if you’ve been following, the Canadian dollar has really been discounting. So in Canadian dollar terms, heavy oil in Canada is still like $95 a barrel Canadian, but we could be making a lot more money. It’s still money that we should be making that we’re not because of this discount.
Peter Tertzakian:
No, exactly. Then the discount, who’s making the money? Well, we talked about the tanker owners. They’re making a ton of money. The refiners are making a ton of money off of the spread, and it all comes at the expense of the producer, which ultimately comes at the expense of the resource owners here in this country, which are the people of the province where the products are made. It’s not only a heavy oil thing. I mean, look at the natural gas prices are discounted massively too. That’s a whole separate podcast.
Jackie Forrest:
Well, let’s talk about the causes. And Studio, your shop wrote a great piece on this. We will put a link to it, about the differential. You called it The Saga Continues. You estimated, as you said, in 2024, that prior to the Trans Mountain starting up, it had cost $49 billion since 2010, so over a decade, and now we’re back to the big discounts. Well, we do have the Trans Mountain, but the problem is it’s filled up mostly, so that’s one of the issues. Another issue has been that there was some short-term outages of US refineries that increased our inventories. And this is the problem. We don’t have optionality. So when there’s less demand in the US because refineries go out or hurricanes or policy changes, we don’t have in other markets.
But the new one that’s putting pressure on the differential is this competition from Venezuela, and I think I want to spend a little bit of time talking about that. Venezuelan imports to the US have increased by about 600,000 barrels a day, all into the US Gulf Coast. This is an important market for Canadian heavy, because that’s the market that sets our price. It’s the market that is our most distant market, and that’s the one that sets the price. And this is part of the problem is we’re seeing this competition, and Venezuela is talking about growing more. Even over the weekend, they’re talking about over $70 billion of investment in the next five years.
Peter Tertzakian:
I mean, think about it this way. If the US refiner in the Gulf Coast is buying a barrel of heavy oil and now it is buying a barrel of Venezuelan heavy instead of a barrel of Canadian heavy, the Canadian heavy can get loaded onto a ship in the Gulf to transit to some export destination. But to get on a ship now costs $35 a barrel more than it used to, from our prior conversation.
Jackie Forrest:
Yeah. I’ll put a link to this Reuters article, says, “$40 per barrel to ship oil from the US Gulf Coast to China.” And of course, from the US Gulf Coast, you have to take the long way around, like around Africa. So it’s a really long shipping distance, plus the fact that the tankers are hard to get and very expensive.
Peter Tertzakian:
I mean, it’s the other side of the world. The real point is that there’s this indirect set of impacts from the Venezuelan situation. As I said, because of the Venezuelan imports, the American refineries say buying, we don’t even know what the terms of the deals are, cheaper Venezuelan oil say than Canadian, but the Canadian, they get put on tankers, but the tankers are more expensive. So it’s a very complicated set of dynamics that are occurring, but ultimately we can measure it directly to us, which is that $12 a barrel on, I don’t know how many million barrels a day it is that goes down there or hundreds, thousands.
Jackie Forrest:
Well, it affects the price of all oil, even the oil that trades in or is used here in Western Canada, right? So it’s on approximately three million barrels a day of heavy oil. So this is not great. Venezuela growing more will only put more pressure and is a really important reason why we need a West Coast pipeline. Just to put it in perspective, the West Coast pipeline, if we had it, and we do have it today, but only for 10% of our exports through the Trans Mountain, but if we had another million barrels a day, of course we could put a lot more that direction. The shipping distance to Asia is one third what it is for the US Gulf Coast having to go around Africa. And so even in a situation where tankers were very expensive, it would make a huge difference in terms of the Canadian producer’s ability to deliver crude at a decent price into Asia.
And so we need that optionality, especially when Venezuela may grow. And I know a lot of people are skeptical, and it’s certainly highly uncertain what will happen in Venezuela. I mean, we hear Delcy Rodriguez, the acting president, talk about $70 billion of investment, but there are some signs of things that could happen. Like Chevron has a plan to invest $7 billion and double the output in five years. Any plans to increase production in Venezuela? These are just headlines. They’re not related to this US government deal with North American Blue Energy Partners, which is I think more uncertain. I think those two things could happen. I think we are going to see production growth from Venezuela.
