Energy and Environmental Policy Trends: The Invisible Cost of Pipeline Constraints

THE INVISIBLE COST OF PIPELINE CONSTRAINTS Over much of the last decade pipeline constraints and the resulting apportionment of pipeline capacity have meant reduced returns on Alberta’s Oil Exports. There is a natural price discount between the US benchmark West Texas Intermediate (WTI) Crude oil price and the Canadian benchmark Western Canada Select (WCS) price. This differential reflects the lower quality of WCS relative to WTI and the costs associated with pipeline tolls to transport this oil from Alberta to US refining hubs. However, at present western Canada is experiencing significant pipeline capacity constraints which have dramatically increased this discount relative to historical levels. Prior to 2013 the WCS/WTI discount generally stayed between 9 and 13% of the WTI price. As of February 2nd 2018, the current differential sits at 47% of the WTI price. A difference largely reflecting difficulties with market access associated with pipeline constraints. This larger discount means that Alberta is getting lower revenues per barrel for each barrel of heavy crude exported. This negatively impacts federal government revenues, private firms’ revenues and most significantly provincial government’s revenues.