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Canadian energy policy-makers may look back on 2012 with fond nostalgia. As difficult as their job was this year, it could look like a day at the beach compared with the challenges that are coming to a head as we enter 2013.

While 2012 marked some controversial policy decisions from Ottawa on foreign investing in Canada's oil and gas sector, 2013 will shift the focus to an issue that threatens the industry in a more fundamental way. The country faces a critical shortage of transportation infrastructure to get its oil to key markets – and it's threatening to cut down Canada's energy companies at the knees.

"Western Canada's oil industry faces faces a serious challenge to its long-term growth," Toronto-Dominion Bank said in a report this month. "Production growth will become constrained unless new pipeline capacity is built to access new markets."

The flood of new shale oil supplies coming on stream in the United States, combined with inadequate pipeline capacity to move Canadian oil to the markets that most need it, has left Western Canada (and the Alberta oil sands in particular) with a glut of oil that has gutted prices. The Western Canada Select oil grade – the benchmark for oil sands crude – was trading last week at a 40-per-cent discount to the U.S. benchmark West Texas Intermediate grade, and was selling for just half the price of Brent crude, the European standard.

Nomura Securities International Inc. economist Charles St-Arnaud estimated that this gaping price chasm is costing Canadian producers a collective $2.5-billion a month in lost revenues, relative to what they would get under more traditional spreads to Brent of about $10-$15 (U.S.) a barrel (the current spread is about $55).

Share values are suffering as a result. As of Dec. 19, the stock prices of the top six producers in the oil sands were down, on average, 5.5 per cent this year, compared with a 4-per-cent rise in the S&P 500's energy subindex; the median price-to-earnings valuation of those companies was barely over 10 – or 1.5 multiples lower than that of the S&P 500 energy group.

North American pipelines are already running at very nearly full capacity, while the volume of oil being pumped out of the ground is growing rapidly, and could explode in the next decade or so. A report from bond-rating agency DBRS projected that output from the oil sands will more than double by 2025, to 4.5 million barrels a day (b/d) from two million. At the same time, output from the booming Bakken shale oil field straddling the North Dakota-Saskatchewan border – which is about $20 a barrel cheaper to produce than the oil sands, and which increasingly competes with the oil sands for pipeline space – is seen soaring to 1.7 million b/d by 2025 from the current 700,000 b/d.

But it won't happen unless there's somewhere for the oil to go. Bakken and the oil sands are relatively high-cost supplies to produce; without sufficient transportation capacity to clear up the gluts and restore decent prices, it simply won't be economical for companies to invest in more output.

"Production growth cannot occur unless some of the planned pipeline projects out of the Western Canadian Sedimentary Basin go ahead," the TD report said.

This would include a couple of proposed major projects that are hopelessly bogged down in environmental disputes and political wrangling: Keystone XL, which would deliver Canadian oil sands crude to feed the expansive refining capacity for heavy oil on the U.S. Gulf Coast; and Northern Gateway, which would send oil to the B.C. coast for export across the Pacific.

While the oil patch's troubles don't often garner much sympathy across Canada's broader citizenry, TD noted that the transportation woes are more than just a problem for oil producers and investment in the sector. They are a serious threat to the national economy.

TD calculated that investment in Canada's oil and gas sector was responsible for 20 per cent of the country's economic growth in 2010 and 2011. It noted that a study this year from the Canadian Energy Research Institute estimated that if current proposed major pipeline expansions don't proceed, "Canada could forgo as much as $1.3-trillion of GDP … and $276-billion in taxes from 2011 to 2035" as a result of the constrained activity in the oil patch.

If this isn't a call to action on a national energy policy, I don't know what is. Unless Ottawa develops the political will to kick-start a major renewal of pipeline infrastructure in this country, and fast, one of Canada's biggest economic engines could be left lying on the road.

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