Study suggests pipeline capacity constraints are costing Alberta billions in lost revenue

Study shows Alberta losing oil revenues A recent report says Alberta is losing oil revenue because of limited pipeline capacity and market access. Mark Villani explains.

A new report from the University of Calgary shows Alberta is losing about $7.2 billion each year in government revenues because of a lack of pipeline capacity and limited access to markets for heavy oil.

The university’s School of Public Policy produced the study that shows Alberta is losing about $6.60 on every barrel of heavy oil that is exported to the United States.

The researchers tried to determine what a reasonable price difference would be if pipeline capacity restraints weren’t an issue.

“If you have a lower quality of oil, you’re going to get a lower price, but that’s a natural differential. And so what we did in the study is we went back through and figured out an average differential in periods when there wasn’t a pipeline capacity constraint or there was but we weren’t butting up against it when there was still free capacity in the pipeline, versus now when we are at capacity. And we’re using benchmark prices, which are generally indicative of the price movements so all of these prices move together so when you end up with price suppressing, some prices might be a bit lower, some prices might be a bit higher, but it’s really that wedge that is more of less the same across the board,” said Kent Fellows, research associate, U of C School of Public Policy.

Fellows says there is a high differential in the price of West Texas Intermediate compared to Western Canadian Select and that is making it tough for Alberta to compete.

“That means a lower price for Alberta oil and a lot of that is due to the fact that we’re at capacity on the pipelines, that we’re just having trouble getting the product to market,” said Fellows.

He says the differential should be about $15, to account for quality differences and transportation costs, but that it is closer to $40 and that is being ‘left on the table’.

“When you run that through the total production figures it’s about $14 billion a year that we are losing because of pipeline capacity constraints, and that’s a value that we’re losing on current exports not accounting for the fact that we night be able to expand exports if we had more pipelines,” he said.

Of the $14 billion, about $7.2 billion is being forfeited from royalties and other taxes. Individual companies are losing about $5 billion and the rest is being lost at the federal level.

Fellows says environmental concerns over new pipelines are important but that stalling the process is a high price to pay.

“A better way to think about this is where can we reduce emissions, where can we have environmental protections at the lowest cost? Where can we, sort of, balance those costs and benefits and stalling out pipelines is not a great way to do it because it’s costing us $14 billion a year,” he said. “The value in these numbers is putting a price tag on it so that when the Alberta government is talking to the B.C. government, when the federal government is looking at these policies, at large, it’s a lot easier to see what the value is in getting the new pipeline.”

Robyn Allan is an independent economist in B.C. and says the findings misrepresent how the sector works.

“If the person who wrote the report even bothered to listen to what oil producers are saying, they are all saying this is a short-term problem. We are picking up capacity on Enbridge and Trans-Mountain and by rail and we expect these differentials to return back to normal levels in a few months. And so to suggest that we’ve got a huge problem is really unfair to the public,” she said. “We have to understand how much oil in Canada is actually subjected to the spot market pricing of WTI to WCS, the North American light oil benchmark versus the heavy oil benchmark in Canada. And when we actually look at how crude oil producers have protected themselves from this differential, they expect and know is volatile, really only one in ten barrels produced in Canada is even subjected to it so even if there were a problem, and even if it’s a long-term problem, which it’s not, the impact is negligible.”

The government is looking at new processing capacity in the province and Fellows says new technology could be part of the solution but that it is not a substitute for pipeline expansion.

“What partial upgrading does is it improves the quality of the oil a little bit and also gets to the point where you can put it in a pipeline without having to dilute it. So that frees up pipeline capacity because you’re no longer adding diluting agents to the bitumen,” he said. “In terms of being a cost effective strategy, nothing beats new pipelines at this stage.”

To view more of the findings, click HERE.