Canada’s oil sands output to grow despite record-low investment, export bottlenecks
by Henry Lazenby (feat. Kevin Birn)
February 16, 2018
"Oil sands production is akin to baseload power generation, but for the oil market. Once operational, oil sands facilities are largely unresponsive to the oil price – with production neither ramping up nor ramping down materially. And since oil sands do not have to overcome production declines, every incremental investment in new capacity, no matter how small, can result in growth," IHS Markit executive director Kevin Birn said in a recent statement. He is responsible for heading the firm's oil sands dialogue initiative.
Entitled 'Scenarios for Future Growth, the Oil Sands Dialogue' report forecasts the outlook for oil sands investment and production growth across different price outlooks in the IHS Markit global energy scenarios.
The report found that upstream investment in new oil sands production capacity has fallen by two-thirds since the 2014 collapse of oil prices – from more than $30-billion then, to just more than $10-billion estimated for 2017 – and may fall further in 2018, before beginning to recover. Yet, oil sands output is still expected to grow in each of the IHS Markit scenarios.
The firm said Canadian oil sands production is expected to have topped 2.6-million barrels a day. Depending on the IHS Markit scenario and corresponding global oil price trajectory, oil sands output could rise by between 700 000 bbl/d and 1.4-million barrels a day by 2030, with nearly 400 000 bbl/d of growth in all cases coming from projects under construction today, or projects recently completed and ramping up, IHS found.
The report said that although costs having fallen significantly in the oil sands sector, it is the unique nature of oil sands production that makes a future without oil sands growth difficult to envision over the coming decade. It cited the lack of production declines – if existing oil sands facilities are maintained, their output levels do not decline – which is unique compared with other types of oil production globally, the analyst noted.
Despite the collapse of oil prices slowing investment, projects under development at the onset have continue to be completed and production growth has continued. However, the reduced investment will impact the rate of future growth, the report says. In all IHS Markit scenarios, the level and pace of future investment and growth in the oil sands is lower, compared with the decade preceding the oil price collapse.
"Growth in the Canadian oil sands will ultimately be a function of the future price of oil and the challenges that face the industry, but growth will also be different, driven forward through the optimisation and expansion of existing facilities, because they are lower cost and quicker to oil. A more consolidated industry has also emerged in the last few years, which means that even in much higher price scenarios, overall investment is likely to remain lower than in the past," Birn stated.
Meanwhile, Canada, which holds the third-largest oil reserves in the world after Venezuela and Saudi Arabia, is being held hostage by the British Columbia minority provincial government, who is trying everything in its power to stop a planned federal- and provincial-approved $7.4-billion project to expand an existing 50-year old crude pipeline to the West Coast dead in its tracks.
Canadian crude receives a steep discount for its oil products compared with the North American benchmark, the West Texas Intermediate, because it is expensive to produce and has to travel thousands of kilometres to the Mexican Gulf where North America's refineries are located. Faced with a brewing trade war with its neighbour south of the border, Canada desperately needs to access new developing markets in Asia, via its West Coast, to boost export income and provide a solid platform for future economic growth.