Petroleum Still Fuels the Canadian Economy

Motor vehicles are still for the most part running on gasoline, and Canada is from its oil reserves a gasoline “energy superpower.”  It has the world’s third largest proven petroleum reserves and it is the fourth largest exporter of petroleum and the fourth largest exporter of natural gas.  The overwhelming importance of the petroleum industry to Canada’s economy has developed over the last 50 years.  Canadian oil is concentrated in Western Canada, and offshore in the Atlantic Provinces and the Beaufort Sea, and issues in the mid-stream component of the industry —the transportation, and wholesale marketing of petroleum products — have recently become ‘centre-stage’ and highly politicized.

Pipeline capacity is perhaps the key issue for market access constraints on Canadian oil.  The ‘market’ access in issue is, of course, the United States, Canada being the largest single source of oil imports to the United States, providing in 2015, for example, 43% of US crude oil imports.  When export pipelines reach capacity, as they did earlier in 2018, production has to be curtailed.  This further contributes to discounting the price of our resource.

To this point: — Western Canadian Select [WCS], a blend of oil sands bitumen and lighter oil normally sells for US$14 to $16 per barrel less than New York-traded West Texas Intermediate [WTI]— due to quality differences and transport costs.  Earlier this year, this price differential widened to as much as $30.  In March 2018 it averaged about US$23 per barrel.

The recent purchase by the Canadian federal government of the Kinder Morgan pipeline, an expansion of the existing Trans Mountain pipeline, is estimated by Herbert Grubel, professor emeritus of economics at Simon Fraser University to “increase the profits of Canadian oil producers by $16 billion a year without increased production and more if output is increased.”

Rail transport is the alternative option for exporting Canadian oil to the US, but capacity is also problematic, the cost higher, and the environmental risks not insignificant.  And increasing the capacity of this vital alternative is a long-term project not without business risk.  Canada’s two major railway companies, Canadian Pacific and Canadian National juggle transporting grain and crude oil.  Grain gives way to oil in the second half of the year, as it will this year. CN Rail reportedly has a “$3.4-billion capital program this year to expand capacity and it will take delivery this month of the first of 60 new locomotives it expects to buy this year.

The railway companies are said to fear that expanding their “crude-by-rail” business could spell trouble if the pipeline projects are resurrected.  Media reports say, “They want long term take-or-pay contracts, agreements that the shipper will supply the tanker cars and attractive prices.”  Rail analyst Daniel Sherman of Edward Jones said, “At some point they’re going to get those three sticking points resolved with the people that want to ship and they’re going to agree on a price and we’re going to see more shipments.”

As an indicator of rail transport levels and expectations, Calgary-based Altex Energy, for example, is currently loading about 45,000 barrels per day [bpd] “on railcars at its terminals in Alberta and Saskatchewan, up from 35,000 bpd in March, and expectations are that will continue to grow as more locomotives are available, said CEO John Zahary” on June 14th, 2018.