May 25, 2018
Additional pipeline capacity for Canadian oil coming online over the next few years won’t be enough to solve significant bottleneck pressures with mounting associated costs for the industry and the country, states a CIBC Capital Markets report.
“The current pipeline infrastructure in Canada is designed to meet the needs of the past, less so the present, and clearly not the future,” say Deputy Chief Economist Benjamin Tal, and Economists Andrew Grantham and Katherine Judge, pointing to $12 billion in forgone revenues over the past five years which could rise to $15 billion by 2019.
This is in addition to the “cost of increased reliance on expensive rail transportation and reduced investment.”
While Line 3 and Keystone XL will enhance capacity and help narrow the discount on Canadian oil by 2021, “what we do with that time will shape the future of the energy sector in Canada,” the report says. “Demand for oil in North America is falling – reducing intra-continental export opportunities – while Asian markets are expected to dominate demand growth in the coming decades. Simply put, the current pipeline system is ill-equipped to deliver products to where they are needed most.”
The report notes that the United States has almost eliminated the need for imported energy and gained market share abroad while Canada continues to be reliant on the US market. “There is a clear and urgent need to find a way to ship Canada’s oil in a sustainable way to Asian markets, the Gulf coast, eastern Canada and the US eastern seaboard. Inaction is not an option.”
With the realization that rail cannot be the ultimate and permanent solution, pipelines remain the only reasonable option for shipping Canada’s oil to world markets, the report adds.
“The debate about the Trans Mountain Expansion pipeline is not about the here and now, it is about the future. Even with added capacity over the next few years, Canada’s oil patch will once again face significant pipeline bottlenecks with mounting associated costs. The Trans Mountain expansion line will work to add enough capacity to ease that pain. More importantly, that line represents the only option for Canadian oil to reduce its dependency on the saturated US market and find its way into much faster growing markets.
“The future of Canada’s economy looks brighter when the energy sector is thriving in a sustainable manner, of which pipeline capacity is a crucial component,” the report says. “Given the evolution of demand and increased competition stateside, investment in more efficient modes of transportation is necessary to attract future investment in the oil industry and maintain the competitiveness of Canada’s position as a major oil player.”
Beyond the energy sector, the successful implementation of pipelines would also demonstrate the attractiveness of Canada to international corporations that may be looking to expand. “Thanks to fairly stable growth and politics, Canada has been perceived as a good place to invest recently. That reputation could, however, be dented by further delays in major projects and impact business investment, not just within the energy sector, but within the wider economy as well.”
(CIBC Capital Markets)