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article imageInsufficient export pipelines hurting Canadian oil producers

By Karen Graham     Feb 1, 2018 in Business
Toronto - Canada's oil and gas producers are struggling to stay competitive with their U.S. counterparts because of the policy limitations in expanding pipeline capacity, says a new report from the C.D. Howe Institute.
According to the report released on February 1, the main government policy hurting the competitiveness of Western Canada’s conventional oil producers is insufficient export pipelines and not carbon taxes.
Associate director of research for C.D. Howe Institute, Benjamin Dachis said the report is the first of what will become an annual comparison of Canada's oil and gas sector with its North American equivalents, reports CTV News Canada.
In the report, “Death by a Thousand Cuts? Western Canada’s Oil and Natural Gas Policy Competitiveness Scorecard,” authored by Dachis, he makes an apples-to-apples comparison on the policy-induced costs to oil and gas producers in both the U.S. and Canada.
“Canadian energy producers are at a competitive disadvantage relative to producers in the United States,” Dachis notes. “Much attention has been paid to carbon taxes, but a lack of market access for oil and taxes on investment – not emissions prices – are the main policy-induced competitiveness problems for conventional energy producers in Western Canada.”
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The lack of pipelines reduces the profitability of a new well by about $600,000 while cutting revenue by at least $5.00 a barrel, a figure that could make some investments uneconomical, reports the Edmonton Journal. “Construction has yet to start, however, on any major pipeline expansion due to procedural hurdles. These hurdles are likely the largest competitiveness cost for Canadian oil producers relative to U.S. producers,” the study says.
The report comes out just days before the federal government is expected to come out with plans on how it will overhaul the environmental and regulatory review process for major energy projects. And while the industry expects the new plans to create a make-or-break moment for future pipeline projects, Dachis says not having enough pipelines will hurt Canada's energy sector.
"If Canadian governments allowed pipelines to be built expeditiously, the competitiveness of western Canadian oil producers would be greatly improved," he wrote.
Carbon Taxes not the problem
While some commentators may be quick to blame carbon taxes, the study shows that greenhouse gas emission levies are having a relatively small impact on the industry outside the oil sands. The oil sands were not part of the analysis because they are far different and don't compare to conventional oil and gas wells.
The Alberta carbon tax is set at $30 a ton, but won't be imposed until 2023 on conventional oil producers. And the way the tax is set up, oil producers will receive most of that money back as a rebate based on their output. “There’s a really smart design to the carbon tax in Alberta because it’s a two-part system,” said Dachis. “Companies with low emissions per barrel will be better off under this system.”
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The study takes into account policy-induced costs, including lack of market access, taxes on investment and royalties, property and municipal taxes, in addition to carbon taxes.
Using Alberta oil wells as an example, Dachis found that a conventional oil well will have total costs of around $770,000, about the same as what a similar oil well would face in Saskatchewan. This is the result of federal, provincial and municipal policies, which also includes royalties and income and property taxes. This is more than twice the “policy costs” for producers in the U.S.
Dachis hopes the report will start discussions on the best way to ensure the Canadian energy sector is keeping up with their counterparts South of the border. "If we spend more of our time debating things like emission pricing and don’t really look at what it’s going to take to get pipelines built, we’re not looking in the right places.”
More about Canada, Oil producers, pipelines, Competitiveness, US oil producers