Market (dis)Connection in Canada’s Oil and Natural Gas Sectors

Mathieu Frigon & Mohamed Zakzouk
Library of Parliament

To be profitable, energy resources must be transported economically under favourable market conditions. Recent shifts in the trade dynamics of Canada’s oil and gas sectors shed light on the critical link between transportation infrastructure and market access.

OIL: Increasing western production needs access to world markets

A substantial portion of Canada’s oil reserves are located inland, with Alberta and Saskatchewan accounting for 77.4% and 13.7% of the total production by volume respectively (2014 figures). As Map 1 illustrates, most of Canada’s oil pipeline network connects Canadian producers to refiners and consumers in the United States. Fewer pipelines reach the Canadian coast, where oil can be transported directly overseas.

Canada_Energy_Feb292016_ENG_FV-01

Sources: Figure prepared by Library of Parliament, Ottawa, 2016. The figure was created using data from Statistics Canada, “Table 16-26”, “Table 16-27” and “Table 16-28”, Shipping in Canada; 2011; Industry Canada, Trade Data Online [database]; Natural Resources Canada, Canvec Canada Data; Natural Resources Canada, Energy Markets Fact Book: 2015-2016; and Natural Resources Canada, Pipeline Infrastructure, 2006.  Pipelines further updated with asset maps from CEPA, Natural Gas and Liquids Pipelines; Alliance, Interactive Map; ATCO, ATCO in the Heartland; Enbridge, Operations; Inter Pipeline, Asset Map; KinderMorgan, Products Pipelines and Facilities; Pembina, Asset Map; Plains Midstream, Asset Map; Spectra, Maritimes and Northeast, Dawn to Parkway, Spectra Express, and Platte Pipeline; TransNorthern, Asset Map; and TransCanada, Asset Map. Pipeline projects identified using project route maps from Enbridge, Line 9 Reversal; TransCanada, Coastal GasLink, Energy East Pipeline Project, Keystone XL, and Prince Rupert Gas Transmission; Chevron, Pacific Trail; Pacific Northern Gas, PNG Looping Project; Spectra and BG Group, Westcoast Connector Gas Transmission; Northern Gateway, Route Map; and TransMountain, Expansion Project Route. The following software was used: Esri, ArcGIS, version 10.3.1. Some information is licensed under Open Government Licence – Canada.

 

For the purpose of continental trade, Canada’s pipeline network provides a relatively safe and affordable means of oil transport with relatively low direct environmental risks, compared to transport by rail. According to the U.S. Congressional Research Service, it costs US$5-to-$10 less to transfer one barrel of oil by pipeline than by rail.

On the other hand, fewer pipeline connections to the coast mean less access to markets overseas. Once it reaches a marine terminal, oil can be easily and affordably transported by tanker to reach a broader range of international destinations.

Moreover, oil sold at the coast is priced differently, since Canada’s pipeline network supplies a largely “landlocked” market with different dynamics from the international, waterborne market. In 2014, 97% of Canadian oil exports went to the United States, mainly via pipeline.

Over the past 10 years, oil production in Alberta grew by more than 80%, while pipeline connections to Canada’s coastal terminals remained largely unchanged. Such a surge in continental supply, coupled with insufficient pipeline connections to the coast, may have contributed to oil selling at a substantial discount in Edmonton, compared to port cities such as Montreal (Figure 1).

Figure 1 – The Price of Light Sweet Oil in Edmonton vs. Montreal, 2012-2015

Figure 1 ENG

Source: http://www.nrcan.gc.ca/energy/fuel-prices/crude/4927

 

Given these price disparities, it comes as no surprise that pipeline project proposals such as the Keystone XL, the Northern Gateway Project, the Trans Mountain Expansion Project and the Energy East Pipeline Project have sought to connect oil producers in Alberta to international markets through the coast (Map 1).

NATURAL GAS: Growing U.S. production points to export opportunities overseas

Most of Canada’s marketable production of natural gas is in the west, with Alberta and British Colombia accounting for 71% and 24% of the national total respectively (2014 figures). Due to the current lack of infrastructure to export liquefied natural gas (LNG) by tanker overseas, 100% of Canada’s natural gas exports go to the United States via pipeline.

In recent years, the combined production of Alberta and British Columbia declined by about 17%, while production in Pennsylvania increased ten-fold, mainly as a result of shale gas development (Figure 2). These changes caused a shift in the bilateral trading dynamic, given the proximity of Pennsylvanian suppliers to eastern markets. The economics of transporting natural gas from Western Canada all the way to Eastern Canada and the northeastern United States have become less favourable.

Figure 2 – Natural Gas Production in Alberta, British Columbia and Pennsylvania (production of natural gas in Pennsylvania reflects production from shale gas wells only)

Figure 2 ENG

Source: Statistics Canada, Table 131-0001, Supply and disposition of natural gas. Energy Information Administration

 

Indeed, between 2010 and 2014, Western Canadian natural gas exports transiting through Eastern Canada to the U.S. northeast declined by 38%. Furthermore, according to the National Energy Board, “some former export points are now being used to both import and export natural gas.” The Board adds that more export points will likely be used to import U.S. gas in the near future, either occasionally or permanently.

Contrary to oil, coastal market prices for natural gas are widely divergent, with averages ranging from US$16.33 per million BTU (/m Btu) in Japan, to US$8.22 /m Btu in the United Kingdom and US$4.35 /m Btu in Louisiana (2014 figures). These variations are due to the high cost of transporting natural gas by sea, since the gas must be purified and liquefied before it gets shipped by LNG tanker. Subsequently, the importing country must have the infrastructure necessary to re-gasify the LNG for distribution to various end users.

Despite attractive market conditions in Asia (most notably Japan), Canadian natural gas exports are currently limited by the lack of LNG processing and shipping infrastructure at western marine terminals. An LNG Strategy was developed in British Columbia with the goal of having three LNG facilities in operation by 2020. Furthermore, as shown in Map 1, a number of proposed pipeline projects would allow natural gas from Alberta to reach the B.C. coast, including the Coastal GasLink, the Pacific Trail Pipeline, the Pacific Northern Gas Looping Project, the Prince Rupert Gas Transmission, and the Westcoast Connector Gas Transmission.

Related resources

Mathieu Frigon and Francis Perreault, The Economics Of North American Pipeline Projects: The Race to the Sea, Library of Parliament Background paper, Parliamentary Information and Research Service, 23 April 2012.

Canadian Oil and Gas: The U.S Needs Less, Asia Needs More,The Canadian Chamber of Commerce, 2013.

Oil and Gas Export Challenges, PwC Canada. Retrieved from http://www.pwc.com/ca on March 3rd, 2016.