A new analysis by IHS Markit has found that delays in the expansion of export pipeline capacity have contributed to wider differentials and lower commodity prices, costing Canadian heavy crude producers billions of dollars.
Kevin Birn, vice president, North American crude oil markets at IHS Markit says these delays have resulted in supply bottlenecks, the cost of which “has been borne by Canadian heavy crude oil, fetching a lower price than it otherwise would have.”
IHS Markit estimates that without pipeline export capacity constraints, western Canadian heavy crude would have sold for at least $3 per barrel more, on average, compared with WTI, Cushing between 2015-2019. This adds up to over USD$14 billion over the last five years.
The international consultancy firm says these estimates are conservative, “since they are based on differentials in excess of the upper range of what could have otherwise been expected over the entire period.” Also, the estimate only included heavy, sour crude oil. All other western Canadian grades were also impacted by the pipeline delays and opposition.
Historically, the value of heavy, sour crude oil typically garners a lower price than many commonly-traded US and global benchmarks because Canadian crude production is concentrated inland, is far away from market and is often compared to different quality crudes.
Constraints on pipeline capacity have exacerbated the differentials beyond what they otherwise would have been, according to IHS Markit. In 2018, differentials widened out beyond $50 per barrel. In this current extremely low-price environment, differentials have narrowed to about $12 per barrel.
Despite these challenges western Canadian producers face, production rose significantly since 2015, rising over 700,000 barrels per day. The majority of the increase was heavy sour crude oil.
Birn says conditions may be changing which could keep the differentials narrower, potentially by as much as $3-$4 per barrel on average, in the coming decade.
“There is potential for western Canada to have lower price differentials, on average, in the coming decade,” said Birn. “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.”