Peter Tertzakian:
There’s no doubt in my mind that Venezuela is not only going to attract investment that would’ve otherwise potentially come here to Canada, but it’s going to, as a consequence, grow its production back on a trajectory back to historical levels, and it will compete with Canadian oil and other heavy oil around the world. I guess under normal circumstances where tankers are available, it may not be as severe, but if we take control of our oil and our sovereignty and not have a transit through the United States and go directly to the West Coast, it is not only under our own sovereignty, but then the transit times off the West Coast to those Asian markets is a lot shorter.
Jackie Forrest:
And no choke points. Straight shot to Asia. I think more and more everyone values that more than they ever did. And I think the other concern is Venezuelan crude, while it is heavy like ours, in some respects it is higher quality. It tends to have a lower acid number, a measure of how corrosive the crude is. I think they can produce their oil fairly cheap. Their oil doesn’t need steam to get it moving the way we do, or mining. So yeah, I think having that transportation advantage is going to be very important for Canadian producers to remain competitive. It’s all going to add up in terms of our competitive advantage.
So another concern which hasn’t really hit the radar yet of too many people, but the heavy oil market is only so large globally. If Venezuela grows even half of what they’re talking about, if we grow even half of what we talk about, there are limited refineries that can absorb this very heavy crude. And so I do think not only do we need pipelines, but we may need to start thinking about upgrading our heavy oil to lighter oils, which we do already actually, in these units called upgraders because we may need to have more types of products that refiners can consume because there’s only a subset of refiners that can take the very heavy oil. And that was a discussion 10 years ago and it kind of went away because Venezuela declined and Mexico heavy oil declined and there was plenty of refining capacity to take more heavy oil. But we might enter an era here where that becomes part of the conversation as well.
Peter Tertzakian:
Well, we’re already in an era where refining capacity is highly valuable. It’s, we’ll say trading at a premium if you have refining. I mean, it’s a very lucrative business at the moment because of the geopolitics of the world.
Jackie Forrest:
Yeah, for sure. And so we’re even losing refining capacity and that’s going to reduce the ability to consume those heavy oils. I did want to talk about one thing in your paper. You looked at different scenarios of what this costs and basically estimated that if the discount of $26 a barrel persisted at the current spot price for all of 2027, it would cost $20 billion of lost revenue compared to a normal market that had none of these problems. So when we think about the cost of the potential West Coast pipeline, I think it’s being estimated at between $34 billion, $35 billion and 40 billion, something like that. When you think about just one year of a situation like this, it seems like a big number, but it seems like we should do it, when you look at the potential cost.
Peter Tertzakian:
Yeah. And then I’m just doing back of the envelope calculations as I usually do, that loss of revenue, if you multiply it out by the average royalty rates, of course it depends upon whether the oil’s pre-payout, post-payout and all that kind of stuff. But I’m going to conservatively say it’s minimum $6 billion in forfeited royalty payments, like a 30% times $20 billion. It’s a lot of money.
Jackie Forrest:
Right. So you talked about why we should build the West Coast pipeline, why different types of people should invest in it. Well, because governments lose when we don’t have the takeaway capacity too, so there’s a return for them.
Peter Tertzakian:
Yeah. I mean, the whole idea of royalties and the resource owner partnering with the company operators, the explorers, developers, and marketers of the products, it’s a partnership that creates a win-win for both parties. And so in normal geopolitical times, it’s fine, it all works. But now we’re not in those normal times, we’re in a completely different era. We have to acknowledge it. And so these are why these investments are needed to protect these sorts of resource value creators in our economy.
Jackie Forrest:
Right. It’s like insurance, right? Because you pay for insurance every year and then once in a while you actually get paid back and it was worth the many years of insurance you paid for. So I think we need to take that kind of longer perspective. And this is a reminder of the value of that optionality.
Peter Tertzakian:
Yeah. The optionality relates to the resiliency. I think this has become a new term that is going to become even more important. Whatever product it is, you want your supply chains to be resilient to economic shocks, which could come from any number of different sources, most notably from the geopolitics of the world. So we need to have resiliency for a lot of our resource products, not just oil and gas, for all of our various products through diversification of markets and upgrading and diversification of export infrastructure.
Jackie Forrest:
All right. Well, with that, I think we can wrap it up. We’ve covered a lot of ground today, covering the oil markets, the diesel situation, and the Canadian situation here.
Peter Tertzakian:
Well, we’re going to watch the polls and talk about the results of the election next week. So stay tuned.
Jackie Forrest:
Stay tuned. And thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
For more ideas and insights, visit arcenergyinstitute.com.
