Oilpatch could lose $100B without new pipelines, researchers warn

Western Canadian oil producers are at risk of losing $100 billion in the next 15 years if no new pipelines are constructed in North America, according to energy research firm Wood Mackenzie.

Canadian oil production continues to rise and pipeline capacity remains constricted, pushing 200,000 barrels of oil a day onto the railways.

"In the past several years, we have seen big increases in supplies of oil from the United States and Canada," saidAfolabiOgunnaike, a senior research analyst in refining and oil product markets for Wood Mackenzie."Most of the supply is from parts of the country far removed from refining demand centres. That has led to price discounts."

The discounts are the lower prices Canadian producers receivefor oil purchased by refineries in the southern U.S. The differential is between the price ofWestern Canada Select (WCS) andWest Texas Intermediate (WTI), the North American benchmark.

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Oil transportation bottlenecks can causeoil differentials to rise.The differential, dubbed the "bitumen bubble" by former Alberta premier Alison Redforda few years ago, can potentially reduce the earnings of energy companies and the royalties collected by provincial governments.

Currently, the differential between WCS and WTI is narrow, at about $7a barrel compared with $20 last summer.

Groups battle pipelines

Wood Mackenzie expects $100 billion in value is at stake over the next 15 years based on how much the differential will grow, multiplied by the anticipated oil production of Western Canada. Wood Mackenzie expectsoilsandsgrowthto reach 3.5million barrels a day by the mid 2020s, up from 2.3million barrels a day now.The $100-billionfigure assumes the worst casescenario for industry, that no new pipelines will be constructed.

That is preciselywhat some environmental groups are pushing for. Without any new pipelines, future growth of the oil sector would be affected. The strategy of many environmental groups is to indirectly constrict oilsands production, by opposing pipelines, whether they be conversions, expansions, or new construction. The analysis by Wood Mackenzie puts a number on what is at stake for the energy sector if that opposition is entirely successful.

More than $40 billion worth of pipeline projects are proposed in North America, although many are stalled, including TransCanada'sKeystone XL and Enbridge's Northern Gateway. While a few projects such as Northern Gateway try to export Alberta oil through the West Coast, most pipelines aim to move crude south to refineries on the Gulf Coast.

That's the mission of Keystone XL, although Wood Mackenzie does not expect that pipeline to be constructed before 2020. Instead, the firm points to other projects that have a better chance of being constructed and operationalin the next five years such as Enbridge'sAlberta Clipper andLine 3 replacement. Both projects involve expanding current pipelines.

"We see heavy Canadian crude making inroads into the Gulf Coast refining market,"saidOgunnaike."Of course this is predicated on a set of pipeline assumptions."

Canadian heavy oil to Gulf Coast

Ogunnaikeexpects heavy oil from Canada to increasingly replace supply from other countries such as Mexico and Venezuela. Mexican production continues to decline, while increasingly Venezuela is sending heavy oil to Asia, in part to pay back debt.

In 2011, Canada was supplyingfive per cent of theheavy oil refined inthe Gulf Coast. That could rise to 50 per centby 2025. Gulf Coast refineries are set up to process heavy oil, rather than lighter oil like the output from U.S. shale fields.

While Wood Mackenzie does not expect Keystone XL to be constructed in the next five years, the firm does not dismiss the project altogether.Keystone still makes economic sense to transport Canadian crude to the Gulf Coast compared to alternatives such asTransCanada's Energy East project orshipping crude by rail. With so much production possible from Western Canada, the oil industry could use both of TransCanada'sproposed projects.

"Energy East is a more expensive path than Keystone XL to the Gulf Coast, but there still is a need for additional capacity,"Ogunnaikesaid.