Strained oil pipeline capacity in Canada is starting to bite where it hurts, with energy stocks sinking to their lowest level in two years along with a steep discount in Canadian heavy crude prices that would cost the country’s economy C$15.6 billion a year at current levels.
Scotiabank chief economist Jean-Francois Perrault said in a report that delays in approving new pipelines “have imposed clear, demonstrable and substantial economic costs on the Canadian economy.”
The only hope for an easing of the pain is more rail capacity becoming available, lowering the cost to C$10.7 billion or 0.5 percent of gross domestic product for all of 2018, then C$7 billion annually or 0.2 percent of GDP until Keystone XL and Enbridge’s replacement of its Line 3 into the United States come on line.
But Perrault said that if either of those projects gets derailed there would be an impact on Canada’s economic well-being, with consequences that spread far beyond Alberta.
He said the temporary shutdown of the existing Keystone system after a leak last November filled oil storage tanks in Alberta to record levels and increased the price spread between Western Canada Select, the heavy crude benchmark, and West Texas Intermediate to more than US$30 a barrel that has continued under a regulator-imposed 20 percent reduction in Keystone volumes.
Constrained takeawayHowever, Perrault said the Canadian oil patch should expect at least “an 18-month period of acutely constrained takeaway capacity” now that Enbridge’s Northern Gateway and TransCanada’s Energy East projects have been abandoned due in part to “significant regulatory hurdles and political challenges.”
That has forced producers to either use more expensive forms of transportation such as rail or place increased volumes in storage until sufficient pipeline capacity becomes available.
He said major rail companies like Canadian Pacific and Canadian National are aware that crude-by-rail transportation is only a stop-gap solution and that demand for railcars is likely to fall back after less expensive pipeline capacity becomes available.
To that end, rail companies are asking producers to agree to multiyear, take-or-pay contracts that demonstrate the oil patch has “skin in the game,” he said.
New oil sands projectsBut the startup of new oil sands projects has fueled a rebound in crude-by-rail, with railways hauling 34 million barrels out of Canada in the first nine months of 2017, 8 percent up from all of 2016, the National Energy Board reported.
In response, Plains Midstream Canada said it is reopening its loading facility in Saskatchewan, while some railways have discounted shipments from Alberta to Texas to about US$12 a barrel, compared with US$10 by pipe.
The discount on Western Canada Select crude is now hovering around US$24 a barrel, compared with the spread of US$13 for the two years prior to the spill, and Scotiabank predicts it will average US$21.60 for all of 2018.
Alex Pourbaix, chief executive officer of oil sands producer Cenovus Energy, has echoed the concern of his peers, saying the price spread is having an extraordinary impact on the Canadian economy by triggering a transfer of wealth from Alberta and Canada to U.S. refiners and consumers.
Bloomberg said the dearth of pipeline capacity, which has depressed Canadian oil and natural gas prices, is now bogged down in the squabbling between Alberta and British Columbia over the Trans Mountain expansion.
“On top of that, the industry is facing carbon taxes other jurisdictions don’t have to pay and it’s competing with American drillers which are seeing taxes cut under the Trump administration,” the news agency said.