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article imagePipeline bottleneck is choking Canada's economy

By Karen Graham     May 22, 2018 in Business
Ottawa - While oil production in Canada is surging, profit margins for oil producers are sinking as they strive to stay competitive with U.S. markets. This is because Canada simply does not have enough pipeline capacity to deliver its oil to market.
There are a few upstream companies, like Marathon Oil Corporation and Hess Corporation and maybe a few others that are enjoying the shale boom and rebound of prices in the U.S., Canadian companies are now toying with the idea of reducing production, reports NASDAQ.
The whole country has been focused on the inter-provincial squabble going on between British Columbia and Alberta for months, and while both sides may be right in their arguments, everyone seems to have forgotten the bigger picture - How much Canadians will lose by not having sufficient pipeline capacity to deliver their oil to market.
A study published by Fraser Institute on May 8, 2018, showed Canada’s pipeline constraints will reduce revenues for Canadian energy firms by roughly CA$15.8 billion in 2018, or approximately 0.7 percent of Canada’s national GDP.
File photo: A westbound oil train rolls through Essex  Montana in January 2013.
File photo: A westbound oil train rolls through Essex, Montana in January 2013.
Roy Luck (CC BY 2.0)
The report noted that the lack of sufficient pipeline capacity has resulted in oil producers being forced to become more dependent on the U.S. market and rely on more costly modes of energy transportation. This is particularly true of the heavier varieties coming out of the oil sands.
Not only are there bottlenecks in oil sands pipeline infrastructure, but this has caused oil producers to almost give away their product at vastly discounted prices. The bottom line? Canadian producers are selling to the U.S. market at a tremendous loss of revenues.
And according to the Fraser Institute's calculations, this means that the difference between Canadian and U.S. oil came to $26.30 a barrel in 2018. This also happened between 2012 and 2017, when the price differential was $16.54 per barrel, causing a loss of $20.7 billion in revenues for Canadian oil producers, or a loss equivalent to almost 1 percent of Canada’s national GDP
Protester holding sign stating No Pipeline  No Consent  during a Kinder Morgan Pipeline Rally on Sep...
Protester holding sign stating No Pipeline, No Consent, during a Kinder Morgan Pipeline Rally on September 9th, 2017 in Vancouver, British Columbia, Canada.
William Chen (CC BY-SA 4.0)
Pipeline problems galore
Even with increased oil production, Canada has not been able to add any new pipelines in recent years due to the cancellation of the Northern Gateway and Energy East projects. And if we add the delays in the Kinder Morgan Trans Mountain Pipeline extension and the Keystone XL pipeline project, things are not looking up.
Besides an overdependence on American oil, the other major problem facing Canadian oil producers is the cost of shipping their crude by rail. Not only does this cost more, but it leads to lower prices for Canadian crude and an even wider price differential.
And when we look at environmental factors, we know how much more dangerous to people and the environment shipping oil by rail can be. The sad part of all this is that Canadians are between a rock and a hard place, and everyone can only hope there is an equitable answer to the pipeline problem.
More about Canada, Oil production, Economy, Revenue loss, pipelines