Western Canada lacks pipeline capacity for more crude production

By Patrick C. Miller | April 19, 2017

A supply increase of nearly a million barrels of crude by 2020 in western Canada will put increased pressure on a pipeline system that’s struggling to bring incremental capacity online, according to a new report by IHS Markit

The report examines the relationship between pipelines and prices, the implication of delay in new pipeline capacity in western Canada and the current outlook for the industry. London-based IHS Markit provides information, analysis and solutions to businesses, financial institutions and government.

“The need for new pipelines departing western Canada has not diminished with lower oil prices—quite the opposite,” said Kevin Birn, energy director for IHS Markit. “Canada remains a growth story with production volumes increasing since the oil price collapse. And with continued growth it appears inevitable that volumes will overtake an already-constrained system and create a resurgence of crude-by-rail.”

The report—entitled “Pipelines, Prices and Promises: The story of Western Canadian Market Access, the Canadian Oils Sands Dialogue” says that without new pipeline takeaway capacity, Canadian crudes will face limitations from the existing pipeline infrastructure as western volumes continue to increase.

Transportation costs are a key reason why oil prices differ between regions, according to the report. While quality differences—such as light versus heavy oil—result in price differences between different types of crudes, IHS Market said transportation costs contribute to price differences between regions for crude of the same quality.

A survey of recent major pipeline proposals conducted for the report found that the length of the pipeline review process—from first application through the end of 2016—has averaged more than five years per project, creating uncertainty for project proponents and western Canadian producers.

Although the recent approvals of Keystone XL by the Trump administration and Trans Mountain Expansion by the Canadian government have returned a level of optimism for pipeline projects, potential for additional delays exists, the report said.

“Greater price discounts for Western Canadian crudes would return with an increase of crude-by-rail shipping,” Birn said. “Such discounts are likely to be more modest than in previous years as past investments in crude-by-rail infrastructure—such as loading terminals and railcars—would pay off. But the fact remains that you will still see increased price volatility and loss of value for producers until adequate pipeline capacity is restored.”