Canada has plenty of oil, and demand is high, but the Canadian oil industry has nevertheless taken a major hit this year thanks to its persisting pipeline bottleneck. The Albertan oil industry has long been plagued by insufficient pipeline volumes but has not been able to fix the issue with any semblance of efficiency thanks to major bureaucratic and litigation-based delays on building new infrastructure like the long-delayed Trans Mountain pipeline expansion project.
With pipeline capacity maxed out, Canadian oil producers have run out of storage space, leading to a major glut in oil reserves with nowhere to go. This has forced Canada to sell their oil at a major discount. In fact, a new study released this week by conservative think tank the Fraser Institute calculates that Canadian oil producers missed out on a whopping $20.62 billion more than they earned this year thanks to their severely depressed prices. Compared to the West Texas Intermediate benchmark, in the last year Canadian heavy crude traded, on average, at a discount of $26.50 U.S. a barrel. This is a huge dive from the five-year preceding, when Canadian heavy crude traded at an average of just $11.90 U.S. a barrel less than West Texas Intermediate.
The pipeline capacity deficit has negatively impacted the Canadian economy in a number of ways. “Canada’s lack of adequate pipeline capacity has imposed a number of costly constraints on the country’s energy sector including overdependence on the US market and reliance on more costly modes of energy transportation,” states the Fraser Research Bulletin. “In 2018, these factors, coupled with the maintenance downtime at refineries in the US Midwest, resulted in significant depressed prices for Canadian heavy crude (Western Canada Select) relative to US crude (West Texas Intermediate) and other international benchmarks.”
Fraser Institute went on to say that their calculations also found that if Canadian oil had been able to be transported in volumes corresponding to their current levels of production instead of watching their oil glut balloon and prices drop accordingly, Western Canadian Select would have traded at an average price of $52.90 U.S. a barrel during 2018 instead of the actual average price from last year, which clocked in at just $38.30 a barrel. “In September 2018, western Canadian oil production reached 4.3 million barrels per day but the takeaway capacity on existing pipelines remained constant at around 3.9 million barrels per day,“ the think tank’s report states. Related: The Beginning Of The End For British Shale Gas
These revenue losses pose a significant threat to the health of the Canadian economy. Since oil is one of the country’s most valuable commodities for export, the Fraser Institute reports that the overall loss of revenue from the oil industry in 2018 represents approximately one percent of the nation’s gross domestic product (GDP).
Canada has not sat idly by as a significant portion of its GDP lays to waste, however. The Canadian government and the local Alberta government have made significant efforts to correct the price drops, with enforced production cuts among other strategies, and there were some immediate positive results stemming from these quick fixes, but ultimately these efforts are not sustainable as a long-term solution to Canada’s pipeline to production gap woes.
What Canada ultimately needs in order to solve its pipeline problem is just that--pipelines. There are a number of massive trans-national pipeline projects underway, but they have so far been hopelessly entangled in litigation and other persistent delays. Enbridge's Line 3 project is currently being held up by regulators in Minnesota, the Keystone XL expansion has faced one legal hurdle after the other with no end in sight, and the Trans Mountain expansion--which most experts consider to be the Canadian Oil industry’s best bet--has been held back due to environmental violations and insufficient cooperation and consultation with the Indigenous peoples who rightfully own the land that the pipeline would need to pass through.
By Haley Zaremba for Oilprice.com
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