A question that we get asked a lot is whether Canada really needs more pipelines. It’s a fair question because there are a lot of conflicting points of view to sort through.
We know that pipelines will play a critical role as the world moves toward lower carbon sources of energy. This critical infrastructure will be needed long into the future to transport the materials needed to build equipment like solar panels and wind turbines, and the natural gas and hydrogen that will help reduce emissions here in Canada and around the world. As the energy sector evolves, oil and gas will continue to be leading sources of energy for decades to come as demand continues to grow. Pipelines are the safest way to move those products.
Yet, some argue that Canada does not need any more pipelines – that the ones we have will hold us over for the next several decades as renewable energy sources overtake oil and gas.
Kevin Birn is a leading industry analyst and Vice President of North American Crude Oil Markets with IHS Markit. He answered some questions to “set the record straight” and help explain why this debate is difficult to settle.
In the immediate term, the answer is yes. We think western Canada has the ability to overproduce its current takeaway capacity. We do see the need for incremental capacity in the near term. The closest to coming online would be Enbridge’s Line 3 Replacement Program, followed by the Trans Mountain Expansion Project. Once those two projects are complete, we will still need to see expansions or optimizations on the current system to meet the potential supply coming from the market. That is especially true now that the U.S. President has pulled the plug on the Keystone XL Pipeline.
I think there are several factors at play. One is understanding market dynamics, resource characteristics, and economics, which relate to what the future supply will be. On the other side is understanding the operational situation of existing crude oil export systems.
I believe the key issue, however, is wildly varying views about the pace of the energy transition and what it could mean for oil demand. The outlook for energy markets is arguably more uncertain today than in previous years as governments are increasingly moving more aggressively to accelerate transition.
There is also a chicken and egg situation between supply and export capacity which can complicate this story:
If we create an environment of price uncertainty because we don’t have enough export capacity, the attractiveness of investing in the region falls which in turn negatively impacts production expectations. So, the question of whether Canada needs more pipelines can be a bit of a circular discussion, as it impacts the stability and predictability of the regional price itself, and thus investment and production.
First a quick explanation: Western Canadian heavy crude has traded, and will continue to trade, at a lower price than other crudes globally. This is due to differences in crude quality and the fact that western Canada is land-locked and distant from markets, which means producers need to pay to transport their product to market. These two factors contribute to the oil price differentials (the differences we see in prices) in western Canada. Over the last half decade and even more, western Canada has seen that differential widen to more than what would be expected if there had been sufficient pipeline capacity.
The solution is to ensure adequacy of export capacity—ideally in the most efficient, and thus lowest cost mode of transport. Globally the dominant form of overland transportation is pipeline. In the absence of adequate pipeline export capacity, producers have to seek out alternative modes to market and typically they do cost more money. This can contribute to wider differentials and lower returns for western Canadian crude oil.
This is where the importance of adequate export capacity, and incremental pipelines come in. Unfortunately, pipelines have been caught in the fray of a larger debate over the future role of crude oil through the energy transition and the environmental impacts of the Canadian sector compared to other oil producing regions globally. Pipelines have become a proxy for that versus what the fundamental role of them is – transportation conduits.
The world is beginning to act more aggressively on energy transition and Canada has brought forward a suite of policies to accelerate that transition in this country. This will be the future and it will impact oil demand. However, oil demand has not gone away, and its pervasive nature will likely make it an enduring fuel and chemical input for decades. It is likely in Canadians’ best interest to maximize the value of its production and this will require incremental pipeline capacity. It is important to remember that this in turn impacts revenues, taxes, royalties and jobs—economic benefits to Canada and money which can also be used to help fund that energy transition.
Special thanks to Kevin Birn, Vice President of North American Crude Oil Markets with IHS Markit, for his insights.