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Over the past decade Canada has consistently been amongst the
fastest growing producers of crude oil globally. And although
growth is set to slow, additions are still expected to be able to
add nearly 1 million more barrels per day of output by 2030.
The rise in Canadian production has been a story principally
fueled by the expansion of the Canadian oil sands. At its peak, in
2014, over $30 billion was invested in the construction of over 1
million b/d of production capacity. However, this also fueled cost
inflation. When the price collapse of 2014/15 set in, the
anticipation of a quick payback for many new entrants in the oil
sands evaporated and interest for many declined.
Four and a half years later, the majority of the large oil sands
projects in construction at the time of the price collapse have
been completed. This includes mega-scale mining operations and
several SAGD operations. The onset of the oil price recovery
restarted several projects deferred during the worst of the low
prices. Operators have also advanced capital efficiency
initiatives—projects aimed at improving reliability and output
from existing operations. This includes debottlenecking projects
and investment that can make use of underutilized capacity in
existing operations to achieve higher output. Over the past five
years, this ongoing activity allowed oil sands output to expand by
three quarters of million b/d and made Canada the 4th largest
producer in the world.
Yet, pipeline infrastructure has not kept pace and late in 2018
supply overtook available takeaway capacity. Crude-by-rail was
called upon to fill in the gap, but lagged demand and the result
was price volatility at a scale with few parallels in the history
of the oil markets. Western Canadian oil price differentials traded
from as little as $11/bbl below US benchmarks, to over $50/bbl. The
volatility in western Canada, was addition to that which occurs in
the global oil market, which saw both a bull and a bear market in
2018.
Faced with the prospect that if the extreme oil price discounts
of late 2018 persisted much longer, some companies might have
struggled to remain solvent, the Government of Alberta took the
extraordinary step to intervene in the market to correct the
oversupply by mandating crude oil production cuts for 2019. The
impact was nearly immediate on price differentials and since then
they have generally averaged less than $12/bbl (though recently
there has some modest widen)—less that would be indicated by
historical transportation and quality adjustment to US benchmarks
due to a tightening heavy oil market.
Yet, since the collapse in 2014/15, only one new largescale oil
sands project has been sanctioned, only to be delayed by the
uncertainty presented by price volatility and Alberta curtailment.
Assuming Alberta curtailment generally eases over 2019, rail
capacity and movements are likely to build over 2019. But in the
absence of new pipeline infrastructure there is a sense of price
insecurity in western Canada that will continue to weigh on new
large scale incremental investments in the Canadian oil sands. With
large scale oil sands projects taking two, three, four or more
years to be brought online, the reality of slower pace of
investment and growth in the Canadian oil sands is taking shape.
The unfortunate irony for the Canadian oil market and producers is
that the call on Canadian heavy sour crude oil—the principal
export from the Canadian oil sands—has never been greater. The
rapid deterioration of Venezuelan output is tightening the supply
of heavy sour crude oil globally and reducing the magnitude of the
historical quality discount between heavy and light crude oil.
Moving into the next decade, a slower pace of oil sands growth
is taking shape. This is something we've discussed in nearly all
our preceding oil sands outlook releases.* As shown in Figure 1,
whereas growth over the current decade regularly averaged
year-on-year supply additions in excess of 150,000 b/d per year, in
the coming decade additions are shaping up to be more modest at
beneath 100,000 b/d.
This is a function of a view that while oil prices of the past
few years were unsustainably low, the prices that prevailed over
the first half of this decade—on average in excess of
$100/bbl—were equally unsustainable and a lower long-run price
expectation is likely to result. In this environment, upstream
producers globally have collapsed onto the assets they view that
they may have the greatest strategic competitive advantage to
specialize in. This trend included the oil sands where many global
oil and gas players divested assets to localized specialists in oil
sands extraction—predominately legacy Canadian-based oil sands
companies. Certainly, the negative perception of the carbon
intensity of oil production weighed on those decisions. As a
result, even in the event of a major upswing in prices, there are
simply fewer instruments left in the band at this point to muster
the level of activity of years gone by.
Despite a more modest growth profile, Canadian oil sands
production is still expected to reach nearly 4 million b/d by the
close of the coming decade—nearly 1 million more than today.
However, the drivers of growth in the coming decade are
fundamentally different. Over the past decade and a half the
majority of activity was focused on building out a foothold in the
oil sands. Today there is well over 3 million b/d of installed
production capacity in place. It is from this base—ramp-up of
recently completed operations, and optimization and debottlenecking
of existing production capacity—where most production growth is
expected to come. IHS Markit expects two-fifths of the anticipated
rise in oil sands production to 2030 will come from ramp-up of
projects in construction or recently completed, including
optimization; about one-quarter of growth will come from projects
where some construction or site clearing has begun but are
currently on hold as well as debottlenecking of existing
operations; with the remainder of growth coming from 'new
projects', principally the expansion of existing facilities.
IHS Markit had anticipated 2019 to be the likely pivot point in
the shift towards more modest year-on-year gains. However, the
decision by the Government of Alberta to artificially reduce output
has deferred some of the anticipated production gains for 2019,
into 2020. There is upside growth potential in the coming decade
for the Canadian oil sands; the key being the ability of government
and industry to restore confidence that crude oil produced in
western Canada can get to market at a reasonable transportation
cost and the carbon intensity will continue to trend down.**
