The massive price discount energy companies producing oil in Canada receive for their crude will linger throughout 2013 even if the industry is able to build and expand pipeline networks in the United States, experts say, noting that the domestic economy's potential is being held back.
A barrel of Western Canadian Select is worth $47.20 (U.S.) a barrel right now – a whopping $40 discount to the North American benchmark, known as West Texas intermediate (WTI). Further, the global benchmark, known as Brent crude, sits at $109.62 a barrel, giving it a gaping $62.42 advantage over much of the oil coming out of Western Canada.
Low prices for Canadian crude are caused by a traffic jam of oil in the U.S. Midwest. But even if relief valves are opened thanks to the Seaway pipeline expansion and construction of the southern leg of the Keystone XL pipeline, the glut will merely shift from the Midwest to the Gulf Coast, CIBC World Markets predicts.
Industry optimists long hoped that new pipelines would ease the gap between Canada's heavy crude and WTI, making expansion in the oil sands more financially sound. Projects such as Seaway and the southern chunk of Keystone XL may get heavy oil to refining markets, but the recent light oil boom, centred in North Dakota, means excess oil will remain in North America.
Canada will lose billions of dollars in revenue per month, economists calculate, because of the price difference.
"The heavy side is a disaster right now," said Andrew Potter, a CIBC analyst in Calgary. "There's a view that these pipelines kind of save us and we're going to see this miraculous contraction of the Brent-WTI [differential]. It certainly will get better, just not as good as a lot of people think."
Canada loses as much as $2.5-billion in revenue each month when the difference between domestic oil and the international benchmark is around $50, according to Charles St-Arnaud, an economist at Nomura Securities International Inc.
"If it were not for the excessive spread, Canada's trade balance would currently show a surplus of about $2.3-billion, instead of the current $0.2-billion," he said in a note last week. "This implies to a revenue loss of about $30-billion a year, or about 1.6 per cent of GDP."
BP PLC's refining complex in Whiting, Ind., is being revamped so it can process Canada's heavy production. It will soon ease the pain for some heavy crude companies, but its redesign comes as Imperial Oil Ltd. starts up is Kearl oil sands mining project, adding to supply. The first phase of that effort will spit out 110,000 barrels of oil a day.
The energy industry has its hopes set on much larger pipeline projects, including TransCanada Corp.'s entire Keystone XL network, which still needs approval from the U.S. State Department.
Enbridge Inc. wants to reach Canada's West Coast via the Northern Gateway pipeline, and Kinder Morgan Inc. has proposed twinning its existing Trans Mountain network. There are also plans to use existing infrastructure in Canada to move oil eastward, potentially reaching the Atlantic coast.
While Mr. Potter believes the spread between global and North American oil prices will narrow when the Seaway expansion and the southern stretch of Keystone XL are operating, he thinks the days when Canadian crude was comparable to Brent oil are over.
"We have to get our heads around that," he said. "We are going to be discounted off global benchmarks for a long time." Now it is question of whether pipelines will be built quickly enough for that to be "an acceptable range versus a completely disastrous range."