Refining the relative arguments



What does it mean when someone claims that an argument is “academic”? Let’s turn to that most non-academic of sources for the definition. The best reply on Yahoo! Answers:

It means that there is no point in considering or discussing it because events have occurred to make it no longer relevant for discussion.

For example, I wanted to discuss with you how best to advertise a business, but as the business in question has now been sold, the matter is now academic.

And that is how I’d describe the debate that certain academic economists have reignited in the wake of the Enbridge Northern Gateway Pipeline conditional endorsement by the federal cabinet.

Let’s take a slightly different look at the new business reality. And let’s simplify assumptions about world demand/markets for bitumen vs SCO.

Simplifying assumptions

1) let’s assume both bitumen and SCO sell at the same world price (so light/heavy differential is zero).
2) Delivery point for shipping by pipeline is Edmonton
3) Destination is China refinery
4) Shipping to the US via pipelines/railcars is restricted or bottlenecked in the foreseeable future
5) The price for diluent is the same in China as it is in Edmonton and unconstrained

Question 1: Is there a business case for upgrading raw bitumen to synthetic crude oil in Alberta?


In this case, the analysis comes down to transportation costs. And at a first cut, let’s assume shipping dilbit by pipeline and tanker has public support (or not overwhelming public opposition) – an assumption we will revisit later.


1) ship dilbit to St John, NB via Energy East and onto China via supertanker
2) ship SCO to St John, NB via Energy East and onto China via supertanker

3) ship dilbit to Kitimat via NGP and onto China via supertanker
4) ship SCO to Kitimat via NGP and onto China via supertanker

Shipping volumes of dilbit vs SCO

In this analysis, let’s use typical dilbit composition of 70% bitumen and 30% diluent by volume. So, to ship 1 barrel of bitumen requires 1/70% = 1.43 barrels of

And for SCO, let’s use 14% shrinkage. So, 1 barrel of SCO requires 1/86% = 1.16 barrels of bitumen

Therefore, for every barrel of SCO, you need to ship 1.43 barrels of dilbit/barrel of bitumen x 1.16 barrels of bitumen/SCO = 1.66 barrels of dilbit.

Pipeline and tanker tolls

In this analysis, I’ll use the Scotiabank Commodities Report July 30, 2013 report and the graphic presented on page 2 as the first approximation:

Screen Shot 2014-07-05 at 2.13.51 PM

Energy East option
Accepting the tolls at face value, to ship one barrel (of dilbit or SCO) from AB to China via Energy East = $7/barrel for pipeline toll (Hardisty AB to St. John NB) and $5.25/barrel for tanker toll (St. John NB to China) = $12.25 /barrel.

Northern Gateway option

Similarly, the toll to China from Edmonton via NGP = $3.20/barrel pipeline toll & $3.00 /barrel tanker = $6.20 per barrel.

Shipping bitumen options

Revisiting the four options, costs in terms of shipping one barrel equivalent of bitumen:

1) To China via Energy East, dilbit = $12.25 /barrel x 1.43 = $17.52
2) To China via Energy East, SCO = $12.25 /barrel x .86 = $10.54

3) To China via NGP, dilbit = $6.20/barrel x 1.43 = $8.87
4) To China via NGP, SCO = $6.20 / barrel x .86 = $5.33

First cut

1. Q: You’re a bitumen producer in Alberta. How much would you be willing to pay the BC gov’t in a risk premium to ship dilbit to China via NGP (meeting BC Gov’t condition 5)?

Answer: You’d be willing to pay up to $8.65 per barrel ($17.52 – $8.87).

2. Suppose BC absolutely would not allow dilbit to be shipped through its province. And you are absolutely against paying the BC gov’t a toll – you want to keep all the money in the province.  How much would you be willing to pay to upgrade bitumen to SCO?

Answer: You’d be willing to pay up to $12.22 /barrel ($17.52 – $5.33) to upgrade bitumen to ship via NGP



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