The many delays in expanding oil pipeline takeaway capacity out of Alberta have cost Canada's producers of heavy crude oil at least US$14 billion between 2015 and 2019, IHS Markit said in a new analysis on Tuesday.
Canada's heavy crude usually trades at discounts to the U.S. benchmark because production is landlocked and away from major markets and it is compared to different crudes. However, the pipeline constraints over the past half-decade have additionally widened the discount at which Western Canadian Select trades relative to the U.S. WTI Crude benchmark.
According to estimates from the IHS Markit Canadian Oil Sands Dialogue service, without pipeline export capacity constraints, western Canadian heavy crude oil would have obtained at least US$3 per barrel more, on average, compared with WTI prices at Cushing between 2015 and 2019.
This means that Canada's heavy oil producers have lost at least US$14 billion from the value of their crude over the last five years, IHS Markit said, adding that these are conservative estimates.
While oil pipeline expansion projects were plagued by delays and lawsuits, Canada's crude oil production has increased by more than 700,000 barrels per day (bpd) in 2015-2019, making the export capacity problem more severe, IHS Markit says.
The problem was most evident in the fall of 2018, when the price of Western Canadian Select plunged to as low as US$14 a barrel in October and November, with its discount to WTI at around US$50 a barrel. In early December 2018, the Alberta government moved in to shore up the price of Canadian heavy oil, mandating an oil production cut beginning in January 2019. Alberta is now lifting the mandatory cut since there is enough space on pipelines as producers are not pumping to capacity amid lower demand in the pandemic.
"There is potential for western Canada to have lower price differentials, on average, in the coming decade. Incremental expansion of pipeline export capacity would help ensure production is not subject to the regional bottlenecks and price volatility of the past. Meanwhile, declining availability for other global sources of heavy, sour crude-such as Venezuela-could give Canadian producers an added boost," said Kevin Birn, vice president, North American crude oil markets, IHS Markit.
Earlier this month, Enbridge started construction on the Line 3 oil pipeline replacement in Minnesota after receiving all necessary approvals and permits. Line 3 is one of the hopes for Canada's oil producers to have crude oil takeaway capacity out of Alberta increased, and possibly one of the best chances for this, considering that President-elect Joe Biden could move to kill Keystone XL, the project that was resurrected by U.S. President Donald Trump.
By Tsvetana Paraskova for Oilprice.com
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Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. More