Pipeline shortages to return sooner rather than later as oil production booms
After being hamstrung for years by a lack of export capacity, Canada's oil industry will have reason to celebrate when the much-anticipated Trans Mountain pipeline expansion comes online, expected to be sometime this spring.
But the party may be short-lived, as the more-than-$30-billion pipeline is expected to quickly fill up - returning Canada's oil producers to a “Groundhog Day” scenario of restricted growth and depressed prices.
“I think the industry wanted to believe Trans Mountain was the answer. They wanted everybody to believe that having this new capacity was going to free them from this problem,” said Richard Masson, executive fellow with the University of Calgary's School of Public Policy.
“But we've never really been free from this problem.”
Export issues have been a thorn in the side of Canadian energy companies for years, due to a lack of pipeline capacity from Alberta's oilsands region to coastal tanker loading facilities.
That shortage of pipeline space, combined with refinery and transportation costs, is the reason Canadian oil producers typically take a price discount on their product compared to U.S. competitors. In a particularly dramatic example, the discount known as the Western Canada Select differential widened so much in 2018 - to US$50 a barrel - that the Alberta government moved to curtail oil production in the province until prices improved.
While the situation has moderated since then, in part to due to the 2021 completion of Enbridge Inc.'s Line 3 pipeline replacement project, the discount on Canadian oil compared to the U.S. benchmark West Texas Intermediate has continued to hover between US$18 and $20 on average in recent years.
The Trans Mountain pipeline expansion is expected to change that, by making it easier for Canadian oil to get to Asian markets via the West Coast. The high-profile project, which began construction in 2019 and is owned by the federal government, will increase the existing Trans Mountain pipeline's capacity by 590,000 barrels per day to a total of 890,000 barrels per day.
And with that near-tripling of export volumes, comes the ability to turn on the taps when it comes to crude. Many companies have already begun to ramp up production in preparation, and 2024 is expected to be a boom year for oil output in this country.
A TD Economics report suggested Canadian oil production in 2024 could grow by between six and 10 per cent year-over-year, the equivalent of between 300,000 and 500,000 barrels per day.
That's on top of 2023, which was already a record-setting year, and could make Canada the top source of global oil supply growth in 2024.
But it's unlikely the growth will be sustained. Trans Mountain has been plagued by so many construction delays that by the time it does come online, it will quickly be filled. Many in the industry now believe Canadian oil output will exceed pipeline capacity again as early as 2026.
“Everybody's kind of saying, 'OK, we see a pipeline. We're going to be able to grow.' Well, look, everybody's growing at the same time. It (Trans Mountain) is going to be full in no time,” Masson said.
For the industry, part of the problem is that other pipeline projects proposed in recent years - Energy East, Keystone XL - never got off the ground due to environmental and political opposition.
Heather Exner-Pirot, special advisor to the Business Council of Canada, said as a result, lack of market access remains the sector's major barrier to growth - a de facto production ceiling.
“There is no technical, logistical or economic reason to not produce more oil in this country. It's just the transportation,” she said.
“And sometimes you think it's strategic, because the whole strategy of the environmental movement was to attack the pipeline industry. And so now there is a de facto production cap, and that is a problem for the industry.”
Exner-Pirot said Canadian oil producers, especially the major oilsands companies, have weathered a great deal of turmoil in the last decade - from pipeline shortages to roller-coaster commodity prices to growing concern about emissions and climate change.
At this point, she said, they know how to make money even in the face of constraints like lack of pipeline egress.
Producers also have the option to increase their crude-by-rail shipments, which doubled in the last six months of 2023 as companies waited for news of a Trans Mountain start date.
But Duncan Kenyon with Investors For Paris Compliance, which takes financial positions in Canadian companies in order to hold them accountable for their emissions reduction promises, said he believes the industry's pipeline problem poses a serious long-term investment risk.
Part of it, he said, is because there is no expectation that a new pipeline will be built anytime soon.
“The cost of (the Trans Mountain expansion) has tripled from what it was supposed to be. So we're going to be in this situation where we're at pipeline capacity in the next two years and now we have a really clear indicator of what it costs to build a new one,” Kenyon said.
“In two years we're going to be in a game where we don't have exit strategies, in terms of getting oil out of the country.”
This report by The Canadian Press was first published March 11, 2024.
CTVNews.ca Top Stories
DEVELOPING 122 active wildfires burning across Canada, 32 considered 'out of control'
The 2024 wildfire season has begun, and it's shaping up to follow last year's unprecedented destruction in kind, with thousands of square kilometres already consumed.
B.C. parents sentenced to 15 years for death of 6-year-old boy
A British Columbia Supreme Court judge has sentenced the mother and stepfather of a six-year-old boy who died from blunt-force trauma in 2018 to 15 years in prison.
Veteran TSN sportscaster Darren Dutchyshen has died
Veteran TSN broadcaster Darren 'Dutch' Dutchyshen, one of Canada’s best-known sports journalists, has died. He was 57. His family says 'he passed as he was surrounded by his closest loved ones.'
Miller scores late as Canucks grind out 3-2 win over Oilers in Game 5
J.T. Miller scored in the final minute of the game and the Vancouver Canucks came back for a 3-2 victory over the Edmonton Oilers in Game 5 of their second-round playoff series Thursday.
Think twice before sharing 'heartbreaking' social media posts, RCMP warn
Mounties in B.C. are urging people to think twice before sharing "heartbreaking posts" on social media.
Police issue Canada-wide warrant for Regina homicide suspect
Police have issued a Canada-wide warrant for a man wanted in a homicide which occurred in Regina on May 12.
Trudeau calls New Brunswick's Conservative government a 'disgrace' on women's rights
Prime Minister Justin Trudeau assailed New Brunswick's premier and other conservative leaders on Thursday, calling out the provincial government's position on abortion, LGBTQ youth and climate change.
Kevin Spacey receives star support as he fights to get his career back
Kevin Spacey is pushing back on the 'rush to judgment' against him and is being backed by some big names as he seeks to reclaim his acting career.
Speaker cuts ties with Sask. Party, alleges he faced threats, harassment from gov't MLAs
The Speaker of the Saskatchewan Legislature Randy Weekes has severed ties with the Sask. Party after accusing some members of harassment and intimidation tactics, including a situation he claimed saw the Government House Leader bring a hunting rifle to the legislative building.