Politics

Pipeline constraints cost Canadian oil producers $20 billion in lost revenue last year: report

Canadian oil producers could have collected $20 billion more in revenue last year if they'd been able to sell their product at prices closer to the going world rate, according to a new study from the Fraser Institute.

Canadian crude traded at a discount of $26.50 US a barrel last year compared to West Texas Intermediate

Protesters rally against the Trans Mountain pipeline expansion outside the B.C. Supreme Court in April, 2018. The B.C. government, environmentalists and some Indigenous groups have opposed the project on environmental and jurisdictional grounds, while proponents have argued for its economic benefits. A new study argues a lack of pipeline capacity has cost the Canadian economy billions by limiting access to foreign markets. (Ben Nelms/Reuters)

Canadian oil producers could have collected $20 billion more in revenue last year if they'd been able to sell their product at prices closer to the going world rate, according to a new study from the Fraser Institute.

The conservative-leaning think tank said that, based on its calculations, Canadian heavy crude oil traded at an average discount of $26.50 U.S. a barrel last year relative to West Texas Intermediate, the U.S. gold standard. That price discount is far larger than it was in the preceding five years, when producers were seeing a gap of just $11.90 U.S. a barrel.

The price differential is attributed to continuing capacity constraints with existing pipelines and perpetual delays to proposed pipeline projects like the Trans Mountain expansion.

The think tank estimated that if pipeline space had been more in line with current production levels, Western Canadian Select, which includes product from the oilsands, would have traded at an average price of $52.90 U.S. last year, instead of the $38.30 U.S. Canadian producers actually collected.

That price difference, multiplied by the nearly 3 million barrels of oil Canada sent to the U.S. each day last year (minus what the think tank calls discounts for transportation costs and inherent "quality differences" — Canadian crude is heavier than light U.S. oil and thus harder to refine), works out to $20.62 billion in lost revenue potential for Canadian oil companies like Cenovus and Husky.

And because oil is one of the country's most valuable exports, the estimated revenue loss works out to approximately one per cent of Canada's national gross domestic product (GDP), the institute said.

With 99 per cent of Canadian crude exports destined for refineries in the U.S., producers are forced to either store product and wait out price dips or offload product at discounted rates.

Other companies have turned to crude-by-rail transport — a far more costly and potentially more dangerous option — to send product to the Gulf Coast, where prices are higher for Canadian heavy crude than they are at midwest U.S. refineries.

A BP oil refinery sits on the shore of Lake Michigan in Whiting, Indiana. A maintenance shut down at the facility late last year likely contributed to the steep Canadian oil price discount as this refinery buys approximately 250,000 barrels per day of heavy crude from Canada. (John Gress/Reuters)

A mandatory production cut instituted by then-Alberta Premier Rachel Notley, and a promise to buy more rail cars to move product, helped stabilize the Canada-U.S. price gap last year, but the institute said building more pipelines is the most practical long-term solution for Alberta's oilpatch.

The think tank said that while building both Enbridge's Line 3 project — which is facing new delays from Minnesota regulators — and the Keystone XL expansion, which is also staring down new legal challenges, would help stabilize prices, it points to the Trans Mountain expansion as the key to unlocking more value from Alberta's vast oil reserves.

The 1,150-kilometre expansion project would nearly triple the existing pipeline's capacity to 890,000 barrels a day. It would allow pipeline shipments from Alberta's oilpatch to coastal B.C., and then to energy-hungry markets in Asia.

"While building pipelines to secure access to the U.S. Gulf Coast is important as it will reduce the existing price differential, gaining access to new overseas markets is even more crucial ... Given soaring U.S. oil production in recent years and competition from American producers, finding new customers for Canadian heavy crude is critical," says the Fraser Institute report, authored by Elmira Aliakbari and Ashley Stedman.

The Federal Court of Appeal quashed cabinet approvals for the Trans Mountain expansion project last August, citing inadequate consultations with Indigenous peoples and incomplete environmental assessments. The federal government has vowed to build the project despite its legal challenges, but no construction start date has been announced.

According to estimates from the Canadian Association of Petroleum Producers, supply from Western Canada will grow from 4.2 million to 5.6 million barrels of oil a day by 2035. Current pipelines can only carry four million barrels.

Line 3, the largest project in Enbridge's history — a 1,659-kilometre project that will carry oil from a terminal near Hardisty, Alta., through northern Minnesota to Superior, Wis. — would double the capacity of an existing line and move 760,000 barrels a day.

Keystone XL would carry more than 800,000 barrels of Alberta oil a day to refineries in Texas.

If all the proposed projects are actually built — which is far from certain — the shortage of pipeline capacity could be largely addressed.

About the Author

John Paul Tasker

Parliamentary Bureau

John Paul (J.P.) Tasker is a reporter in the CBC's Parliamentary bureau in Ottawa. He can be reached at john.tasker@cbc.ca.

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