Canada’s Need for Energy Infrastructure Investment

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Key Takeaways:

  • Global over-supply of crude oil has significantly lowered oil prices in recent years
  • Heavy crude oil remains one of Canada’s main resources and economic drivers
  • The US is Canada’s largest oil and gas trading partner
  • Production of lighter US shale oil has increased in recent years, increasing competition between oil producers for refineries
  • Canadian oil producing firms are looking to decrease their dependence on American demand and are looking for opportunities abroad
  • There is a lack of infrastructure to efficiently transport Canada’s oil to tidewater
  • Pipelines are an effective to solution to this problem that would lead to an increased demand for Canadian oil, create new jobs, and in turn boost Canada’s GDP.

Current Industry Landscape

The global oil and gas industry has been suffering over the last couple years due to an over supply of crude oil in the market causing a severe drop in price. Currently, Canada’s largest trading partner in the oil and gas industry is our southern neighbor. What does this mean exactly? Well Canadian oil producers extract heavy crude oil from western Canada reserves and mainly transport that crude to US refineries. Canada’s largest refineries, such as Irving Oil, are located on the east coast. This poses the logistical problem of shipping western crude to the Maritime refineries. To add to the competitive landscape faced by western Canadian producers, production of lighter US shale oil has been significantly increased over the last few years. Thus, Canadian producers must compete more heavily with US shale in price for both the southern US and eastern Canada refineries.

More recently, over the summer of 2016, as well as this Fall, the price of oil slightly and briefly recovered above $50/b. Due to cost cutting efforts made by producing firms throughout the depression in oil prices over the last couple years, many US shale producers are able to remain profitable with $50 oil (Ailworth and Puko 2016). This has led to a recent increase in US in-land drilling activity, further contributing to the global oil supply glut.

However, the main reason for the the oil supply glut, and in turn the depressed oil prices, has been the Organization of Petroleum Exporting Countries’ (OPEC) decision to remove their production limits, allowing the member countries to produce oil at maximum capacity. This was done in an effort to drive down the price of oil globally with the theory that many producers would be forced out of the market at such low prices. However, due to many factors including the low interest rates in Canada and the US, more producers withstood the struggling oil market than expected.

OPEC is now attempting to impose production limits but are facing adversity from countries who are reluctant to lower their oil output. If countries such as Libya, Iran, Nigeria, and Venezuela continue to produce oil at record output levels then the effect production limits by OPEC will be significantly diminished. Therefore, it is expected that oil prices will stay low throughout 2017, under $60/b (Kantchev 2016).

Impact on Canadian Oil Producers

Historically, Canada has largely depended on the demand of US refineries its crude exports. However, the recent increase in US shale exploration has led to a plateau in the southern demand (Tetzlaff 2016). Canadian oil producing firms are now looking for other markets to diversify their exports. Emerging markets such as Asia present opportunity to these firms (Tetzlaff 2016). The challenged posed to Canada’s oil producers is getting their supply to tidewater in order to be exported abroad (Tetzlaff 2016). This is where midstream oil pipeline companies come into play. There is a desire by oil producers in Canada to invest in pipeline infrastructure, thus creating expansion opportunities for Canadian pipeline companies. The expansion of pipeline infrastructure is necessary if Canadian oil producers are to sustain a presence in foreign markets.

Similarly, there is a demand for natural gas infrastructure in Canada as well. In the current industry conditions, eastern Canada is under utilizing western Canadian natural gas products and importing the majority of their natural gas from the US (BNN.ca Staff 2016). This has become a frustration among a number of Ontario and Quebec residents who receive their power from the US. As a result this has become a topic of political debate between provincial parties.

Furthermore, the largest market for western Canadian natural gas has historically been the US. However, the increase in local natural gas production in the US has put pressure on the demand for Canadian natural gas. (BNN.ca Staff 2016). In an effort to reach new markets, Canadian firms are looking for opportunities in eastern Canada as well as in foreign emerging markets. Pipeline infrastructure investment is required in order to transport natural gas resources from western Canada to eastern provinces, as well as to exporting ports on the west and east coast of Canada in a sustainable and efficient manner.

Regulatory Environment

Due to its efficiency, pipelines are a low cost method of transporting oil and natural gas products long-distances. The demand for this mid-stream infrastructure is expected to increase with the continued increase in drilling activity (Canadian Association of Petroleum Producers 2016). Historically, pipelines have faced regulatory pressures from government officials, however these pressures may be reduced in the near future as recent President-Elect Donald Trump has openly backed TransCanada’s Keystone XL (Varcoe 2016). This builds off the support already in-place from Prime Minister Justin Trudeau. Trudeau has repeatedly expressed his goals of transitioning to a green economy. He has also stated that growing the economy through Canada’s abundance of natural resources, and in turn infrastructure spending on pipelines, will help fund that transition (McSheffrey 2016).

Canada’s Need for Infrastructure Investment

The oil crisis caused by OPEC dismissal of production limits has driven down the price of oil in recent years and hurt the resource based, Canadian economy. In addition, Canadian oil producing firms are facing increased competition for refineries from US shale oil producers. Since the US is Canada’s largest oil and gas trading partner, this increased competition has a significant impact on Canada’s oil industry as a whole. As a result, Canadian oil producing firms are now looking to diversify and lower their dependence on US refinery demand. To do so they are turning to emerging markets abroad such as Asia. The challenge faced by these western Canadian firms is transporting their oil output to exporting ports on the west and east coasts of Canada in a sustainable and profitable manner. Pipelines can solve this problem effectively and efficiently, thus increasing the demand for one of Canada’s largest resource, creating new jobs, and boosting the Canadian economy.

 

Brandon Belding

Breaking the Trend

 

References

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