Pipeline Constraints to Cost Canadian Oil Producers $16 Billion

A shortage of pipeline capacity is driving down the price of Canadian oil and will cost the country’s energy sector C$15.8 billion in lost revenues this year, finds a new study released by the Fraser Institute. According to The Cost of Pipeline Constraints in Canada, as oil production has ramped up in Canada in recent years, pipeline construction has not kept pace. In addition, despite approvals from regulators, the status of several major pipeline projects remains uncertain.

This lack of adequate pipeline capacity has created an overdependence on the U.S. market and an increased reliance on oil-by-rail—a more costly (and less safe) mode of transportation.

“Without adequate pipelines to tidewater ports, Canadian oil producers are forced to sell their product in the U.S. at dramatically discounted prices, which results in substantial losses for the energy sector and the economy more broadly,” said Kenneth Green, senior director of natural resource studies at the Fraser Institute.

After adjusting for quality differences and transportation costs, Western Canada Select—the heavy oil extracted from Canada’s oilsands—sells for much less than comparable West Texas Intermediate oil. This year, the price difference between Canadian and US oil is US$26.30 per a barrel. Between 2012 and 2017, the price difference averaged US$16.54 per barrel, costing Canadian producers an estimated C$20.7 billion in revenues.

“More pipeline capacity would not only benefit the energy sector and our economy, it would also benefit the environment because pipelines are safer than rail,” Green said. “For Canadians to continue prospering from our natural resources, the federal and provincial governments must work together to expedite the pipeline process and connect Canada’s oil producers with markets overseas.”