Reality check—Canada’s need for new pipelines is critical
In recent months, Canadian crude oil prices have dropped relative to other international benchmark prices, costing the economy billions in foregone revenues. The recent surge in the Western Canada Select (WCS) price discount compared to West Texas Intermediate (WTI) is largely due to Canada’s insufficient pipeline capacity. The result? Increased crude-by-rail and higher transportation costs.
Between 2009 and 2012, the average price differential was 13 dollars per barrel. However, in February 2018, the differential reached 34 dollars per barrel, which is a striking increase of two-and-a-half times. This significant increase in the price differential reflects Canada’s lack of transport capacity and restricted market access.
Consider this. Despite growing oil production in recent years, Canada has not built any major pipelines, resulting in excess oil production and lack of transport capacity. Simply put, there are not enough pipes to move western Canada’s crude oil.
TransCanada’s Energy East and Eastern Mainline projects were cancelled due to a number of factors including significant red tape. And despite receiving regulatory approval, Canada’s remaining pipeline projects—Trans Mountain Expansion, the Line 3 Replacement Project, and Keystone XL—continue to face delays due to market uncertainty, environmental, and regulatory concerns, and political opposition.
For example, B.C.’s NDP government, led by Premier John Horgan, is blocking the Trans Mountain pipeline expansion despite federal government and National Energy Board approvals.
Analysts suggest that new pipelines may be built between 2019 and 2022, but this timeline seems optimistic given the pipeline obstructionism ramping up across the country. The reality is that many new Canadian pipeline projects remain in political or regulatory limbo.
Meanwhile, insufficient pipeline capacity has increased oil shipments by rail—a more expensive (and slightly less safe) mode of transportation—leading to higher costs for Canadian producers. Increased crude-by-rail has also created a new problem for oil producers; they now struggle to compete with farmers and grain companies for space on rail cars. In fact, rail companies recently cut back on shipping crude-by-rail to free-up more capacity for grain shipping, leaving oil products stranded.
To make the matters worse, rail companies now demand much higher rates “to move oil because they fear the business will evaporate once new export pipelines come on stream.” According to a recent Financial Post article, rail costs to transport crude from western Canada to the Gulf Coast may reach US$20 per barrel, which is much higher than previous estimates.
Ultimately higher crude-by-rail rates mean Canadian oil producers must absorb higher costs—leading to lower prices for Canadian crude. Unfortunately, the current price differential for Canadian crude is likely to remain high until more pipeline capacity comes online.
The reality is that the steep WTI-WCS price differential and high transportation costs for crude-by-rail reaffirms Canada’s critical need for more pipeline capacity. As such, federal and provincial policymakers should recognize the urgency associated with building new pipelines in Canada.