The wide gap between oil’s global benchmark price and what Canadian producers can get for their oil is costing Canada $2.5 billion a month, according to new research that sees the spread remaining for years even if new pipelines are built.
Normally, the price gap between Brent North Sea oil and Western Canada Select oil is $10 to $15 a barrel, says Charles St-Arnaud, an analyst at Nomura Securities. But currently, that spread is a near-record $50 a barrel.
“The significant spread is due to a lack of possible export markets for Canadian oil and this situation will likely persist until Canadian oil manages to flow into export ports or areas of demand in North America,” St-Arnaud says in his report.
He notes that Canada imports more than 40 per cent of the oil it consumes, even though it is a big exporter of oil. “This is the result of the pipeline network that brings oil from the Western provinces to the U.S. Midwest, with no branch bringing oil to the eastern part of the country.”
The oil Canada imports is priced at lofty Brent levels, while Canadian producers have to sell their oil at a big discount. “Oil flowing from Canada to the U.S. is viewed as oversupply, depressing the price for Canadian oil,” he says.
Oil glut in the U.S.
The surge in oil production in the U.S., refining disruptions and a pipeline network that isn’t quite up to the job are all combining to force down prices for Canadian producers, with the result that the larger-than-usual price gap is now costing Canadian producers $30 billion a year in lost revenue.
A revenue loss of that size translates into weaker corporate profits, lower tax revenues for government and a lingering drag on Canadian growth that amounts to 1.6 per cent of GDP, he estimates.
There are no quick or easy solutions to the price spread problem, St-Arnaud says. He notes that many of the various proposals to deal with delivery problems – the Keystone XL pipeline from Alberta south to the Gulf of Mexico, the Northern Gateway pipeline from Alberta to Kitimat, B.C., increasing the capacity of the TransMountain pipeline that runs from Alberta to Vancouver, and the reversal of Line 9 between Sarnia, Ont., and Montreal – carry some political and/or environmental opposition.
Even if new pipeline infrastructure does get built, St-Arnaud says most of the projects are unlikely before 2015, leading him to forecast that the divergence of the Canadian price of oil “will persist for some years.”
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10. Oil And Gas Accounts For 4.8 Per Cent Of GDP
The oil and gas industries accounted for around $65 billion of economic activity in Canada annually in recent years, or slightly less than 5 per cent of GDP. Source: <a href="http://www.ceri.ca/docs/2010-10-05CERIOilandGasReport.pdf" target="_hplink">Canada Energy Research Institute</a>
9. Oil Exports Have Grown Tenfold Since 1980
Canada exported some 12,000 cubic metres of oil per day in 1980. By 2010, that number had grown to 112,000 cubic metres daily. Source: <a href="http://membernet.capp.ca/SHB/Sheet.asp?SectionID=9&SheetID=224" target="_hplink">Canadian Association of Petroleum Producers</a>
8. Refining Didn't Grow At All As Exports Boomed
Canada refined 300,000 cubic metres daily in 1980; in 2010, that number was slightly down, to 291,000, even though exports of oil had grown tenfold in that time. Source: <a href="http://membernet.capp.ca/SHB/Sheet.asp?SectionID=7&SheetID=104" target="_hplink">Canadian Association of Petroleum Producers</a>
7. 97 Per Cent Of Oil Exports Go To The U.S.
Despite talk by the federal government that it wants to open Asian markets to Canadian oil, the vast majority of exports still go to the United States -- 97 per cent as of 2009. Source: <a href="http://www.nrcan.gc.ca/statistics-facts/energy/895" target="_hplink">Natural Resources Canada</a>
6. Canada Has World's 2nd-Largest Proven Oil Reserves
Canada's proven reserves of 175 billion barrels of oil -- the vast majority of it trapped in the oil sands -- is the second-largest oil stash in the world, after Saudi Arabia's 267 billion. Source: <a href="http://www.ogj.com/index.html" target="_hplink">Oil & Gas Journal</a>
5. Two-Thirds Of Oil Sands Bitumen Goes To U.S.
One-third of Canada's oil sands bitumen stays in the country, and is refined into gasoline, heating oil and diesel. Source: <a href="http://www.nrcan.gc.ca/statistics-facts/energy/895" target="_hplink">Natural Resources Canada</a>
4. Alberta Is Two-Thirds Of The Industry
Despite its reputation as the undisputed centre of Canada's oil industry, Alberta accounts for only two-thirds of energy production. British Columbia and Saskatchewan are the second and third-largest producers. Source: <a href="http://www.nrcan.gc.ca/statistics-facts/energy/895" target="_hplink">Natural Resources Canada</a>
3. Alberta Will Reap $1.2 Trillion From Oil Sands
Alberta' government <a href="http://www.huffingtonpost.ca/2012/03/27/alberta-oil-sands-royalties-ceri_n_1382640.html" target="_hplink">will reap $1.2 trillion in royalties from the oil sands over the next 35 years</a>, according to the Canadian Energy Research Institute.
2. Canadian Oil Consumption Has Stayed Flat
Thanks to improvements in energy efficiency, and a weakening of the country's manufacturing base, oil consumption in Canada has had virtually no net change in 30 years. Consumption went from 287,000 cubic metres daily in 1980 to 260,000 cubic metres daily in 2010. Source: Source: <a href="http://membernet.capp.ca/SHB/Sheet.asp?SectionID=6&SheetID=99" target="_hplink">Canadian Association of Petroleum Producers</a>
1. 250,000 Jobs.. Plus Many More?
The National Energy Board says oil and gas employs 257,000 people in Canada, not including gas station employees. And the Canadian Association of Petroleum Producers says the oil sands alone <a href="http://www.capp.ca/aboutUs/mediaCentre/NewsReleases/Pages/OilsandsaCanadianjobcreator.aspx" target="_hplink">will grow from 75,000 jobs to 905,000 jobs by 2035</a> -- assuming, of course, the price of oil holds up.