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Pipeline Bottleneck for Canada-U.S. Routes Costs $5 Per Barrel

The widening gap between supply and demand for pipeline capacity linking Canada and the United States is causing higher fuel costs in North America, according to a new report from the C.D. Howe Institute.

Oil and gas producers in the north are struggling to stay competitive because of rising transportation costs as pipeline projects fail to materialize time and time again. Canada plans to create a new system for the approval of major energy projects.

"If Canadian governments allowed pipelines to be built expeditiously, the competitiveness of western Canadian oil producers would be greatly improved," Benjamin Dachis of C.D. Howe said.

Carbon taxes tend to get the most media attention, but the measures do less to stifle competitiveness than pipeline capacity shortages, the researcher said. The study estimates that the bottleneck cuts profits by around $5 a barrel when all is said in done.

New projects in Canadian oil sands tighten competition further. The Fort Hills oil sands project in Alberta, Canada, achieved first oil this week, with production expected to ramp up over the coming months to 180,000 bpd, France’s Total—which holds 26 percent in the project—said on Monday.

Existing pipelines are facing scrutiny from U.S. regulators as well. TransCanada said earlier this week that U.S. regulators are still requiring the Keystone pipeline to operate at 80 percent capacity after the key vein suffered a 5,000-barrel leak a couple of months ago.

TransCanada said last week it had secured 500,000 bpd worth of 20-year commitments from shippers willing to use its future Keystone XL pipeline in an upbeat update on the progress of the notoriously controversial project. This amount is about 60 percent of the 830,000-bpd pipeline. The company has seen share prices surge as the pipeline’s prospects seem rosier, but the company still needs to make a final investment decision on the project.

By Zainab Calcuttawala for Oilprice.com

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