A lack of pipeline takeaway capacity from Canada's oil sands regions will cost producers C$10.8 billion in forgone revenue in 2018, according to a report by the Bank of Nova Scotia.
As production increases, companies will be forced to rely more heavily on rail to move crude, which comes at an increased cost of between C$8 per barrel and C$10/bbl compared to pipeline shipping, economists at the institution, known as Scotiabank, said in a research report. The bank anticipates that the price discount of Canadian oil sands blends to U.S. benchmark crudes will remain elevated at least until Enbridge Inc. completes a project to boost capacity on its Line 3 system to the Midwest in late 2019.
Canadian oil sands producers have increased output as projects planned before prices plummeted in late 2014 have come online, including the Suncor Energy Inc.-led Fort Hills mine and processing plant, which will add as much as 194,000 bbl/d when it reaches full production. An outage on TransCanada Corp.'s Keystone pipeline system in South Dakota also pinched crude shipments, and the line continues to run at reduced capacity.
Even with the completion of the Enbridge project, Canada will need more pipelines. Either TransCanada's Keystone XL or Kinder Morgan Inc.'s Trans Mountain expansion project will be required by 2020 to maintain adequate takeaway capacity, according to the report, authored by economists Jean-François Perrault and Rory Johnston. Both of those proposals have been bogged down in regulatory and legal challenges.
"Pipeline approval delays have imposed clear, demonstrable and substantial economic costs on the Canadian economy," the report said. "If maintained at current levels, the discount on Western Canadian oil would shave C$15.6 billion in revenue annually from the sector."
Canada has adequate loading capacity to move crude by train to the U.S., but rail companies are reluctant to commit cars and resources to oil handling without long-term contracts. Rail facilities built to move oil had been lightly used prior to the Keystone outage. In November 2017, the National Energy Board reported exports of crude by rail averaged 139,754 bbl/d, up from 127,366 bbl/d a year earlier. The board has not yet released statistics for subsequent months that would reflect the full impact of the Keystone outage.
"To compensate for this temporary demand, rail providers are asking oil producers to agree to multi-year, take-or-pay contracts that demonstrate that the oil patch has 'skin in the game,'" the report said. "These negotiations between rail companies and energy firms are ongoing, and we anticipate that the favorable economics of current discounts will support a middle-ground settlement over the coming weeks and months."