Canada, the world's fourth-largest producer of crude oil, missed out on a recent global recovery in energy prices, and is now taking it on the chin as prices fall.
Crude prices in Canada briefly dropped below $16 a barrel on Friday, after a U.S. federal judge blocked construction of a key pipeline needed to transport oil from Alberta to Nebraska.
That means Canadian crude is going for a fraction of supplies elsewhere, even as U.S. prices have tumbled 21% from last month's highs to about $60 a barrel . In October, Canadian crude traded at its largest-ever discount to U.S. oil of more than $51, according to S&P Global Platts.
Because of the steep discount, Canadian producers are leaving 40 million Canadian dollars, or $30.65 million, a day on the table, according to an estimate from Alberta's finance department. Energy accounts for nearly 11% of the country's nominal GDP, according to government figures.
Earlier this year, higher demand for fuel , coupled with lower production from major exporters, pushed oil prices to four-year highs. U.S. oil prices rose to $76 in early October, while Brent, the global benchmark, briefly surpassed $86.
But congested pipelines and rails have prevented Canada from getting its oil to market, and analysts say storage facilities in Edmonton and Hardisty, Alberta, are brimming over with barrels.
"At $85 Brent, it certainly didn't feel like a bull market in Calgary," said Matt Murphy, an associate at Tudor, Pickering, Holt & Co. in Canada.
The Canadian market was dealt a fresh blow Thursday, when a federal judge ruled that TransCanada Corp. couldn't advance its Keystone XL pipeline without a supplemental environmental review. Completed, the pipeline would carry up to 830,000 barrels a day to Nebraska, where it could then be carried to the Gulf Coast.
A TransCanada spokesman said the company is reviewing Thursday's ruling and reiterated the company's support for the project.
Meanwhile, Canada is producing more oil than ever. According to the International Energy Agency, Canadian production climbed to a record 5.3 million barrels a day in August.
Many producers ramped up crude output as prices rose, only to find that the infrastructure needed to move it couldn't keep up.
"If everybody grows, then everybody needs a new pipeline," said Rusty Braziel, a former trader and principal consultant at RBN Energy LLC. "Growth has just come on so much more quickly than most people were predicting."
Similar issues have rippled through other high-growth areas, though to a lesser extent. Earlier this year, regional prices in Texas fell more than $15 below the U.S. oil benchmark. Logistical constraints and crowded pipelines stifled production growth in the prolific Permian Basin and weighed on shares of drillers focused there.
Production in North Dakota has been on the rise as well. But now pipelines in the region are filling up and producers will need to rely more on rail transport, sometimes competing directly with Canadian barrels, analysts said.
Producers have to go "from understanding your own reservoir to understanding what the supply chain is," said Samir Kayande, director at data-analytics firm RS Energy Group.
Low oil prices could weaken investment in the sector and drag down Canada's GDP growth, said CIBC World Markets chief economist Avery Shenfeld in a report.
In the last 10 years, Canadian crude has on average traded about $17 below U.S. prices, because it is costlier to move and refine it into premium fuels. Recently the unprecedented $51 difference has narrowed to about $42.
The global market actually needs more barrels of the heavy crude that Canada supplies, as production in Venezuela and Iran has declined. Demand is high in the U.S. Gulf Coast, but producers have little means of getting it there.
"The opportunity for Canada is large right now," said Michael Tran, global energy analyst for RBC Capital Markets. "But time is of the essence, and each day that slips away is a missed opportunity."
Efforts to build or expand pipelines in Canada have stalled due to opposition from environmentalists and lawmakers concerned about the environmental impact of deriving crude from oil sands.
"Oil sands have a pretty bad reputation in terms of being heavy or dirty," said Benny Wong, Canadian oil and gas analyst at Morgan Stanley. "You can make an argument of whether that's true or not, but they've definitely become the poster boy of everything bad about oil and gas."
Meanwhile, producers have struggled to move more oil through rail companies , which is more expensive and generally requires longer-term contracts, a commitment few are willing to make if they expect more pipeline capacity in the next few years.
Calgary-based Cenovus Energy Inc. has cut production at its fields in response to the discount, said Alex Pourbaix, the company's chief executive.
He expects the transportation bottleneck to ease as more oil gets transported by rail and Enbridge Inc. finishes the replacement of its Line 3 pipeline, expected by the end of 2019. Mr. Pourbaix said the discount could narrow to $20 a barrel, but conceded the drop might not come until late next year. Until then, Canadian producers will have to bear the cost.
"Canadian companies are selling their oil to the U.S. at fire-sale prices, and it is having a significant impact," said Mr. Pourbaix.