VANCOUVER (miningweekly.com) – The price received for Western Canadian oil will remain vulnerable to service disruptions in current transportation channels, given the excess of production over takeaway capacity up to about 2020, a new report by the Bank of Nova Scotia (Scotiabank) has found.

In a report published on Tuesday, entitled 'Pipeline Approval Delays: the Costs of Inaction', Scotiabank argues that the delays in oil pipeline construction are to blame for the steep discount that Canadian crude fetches in the market. The bank calculated that the impasse in pipeline construction is costing the Canadian economy about C$15.6-billion a year, or 0.75% of the country's gross domestic product (GDP).

"Pipeline approval delays have imposed clear, demonstrable and substantial economic costs on the Canadian economy," Scotiabank's chief economist Jean-Francois Perrault said.

An expected shift from pipeline to oil-by-rail will mitigate some of the discount's impact, reducing foregone revenues this year to a still-high C$10.8-billion, or 0.5% of GDP. Perrault estimated that annual losses associated with transporting crude by rail rather than pipeline will settle at C$7-billion, or about 0.3% of GDP in 2019 and 2020, until more pipeline capacity comes into service.

The reliance on the existing pipeline network and rail shipments to bring Canadian oil to market has a demonstrable impact on Canada's wellbeing, with consequences that extend well beyond Alberta.

"The elevated discounts come with a steep economic cost, and represent to a large degree a self-inflicted wound," Perrault noted.

According to Scotiabank, the costs of the discount are increasing as delays continue to stifle progress in the three major proposed oil pipelines to export more oil from Western Canada, including Kinder Morgan's Trans Mountain expansion (TMX), Enbridge's Line 3 replacement and TransCanada's Keystone XL (KXL).

Scotiabank noted that the takeaway capacity from the Canadian oil patch is expected to remain strained until Line 3, the first of the major pipeline projects, enters service in the latter half of 2019. However, the analyst expects that Line 3 alone will be insufficient and that the market will require either the TMX or KXL to come on line before Canadian crude discounts fall back to levels associated with sufficient takeaway capacity.

The banking group's assessment of the regulatory delays in getting new takeaway capacity built came amid the escalating and very public row between oil-rich Alberta and environment-loving British Columbia, which had seen Alberta ban sales of British Columbia-produced wines in retaliation for the province recently deploying delay tactics to thwart construction of the federally and provincially approved TMX pipeline.

According to Perrault, the current pipeline capacity deficit had been at least 18 months in the making, but a November leak and temporary shutdown of TransCanada's Keystone pipeline in November brought the problem once more into acute focus, and sparked the latest flare-up in Canadian oil discounts.

The Keystone pipeline is currently still operating at 20% reduced capacity because of regulatory orders, keeping heavy crude takeaway capacity at least temporarily tighter than before the outage. The pipeline suspension backed up nearly 600 000 bbl/d of heavy crude oil into Albertan storage tanks, prematurely filling inventory capacity that was meant to act as a pressure relief valve over the coming 18 months, when pipeline capacity was forecast to be insufficient.

Discounts for Western Canadian Select heavy crude rose rapidly following the Keystone outage, from $13/bl in the year before the outage, to more than $30/bl at the peak. The discount on Western Canadian oil production since the spill has lingered at about $24/bl, which is significantly higher than the $13/bl spread for the past two years. Scotiabank expects it to average $21.6/bl this year.

While heavy crude has been particularly hard hit, Canadian light crude benchmarks have also felt the pipeline pinch and discounts have risen by roughly $4/bl relative to before the Keystone outage, Scotiabank noted.