Delays in the expansion of export pipeline capacity have contributed to wider differentials and lower prices for crude in western Canada than otherwise would have been expected. IHS Markit estimates that, without pipeline export capacity constraints, western Canadian heavy crude oil would have obtained at least $3/bbl more, on average, compared with West Texas Intermediate (WTI) Cushing prices over the past half-decade (2015-2019). The impact of this lost value is more than $14 billion.
The estimates of price reduction per barrel and total loss are likely conservative, IHS Markit says, since they are based on differentials in excess of the upper range of what could have otherwise been expected over the entire period. The estimate also only included heavy sour crude oil, despite all other western Canadian grades also being affected.
Despite these challenging differentials, western Canadian production rose more than 700,000 b/d over this period, the majority of which was heavy sour crude.
Heavy sour crude—Canada’s largest type of crude oil export—typically obtains a price lower than many commonly-traded US and global benchmarks because of its distance to market and quality. However, constrained pipeline capacity moved the differentials beyond what they would otherwise have been, most notably in 2018 when differentials widened beyond $50/bbl.
Differentials tend to narrow during low-price environments, such as those experienced in 2020 due to impacts of the COVID-19 pandemic. But current circumstances do not represent typical or average operating conditions, the analysis says. Differentials became historically narrow (less than $5/bbl) earlier in 2020 before beginning to widen again. They currently rest near $12/bbl.
“There is potential for western Canada to have lower price differentials, on average, in the coming decade. Incremental expansion of pipeline export capacity would help ensure production is not subject to the regional bottlenecks and price volatility of the past. Meanwhile, declining availability for other global sources of heavy, sour crude—such as Venezuela—could give Canadian producers an added boost,” said Kevin Birn, vice president, North American crude oil markets, IHS Markit.