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Canadian Oil Trapped Without More Pipeline Capacity
Canadian Oil Trapped Without More Pipeline Capacity
Adding insult to injury for Canada’s oil industry, Democratic Presidential candidate Hillary Clinton came out against the Keystone XL Pipeline on September 22, ending several years of silence and waffling on the controversial issue.
That comes as a blow to TransCanada, the project’s backer, who wanted to connect Canada’s oil sands to refineries on the U.S. Gulf Coast. The 1,179-milepipeline would allow 830,000 barrels of oil per day to be exported from Canada. Clinton’s opposition will add some pressure on the U.S. President to reject the pipeline, which looks increasingly likely.
But if the pipeline is rejected, it won’t just be bad news for TransCanada, but also for Canada’s larger oil industry. Canadian crude trades at a discount to WTI, in part because of a lack of pipeline capacity. That discount has fluctuated over the years – ranging from $40 at a high point to around $15 today – but the bigger the discount, the more revenue is lost by Canada’s oil producers.
Related: Peak Oil Has More To Do With Oil Prices Than You May Think
Now with oil prices less than half of what they were from a year ago, the discount that Canada’s oil sector must sell their oil for is even more painful. “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,” Tim McMillan, president of the Canadian Association of Petroleum Producers (CAPP), told Reuters in an interview in early September.
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For Canadian Oil Sands It’s Adapt Or Die
For Canadian Oil Sands It’s Adapt Or Die
That low oil prices are squeezing out oil sands producers is not breaking news. But in spite of a grim oil price outlook, production out of Calgary has continued to grow, defying both expectations and logic. The implications are serious, not just for the future of Canada’s energy industry and economy, but also North American energy relations.
In June 2015, the Canadian Association of Petroleum Producers (CAPP) revised down its 2030 production forecast to 5.3 million barrels per day (mbd). A year earlier the group predicted Canada would be able to produce 6.4 mbd by 2030. This is compared to the 3.7 mbd produced in 2014. Most experts agree that capital intensive oil sands projects are marginal – if not loss-making – in the $45 – $60 range. Yet production continues apace.
Of course, the nature of capital intensive operations such as the oil sands is that they are also prohibitively expensive to shut down. Producers are left in limbo, praying that prices will rise.
The implications for Canada should not be understated. Of the nation’s estimated 339 billion barrels of potential oil resources, oil sands account for around 90 percent. The Canadian dollar is at a decade low, which softens the blow for exporters in the short term but the long-term economic consequences are less rosy.
Related: Is This The End Of The LNG Story?
Projects are being delayed, and many experts wonder if the current oil sands model has a future. Peter Tertzakian of ARC Financial told Alberta Oil Magazine that the era of oil sands mega projects was over.
In Alberta, an estimated one in 16 jobs is tied to the energy sector. According to the National Energy Board, crude oil and bitumen brought in $70 billion for Canada in 2014. Perhaps, as Tertzakian noted, new projects will simply adapt, becoming more nimble, flexible, and focused on value rather than quantity.
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Who’s afraid of $50 oil? (Answer: Canada’s oil industry)
Oil below $50 a barrel could spur another leg down for Canada’s oil industry
It may be high summer on the calendar, but Canada’s energy companies are already looking towards the coming winter.
What they see is looking worse now than it was even a month ago.
After a rough start to the year that saw companies lay off thousands of workers amid falling crude prices, lower cash flow and wounded share prices, a spring rally in oil was stirring hopes the dreaded other shoe might not drop.
A July-long slide took oil prices back below $50 a barrel, so a rally is looking less likely.
“It’s a very difficult time in our industry, one of the most difficult in decades,” said Tim McMillan, chief executive of the Canadian Association of Petroleum Producers, the lobby group for the energy industry. “The mantra that I’ve heard pretty consistently from companies is preparing for lower for longer.”
Whether the earlier rounds of staffing cuts and budget reductions are preparation enough to weather what’s expected to be a dismal winter drilling season is a question that is already starting to be answered.
In the next few weeks, Canada’s oil companies will get down to the serious work of crafting next year’s budgets. Those plans will come together in September on the way to getting approved in November.
Winter drilling season
For Canada’s oil sector, the winter drilling season, which begins when the ground freezes enough for heavy equipment to move through the northern parts of the country, is where the rubber will hit the road for the industry.
Western Canada’s oil business follows a predictable quarterly pattern; busy in the first three months of the year, which is where companies make a lot of their money. Quiet for the next three during spring breakup, when rigs are taken down and moved through the muskeg before the seasonal warmth thaws the ground. And then a ramp-up through the second half of the year, which launches companies back into the peak busyness of winter.
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Canadian Economy More Damaged By Oil Prices Than Expected
Canadian Economy More Damaged By Oil Prices Than Expected
Canada’s oil industry has had a rough couple of months with production and exports taking a hit.
Low oil prices are cutting into the profits of major producers. Producing from Alberta’s oil sands is costly and requires a high oil price to justify the expense.
In fact, the fall in prices could significantly impact production levels decades from now. Oil companies are shelving large investments because they no longer look profitable. For example, earlier this year Royal Dutch Shell abandoned a potential 200,000 barrel-per-day oil sands mine. Overall, Canada’s oil patch could see a $23 billion cut in investment in 2015, a decline of almost a third from last year. Unless oil prices bounce back, a lot of projects may not move forward.
Lack of investment now translates to lower oil production in the future. Canada may only produce 5.3 million barrels per day in 2030, according to the Canadian Association of Petroleum Producers (CAPP), much lower than the 6.4 million barrels per day the group predicted last year.
Related: Forget Asia. US Natural Gas To Be Exported To Mexico
But again, a lot depends on what happens with oil prices. The decision by OPEC to play for market share doesn’t bode well.
“It really depends on how long OPEC decides they want to keep pricing at this level with their quotas that they’ve established,” Greg Stringham, CAPP vice-president of markets and oil sands, told the Financial Post.
The contraction underway in Canada’s oil sands has been hugely damaging to the broader Canadian economy. First quarter GDP declined by the most in over six years, falling 0.6 percent on an annualized basis. The figures stunned most economists who had expected modest growth, and it indicates that Canada’s economy is feeling the pain of low oil prices much worse than previously expected.
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New Report Warns of West Coast Tar Sands Oil Invasion
New Report Warns of West Coast Tar Sands Oil Invasion
The West Coast of the United States and Canada is facing an imminent tar sands oil invasion, according to a new report from the Natural Resources Defense Council (NRDC).
“The West Coast is about to fall victim to a tar sands invasion, unless our leaders choose to protect the health and safety of our communities and say no to Big Oil,” said Anthony Swift, deputy director of NRDC‘s Canada Project. “At a time when the nation is moving toward a clean energy future, there is no reason to welcome the dirtiest oil on the planet into our communities.”
While the West Coast is not currently the destination for much tar sands oil, the area’s heavy oil refining capacity and deepwater port access make it a likely destination for large amounts of Canadian tar sands oil in the future.
The Canadian Association of Petroleum Producers (CAPP) forecasts that tar sands supply will increase from 2.4 million barrels per day (bpd) in 2013 to 6.2 million bpd by 2030. To achieve those volumes, a significant portion of that oil would have to go to the West Coast by a combination of pipelines, rail and tanker.
The new report notes that if current plans for infrastructure to handle tar sands oil transportation proceed, “tar sands refining on the West Coast could increase eightfold, from about 100,000 bpd in 2013 to nearly 800,000 bpd in coming decades.” To put this in perspective, this is approximately the amount the proposed TransCanada KXL pipeline would transport to the U.S. Gulf Coast.
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