Sooner governments allow for additional pipeline capacity to be built, all of Canada will be better off
A recent report from Scotiabank economists show that the lack of crude oil pipelines is costing Canada $10.8 billion a year.
The report says that the mid-Nov. service suspension on the Keystone pipeline sparked the latest flare-up in oil discounts due to less pipeline capacity.
Scotiabank sees discounts on Western Canadian Select (WCS) oil remaining high until Enbridge’s Line 3 replacement (390,000 b/d) begins service in the latter half of 2019, but the discounts still likely to remain until either the 525,000 b/d Trans Mountain expansion (TMX) or 890,000 b/d Keystone XL (KXL) is completed for the differentials to return to normal.
Pipeline approval delays imposed clear and demonstrable economic costs on the Canadian economy, with the discounts on WCS oil shaving $15.6 billion in revenue annually from the sector, according to the report.
An expected shift from pipeline to rail is expected to mitigate some impact, reducing foregone revenues in 2018 to $10.8 billion.
Canada has world’s third-largest proven oil reserves behind only Venezuela and Saudi Arabia, but Alberta’s bituminous bounty is more than one thousand kilometers from Pacific ports in British Columbia and three-times that distance from major refineries on the US Gulf Coast.
The relatively isolated nature of Canadian energy resources in the Western Canadian Sedimentary Basin (WCSB) comes at a cost: producers pay roughly $10–12/bbl to move their product south by pipeline to refineries on the US
Gulf Coast (USGC) and $20/bbl or more to make the same trip by rail car, according to the Scotiabank report.
The latest spike in the WTI-WCS discount began on Nov. 16 when the operator of the Keystone pipeline discovered a ~5,000 barrel oil spill was discovered and the pipeline was subsequently shut down for 12 days as repairs were made. Keystone is currently operating at 20% reduced capacity on regulatory orders.
According to the Scotiabank report, elevated discounts come with a steep economic cost, a self-inflicted wound with reliance on the existing pipeline network and rail shipments to bring Canadian oil to market.
Assuming KXL and TMX are completed and enter service, Canadian supply will outstrip pipeline takeaway capacity until at least 2020, implying that an atypical and elevated discount on WCS will prevail until that time.
Excess of production over takeaway capacity implies the sector remains vulnerable to interruptions in pipeline flow, as experienced in Nov. If either KXL or TMX do not move forward, Canadian production will outstrip pipeline takeaway capacity indefinitely, according to the report.
Rail shipments are currently $5–10 more costly than pipeline egress. Either of these outcomes are suboptimal from the oil industry’s perspective, and could ultimately lead to less activity in the sector, representing a loss to the Canadian economy.
Pipeline approval delays have imposed clear, demonstrable and substantial economic costs on the Canadian economy.
While some may view these impacts as concentrated in the oil sector and Alberta, the foregone revenue from the steep discounts on Canadian oil have large upstream and downstream effects on a broad section of the Canadian economy and population, according to Scotiabank economists.
The report concludes that the sooner governments allow for additional pipeline capacity to be built, all of Canada will be better off.
Editor’s note: Scotiabank has invested hundreds of millions in the TMX pipeline
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