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, a new analysis by the IHS Markit Canadian Oil Sands Dialogue finds.

IHS Markit estimates that, without pipeline export capacity constraints, western Canadian heavy crude oil would have obtained at least $3 per barrel more, on average, compared with WTI, Cushing over the past half-decade (2015-2019).

The impact of this lost value over millions of barrels produced each day during those years is significant—more than $14 billion (U.S. dollars) over the last five years.

The estimate of price reduction per barrel and total loss estimate are likely conservative, 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, while all other western Canadian grades were also affected.

Despite challenges with western Canadian differentials, production rose significantly through this period, rising over 700,000 barrels per day, the majority of which was heavy sour crude oil.

“Canada has been among the fastest-growing producers of crude oil for more than a decade, rising to the fourth-largest producer in the world. Pipeline projects proposed to keep pace with that growth have faced opposition and delay. The cost of the bottlenecks that emerged has been borne by Canadian heavy crude oil, fetching a lower price than it otherwise would have.” – Kevin Birn, vice president, North American crude oil markets, IHS Markit

The findings, which shed additional insight into the implications of Canada’s long-standing challenges associated with pipeline export infrastructure, are part of the new report, What is Different About Differentials? by the IHS Markit Canadian Oil Sands Dialogue. The report provides a comprehensive review of the factors that shape the price of oil and differentials in western Canada. It also provides guidance on the potential range of values exports should obtain based on a free and functioning market.

The value of heavy, sour crude oil—Canada’s largest source of crude oil export—typically obtains a price lower than many commonly-traded U.S. and global benchmarks on account that western Canadian production is inland, distant to market and it is often compared to different quality crudes.

However, constraints on pipeline capacity exacerbated the differentials beyond what they would otherwise have been—most excessively in 2018 when differentials widened out beyond $50 per barrel.

Differentials do tend to narrow during extremely low-price environments, such as currently being experienced in 2020 due to impacts of the COVID-19 pandemic. Yet these episodes do not represent typical or average operating conditions, the analysis says. Differentials became historically narrow (less than $5 per barrel) earlier in 2020 before beginning to widen again. They currently rest at around $12 per barrel.

Nevertheless, conditions may be changing that could keep the differentials narrower—potentially by as much as $3-$4 per barrel—on average, in the coming decade, Birn says.

“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.” Kevin Birn, vice president, North American crude oil markets, IHS Markit