“The lack of pipeline capacity is costing Canada dearly. Because shipments of heavy oil (via pipelines and rail) cannot keep up with production, inventories are rising and hence depressing prices of Western Canada Select (WCS). As today’s Hot Chart shows, the spread between WCS and WTI averaged roughly US$30/barrel in September, the highest since 2013.” (Krishen Rangasamy, National Bank Hot Charts, September 17, 2018)
“Despite increased oil production in recent years, Canada has been unable to build any new major pipelines due to the cancellation of the Northern Gateway and Energy East projects, and ongoing delays in the Trans Mountain expansion, Line 3 replacement project and Keystone XL.” (Elmira Aliakbar, Pipeline obstructionism costing Canada billions. May 22, 2018)
Canada has earned the unenviable reputation of having little ability to get pipelines built. As the previous quotations and the following chart illustrate, because of Canada’s lack of pipeline capacity, Canadian producers have been shipping their crude by rail, which is a higher-cost mode of transportation.
In other words, Canadian oil producers have had to absorb higher transportation costs, resulting in lower prices for Canadian crude and a wider price differential from the US WTI. According to a recent Fraser Institute study, Canadian oil producers will lose about $15.8 billion in revenue this year due to the lack of pipeline capacity.
One of the recent headwinds for Canadian producers is the weakness in Western Canadian Select (WCS), a benchmark price for most Canadian producers. The gap between the US benchmark West Texas Intermediate (WTI) has widened significantly over the last few months, and there are no signs of the gap closing any time soon.
An ironic byproduct of this is that specialists in the field understand that pipelines are considerably safer than rail transport and less likely to experience an oil spill.
