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Growth in the Canadian oil sands has made Canada the
5th largest producers of crude oil in the world and the
largest source of US crude oil imports-exceeding all of OPEC
combined in 2017. The next two years-2018 and 2019-will see an
additional half million more barrels hit the market. However, all
signs
continue to point to deceleration of growth in 2020.
Rising Canadian oil sands production comes at a critical time
for the heavy oil market. Although the global oil market has been a
story of abundance over the past few years, the heavy market has
borne the brunt of the tightening global oil market. Much of the
constraint shown by OPEC has come from the heavier side of their
production portfolio while output from large heavy oil producers in
the Western Hemisphere-Mexico and Venezuelan-has declined.
Venezuela, in particular, economic collapse has seen their
production plummet. A few years ago Venezuela output was over 2.5
million b/d. As of mid-year 2018 production has fallen to 1.4
million barrels per day and it may fall below a 1 MMb/d.
Through this period, Canada has been the primary source of
material heavy oil supply growth in the world. The ongoing
completion of oil sands projects sanctioned prior to the price
collapse, revival of some deferred projects and some new
investments in capital efficiency projects, assures strong growth
to the end of this decade. However, after 2019, the pace of growth
in the oil sands is less certain and to a greater extent depends on
the timing of yet-to-be-made investment decisions.
Global crude oil benchmark prices-of which there is much
uncertainty over-hold considerable sway over the timing of future
investment decisions. Moreover, for oil sands producers, there is
additional uncertainty over the adequacy of pipeline takeaway
capacity which influences the value of western Canadian crude oil
over and above global benchmarks. Constrained pipelines have driven
deep discounts for western Canadian heavy oil-beyond what would
normally be expected based on quality and pipeline transportation
costs. The price of western Canadian heavy oil compared to WTI has
ranged from under $10/bbl to over $30/bbl over the past 12 months.
Furthermore, pending changes to
the global marine fuel quality specifications in 2020 is
expected to reduce the value of high sulfur fuel oil and thus heavy
sour crude oil-which is the largest form of oil sands production
for a period of time.*
These uncertainties will weigh on further investment decisions
until greater certainty can be achieved. The timing of future
pipeline capacity and the physical act of construction have become
critical signposts for the industry and investors alike. The
decision by the Government of Canada in late May to take on the
ownership of the Trans Mountain Expansion project demonstrates
Canada's determination in seeing the project through to completion
but also unfortunately extent of action required. These new moves
improve the likelihood this project will be completed but there are
still some questions on the ultimate time when it could be
completed.
Yet, despite such challenges, IHS Markit continues to see growth
in the Canadian oil sands in the medium- and long-term. In part,
this is due to a belief that the railroads will respond and help
put a cap on western Canadian price volatility and that new
pipelines will eventually be completed. But it equally relates to
the long-flat production profile of oil sands production which is
unique in the world. The lack of declines means that any
incremental investment, no matter how small, can add to existing
projection and growth can more readily be achieved.
Over the next decade, from 2018 to 2027, IHS Markit expects 1
million b/d more output. Growth will be driven upwards by the
ramp-up of recently completed projects, the resumption of
construction of several projects that were deferred during the
worst of lower prices, and new investments being made into capital
efficiency projects that can deliver not only more oil but lower
costs. This accounts for about half of the growth to 2027, the
remainder will come from projects yet-to-be sanctioned.
Compared to our
2017 outlook our outlook is modestly lower because of ongoing
uncertainties associated with the timing of future pipelines.
Should advancing pipeline projects face additional delay, the
investment outlook and IHS expectations could be negatively
impacted.
