Limitations in Canada’s ability to move oil reportedly contributed to $20.7 billion in foregone revenue
The energy sector seems primed for a rebound; after showing signs of lifting throughout the first quarter, oil prices are now hovering around the US$70 per barrel mark. Increased strength in the space was reportedly a major force behind Canadian equity-fund advances in April, and some bullish portfolio managers now see an investing opportunity in a long-shunned space.
But the Canadian oil industry, despite being a major part of the country’s economy, is not well-positioned to benefit. As the Fraser Institute notes in a new report, local oil producers are challenged by the depressed prices of Canadian crude relative to US benchmark prices.
“The price differential … has widened substantially in recent months due to insufficient transportation infrastructure and pipeline bottlenecks,” the institute said in its report titled The Cost of Pipeline Constraints in Canada.
While differences in quality between Canadian and US crude also play a role, the report said limitations in transportation and pipeline capacity have become an even bigger impediment. Canada’s oil export capacity has been increasing, with available export supply rising from 2.95 barrels per day in 2013 to 3.95 million barrels per day of oil in 2017.
But construction of pipelines for outgoing oil has lagged as major pipeline projects — including TransCanada’s Energy East and Eastern Mainline projects, the Trans Mountain Expansion, and the Line 3 Replacement Project —faced delays or cancellations. Canadian oil producers that have been forced to ship their product by rail have had to absorb the higher transportation costs. Canadian crude inventories in Alberta have also been rising from excess unshipped supply.
“Between 2009 and 2012 the average WTI-WCS differential was only 13% of the WTI price,” the report said, citing Oil Sands Magazine. “However, in February 2018 the differential reached 46 percent of the WTI price.”
The report estimated that the discounted price for Canadian crude led to a $20.7-billion revenue loss for the Canadian energy industry from 2013 to 2017. Given the current inflated differentials between Canadian crude and US WTI prices, the researchers estimated that pipeline constraints will reduce revenues for Canadian energy firms by approximately $15.8 billion — 0.7% of Canada’s national GDP — in 2018.
“The results show that insufficient pipeline capacity has resulted in substantial lost revenue for Canada’s energy industry and will continue to do so, and thus impose significant costs on the economy as a whole,” the report said.
