OTTAWA – Canada lost out on about $25 billion in oil revenues last year due to pipeline and production bottlenecks and is expected to lose $15 billion a year going forward until it deals with its infrastructure deficit, a new CIBC report says.
CIBC economists Avery Shenfeld and Peter Buchanan said the record price discount received by Western producers of heavy oil — mostly bitumen — is no longer the issue it once was, but Canada will continue to lose big time until it permanently solves its pipeline deficit.
“Refinery/upgrader restarts, and a heavier reliance on flexible but costlier to operate ‘rail pipelines,’ have seen a fairly dramatic improvement lately,” the report states.
“Notwithstanding such improvements, Canada continues to face a notable long-term challenge shipping its oil to market. The failure to invest in needed transport infrastructure could still prove costly for Canadian producers, governments, and the economy, to the extent that investment plans are delayed or scaled back.”
Western Canadian heavy oil, which represents about 45 per cent of total production, sold at a discount of as much as $43 a barrel during the winter from the landlocked Western Texas Intermediate price, which itself suffers a discount from North Sea oil, known as Brent.
Because of recent improvements, the differential to WTI has since narrowed considerably to about $14 a barrel, near the $17 historic average.
CIBC calculated for 2012, when the price gap began widening, the difference wound up costing Canada about $25 billion in lost opportunity revenues, and will likely cost the economy another $20 billion this year. Going forward, assuming the gap returns to historic levels, the economists say Canada will lose out on about $15 billion a year.
That’s not as bad as last year, but still represents about five per cent of Alberta and Saskatchewan’s combined gross domestic product.
“It’s a narrowing gap, but it means we were facing crippling costs last winter and its still money left on the table,” explained Buchanan. “We’re not getting the money for our oil we could get if we had cost-effective, unimpeded access to global markets.”
Both the federal and provincial governments have cited lower commodity prices for adding pressure to their fiscal projections, particularly with depressing expected tax and royalty revenues.
But Robyn Allan, an independent economist who has given testimony to the National Energy Review Panel on the Northern Gateway proposal, questions whether lack of pipeline capacity would eliminate the discount.
She argues the gap has more to do with the lower quality of crudes being shipped and transportation costs than capacity.
“Diluted bitumen will sell at a deeper discount no matter how much excess pipeline capacity exists,” she said in an email response.
The CIBC economists say getting the oil to markets is critical, however, and the more options the better — south to the U.S. Gulf coast through the Keystone XL project, West to the British Columbia coast, and even East to markets in Ontario and Quebec.
The report suggests all three are important, but none more so than building a pipeline to B.C. to get oil to Asian markets, possibly the most controversial of projects and most difficult to bring to fruition, given opposition among environmental advocates and First Nations.
With the U.S. ramping up its own production to the point that only 45 per cent of domestic needs come from foreign sources, as opposed to 60 per cent a decade ago, and market growth in Eastern Canada likely to be muted, the best destination would appear to be Asia, the report argues.
“It’s increasingly important that Canada move on one or more of the alternative pipelines to get our product headed Asia’s way,” said Shenfeld, CIBC’s chief economist.
The economists say even with slower growth in China, the country’s appetite for crude is expected to increase by up to four per cent a year, or the equivalent of the entire United Kingdom market every couple of years. As well, demand for oil is growing throughout Asia, they note, as lifestyles there become energy intensive.
In a speech in Vancouver on Wednesday, Trade Minister Ed Fast told the Asia Pacific Foundation that Canada is in position to fuel Asia’s economy resurgence.
“What Canada and the Asia-Pacific region have before them is an exceptional complementarity of assets and needs. On the one hand, Canada’s abundance of energy assets and our need to sell them at their highest value; on the other, an extraordinary magnitude of the demand for energy in China, Japan, India and other Asian countries,” he said in notes released in Ottawa.
The CIBC report argued that “clarity on the pipeline front” will help attract the capital needed to support oil sand expansion.
But Buchanan warns that even on the investment front, Canada no longer has the clear field it once did. A decade ago, almost three quarters of global oil reserves were off limits to global players due to domestic prohibitions against foreign operators and security issues, but that is changing, he said.
Iraq recently replaced Iran as OPEC’s second largest producer, Mexico is moving to amend its constitution to encourage foreign investment, and even Venezuela may in the future become more open, following the death of President Hugo Chavez.
Fast said over the next 10 years, more than 600 major resource projects will be underway or in the planning stages in Canada, requiring about $650 billion in investment.