Canadian crude oil is selling below U.S. West Texas Intermediate crude oil by a record $52.50 per barrel based on records that go back to early 2007. The huge discount is mainly due to a lack of pipeline capacity to move the oil to markets. But, also contributing are growing production from Canada’s oil sands and a reduction in demand due to U.S. refinery maintenance shutdowns.The widening price differentials are costing Canadian producers and governments upward of $40 million a day. A setback for the Canadian oil sector is a court’s overturning the Trans Mountain pipeline expansion approval.
Opponents of accessing Alberta’s enormous oil reserves have focused on fighting against pipelines that would bring products to market, similar to tactics used by opponents of energy production in the United States. They understand that the stopping of pipeline construction strands energy. It’s just another way to “keep it in the ground.”
Government policy is also making Canada an uncompetitive place to drill for oil and gas. For every well that is drilled in British Columbia, over $100,000 is paid in carbon taxes on the diesel used to drill and complete the well. According to Canadian oil companies, the Canadian government needs tostart thinking of ways to help Canadian companies compete with U.S. companies where carbon taxes are not impacting costs.
Discount of Western Canadian Select to West Texas intermediate
In U.S. dollars a barrel (negative figure indicates Canadian crude is cheaper
Canadian Pipeline Proposals
Several oil pipelines have been proposed in Canada to ease the problem but none have come to fruition. Keystone XL, the oil pipeline that was to carry oil from Alberta to the U.S. Gulf, met with snags during the Obama Administration, culminating in a finding that the pipeline was not in the national interest. Now, that the Trump Administration has found it isin the national interest, a revised route needs to be approved through Nebraska before it can be constructed.
Due to the problems associated with Keystone XL’s construction, Canada decided to proceed with other pipeline avenues, looking at moving its oil sands to the east and west by pipeline. Two pipelines were considered going west for export to Asian markets and one was considered going east to Canadian refineries that are currently dependent on imports. These pipelines would move about 2.5 million barrels of oil per day—about three times the proposed capacity of the Keystone XL pipeline.
The Energy East pipeline was proposed to move Canadian oil east and consisted mainly of converting a natural gas pipeline to oil. This proposed project would cost $11 billion, and would move 1.1 million barrels per day from Alberta to refiners in Quebec City and Saint John—a distance of 2,700 miles. TransCanada, however, abandoned the project in October 2017 due partly to regulatory issues.
The two projects that would ship oil sands west were the Northern Gateway project, which would cost around $7.9 billion and move 525,000 barrels a day and the Trans Mountain expansion project (see below). The Northern Gateway project was abandoned by the government after the courts found thatthe government had failed to adequately consult with First Nations and that the project would affect governance rights of asserted Aboriginal title.
Trans Mountain Oil Pipeline Project
The proposed Trans Mountain Pipeline System is a 715-mile pipeline that would carry crude and refined oil from Alberta to the west coast of British Columbia, Canada. The Trans Mountain Pipeline Expansion project would create a twinned pipeline that will increase capacity from 300,000 barrels per day to 890,000 barrels per day. The Pipeline expansion is expected to cost approximately 7.4 billion Canadian dollars ($5.7 billion). During construction, the equivalent of 15,000 people will be employed on the pipeline expansion. It will also create the equivalent of 37,000 direct, indirect, and induced jobs per year during operations.
On November 29, 2016, the Government of Canada granted approval for the Trans Mountain Expansion Project, having received prior approval from Canada’s National Energy Board, who indicated that the pipeline expansion was in the national interest. And, on January 11, 2017, the British Columbia Environmental Assessment Office issued an environmental assessment certificate for the Trans Mountain Expansion Project.
However, earlier this year, Kinder Morganthreatened to abandon expansion plans due to political and legal uncertainty, prompting the Canadian government to purchase the Trans Mountain pipeline expansion project in May for 4.5 billion Canadian dollars ($3.51 billion). The Canadian government acquired the expansion project because it was in the national interest, and it did not expect to be a long-term owner of the asset.
In August, Canada’s Federal Court of Appeal annulled regulatory approval for the pipeline project because the government did not adequately carry out its constitutional duty to consult with affected indigenous communities, and the energy regulator relied on a study that did not fully consider the impact of increased oil-tanker traffic on the environment. The Canadian government ordered a new review of the Trans Mountain pipeline taking into account the impact of increased tanker traffic on endangered killer whales along the coast.
Conclusion
Similar to oil in the Permian Basin in Texas, pipeline constraints are holding back oil sands production in Alberta. Oil producers need to be able to move their oil to market and in the absence of pipelines, are forced to use rail and truck. However, those forms of transportation limit the amount of oil that can be transported, and increase safety problems. As a result, the value of the product is lessened. Canadian oil producers and the Canadian government are definitely aware of the problem and the loss of revenue, and the recent historically high price differential is a brutal reminder of the stakes for Canada in the energy battles being fought here and abroad.
