September 2, 2015 / 10:35 PM / 2 years ago

Canada oil industry says price drop makes new pipelines essential

CALGARY, Alberta (Reuters) - Tumbling crude prices have made building new pipelines more important than ever for Canadian oil and gas producers because the fate of some projects hinges on shipping costs, the head of the industry’s main lobby group said on Wednesday.

An oil pump jack pumps oil in a field near Calgary, Alberta, July 21, 2014. REUTERS/Todd Korol

Canadian companies have long complained that the industry suffers major lost revenue because their oil, Western Canadian Select, is at times sold at a discount of up to $40 per barrel to Western Texas Intermediate crude.

More recently Canadian heavy crude has been trading at a discount of $15 a barrel.

The industry hopes new projects giving them expanded access to U.S. and Asian markets, such as TransCanada Corp’s (TRP.TO) Keystone XL pipeline and Enbridge Inc’s (ENB.TO) Northern Gateway project, would reduce this gap.

Tim McMillan, president of the Canadian Association of Petroleum Producers, said the discount on Canadian crude takes an especially heavy toll with oil prices down by more than 50 percent since June 2014 to around $45 per barrel.

“At $100 a barrel it was a big concern. At $45 a barrel, that is a far larger percentage (of revenue) and is likely the difference between profitable and unprofitable on many of the assets,” McMillan said in an interview.

Environmentalists are pressuring U.S. and Canadian politicians to reject all new pipelines, in hope of stopping the expansion of northern Alberta’s oil sands. Oil sands require the consumption of vast amounts of water and fossil fuels to extract bitumen.

In an example of how lack of market access can hurt a company, junior oil sands producer Connacher Oil and Gas’s CLC.TO transport and handling costs were almost equal to its production and operating costs in the first half of 2015.

The company, which rails just over half its heavy crude to locations outside of Alberta, spent C$15.72 ($11.88) a barrel on transportation and C$16.16 per barrel on production and operating expenses.

That left it with a netback of C$0.50 on every barrel of oil sands bitumen produced.

Companies with committed capacity on export pipelines can reach the U.S. Gulf Coast for as little as $7 a barrel.

Editing by Jeffrey Hodgson and Tom Brown

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