Canada will likely need more pipelines over next decade

A memo to the Canadian Minister of Finance dated December 2015 reportedly states that “the low price environment has led to oil production forecasts being revised downwards, meaning that sufficient capacity (from both rail and pipelines) is projected to exist to transport oil until at least 2025.”  

Although the Liberal government may be relying on this argument to rationalize the lengthy additions it has made to review periods applicable to the major pipeline projects currently in process, Canadians should not be misled. In fact, there’s a strong likelihood that new oil pipeline capacity will be needed before 2025.

The historical record suggests that sharp declines in oil prices such as witnessed during the period from late 2014 until early this year are followed by substantial price recovery as the demand for oil strengthens in response to a period of low prices.

This in turn reduces the gap between supply and demand, putting upward pressure on oil prices. While the current price recovery is being delayed somewhat by the struggle for market share between Saudi Arabia and Iran, prices have already bounced back to some extent. As prices edge higher, despite occasional setbacks, investor interest in oil exploration and conventional and oilsands production development projects in Western Canada is bound to increase and production will grow as a result.

There’s no doubt that the recent price downturn has dampened price expectations, but not to the extent that the Department of Finance memo implies. In June of this year the Canadian Association of Petroleum Producers (CAPP) released its most recent long-term outlook. Although the new forecast indicates that Western Canadian oil production in 2025 will be about 400,000 barrels per day less than the previous (2015) forecast, production is nonetheless projected to increase by more than 19 per cent (700,000 barrels per day) from the 2015 rate. Further, Western Canadian oil supplies available to pipelines from both production facilities and upgraders are anticipated to increase by 900,000 barrels per day during this period.

It’s noteworthy that despite the recent price downturn, the oil producers canvassed by CAPP in the process of developing the association’s 2016 forecast anticipate that Western Canadian oil production will continue to grow. The increased production will require increased takeaway capacity. But, regardless of the extent of the growth in production, producers need an alternative to shipping oil to U.S. refiners to realize the highest per barrel price (net of transport costs) available.

Building the proposed TransCanada Energy East Pipeline and Kinder Morgan Trans Mountain Pipeline extension projects will provide access to markets in Quebec, New Brunswick and overseas, which will serve as alternatives to U.S. markets where Canadian oil faces increasing competition from growing domestic production.

The fact that producers have demonstrated a willingness to enter into firm long-term contractual commitments with the proponents of these projects indicates that they base their plans on oil price expectations over relatively long-term (25 to 30 years) periods rather than current short-term situations such as the “low price environment” referred to in the Department of Finance memo.