Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.

Last week the Canadian Association of Petroleum Producers (CAPP) released its 2013 crude oil, markets and transportation forecast. This year’s CAPP forecast boosts its previous projection of future oil output in 2030 by 500,000 barrels a day. The new CAPP forecast is 800,000 barrels a day higher than the most recent forecast from the International Energy Agency (IEA). Of the additional oil in the CAPP forecast, just 200,000 barrels a day is projected to come from higher oil sands output while an additional 300,000 barrels a day should come from conventional oil resources. The new forecast suggests that there are good days ahead for the Canadian petroleum industry – both producers and oilfield service companies. One of the important aspects of the forecast is its implication of future prospects for the various oil producing provinces of Canada. The report also highlights the need for Canada to seek new consumers for its growing oil output beyond North America’s shores.

The CAPP oil output forecast comes at an interesting time for Canada and its petroleum industry. Two significant export pipeline projects to move more conventional oil from Canada and increased bitumen production from Alberta are struggling to attain approval either from the United States government in the case of TransCanada’s Keystone XL pipeline and from British Columbia with regard to Enbridge’s Northern Gateway pipeline. This year’s CAPP forecast marks the second consecutive year the organization has increased its estimate of Canada’s future oil output by a significant amount. These increased Canadian output projections are consistent with virtually every other oil forecast of future production volumes for major oil producing countries made by government and private analysts during the past several years. These forecasts are acknowledging the impact of oilfield technology on the capability of the petroleum industry to tap difficult-to-produce
shale and tight oil resources globally.

To demonstrate the significance of the increases in the two most recent forecasts issued by CAPP, we present the output projection charts from the 2012 and 2013 reports that show the sources of Canada’s future oil supply. It is not surprising that in both forecasts the oil sands output forms the backbone of Canada’s oil supply. What can be seen when looking at the output mix in 2030 is that in the 2013 forecast total output is about 6.7 million barrels a day compared to the 6.2 million barrels a day projection from the 2012 forecast.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry
Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

The CAPP forecasts also show the split between conventional oil output and the bitumen produced from the oil sands. As the charts in Exhibits 1 and 2 highlight, within the respective crude oil forecasts there are separate forecasts for light conventional oil and heavy conventional oil, pentanes, offshore oil (Eastern Canada) and oil sands output segmented into the production that will come from existing operating mines and in situ operations and those under construction along with a projection for the volumes to come from future development projects not currently underway.

When we compared the 2012 and 2013 forecasts by all these categories, we find some interesting shifts in the outlook between the two forecasts. Our analysis is shown in Exhibit 3. The first interesting observation is the higher level of Eastern oil in the 2013 forecast, which is Canada’s offshore oil production at each measurement point between 2015 and 2025. However, by 2030 the two annual forecasts arrive at the same output estimate. It is also interesting to note that within the West oil forecast the volume of conventional crude oil is projected to climb throughout the entire forecast period in the 2013 forecast while the 2012 forecast projected a decline. The 2013 oil sands forecast projects a slightly
lower volume in 2015 compared to the prior year’s forecast but then is higher at all subsequent forecast years. Another observation is that the pace of oil sands output growth accelerates from 2015 to 2025, but then the growth rate slows by 2030.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

When we focus specifically on the Western Canadian oil production forecast, the chart in Exhibit 4 shows that  conventional light oil output is projected to increase until 2020 but then declines. Heavy conventional oil output is projected to expand throughout the entire forecast period. Within the oil sands category, bitumen obtained from mining operations grows throughout the entire forecast period but faster growth will be experienced by bitumen produced from in
situ operations.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

Another interesting aspect of the CAPP forecast is what they project for output from the various oil and gas producing provinces in Canada. The chart in Exhibit 5 shows CAPP’s provincial output forecast. British Columbia and the Northwest Territories have experienced a steady decline in oil production since 2000, which is projected to continue. Both Manitoba and Saskatchewan increased their output starting in 2006 but are projected to show flat to slightly lower output in the future. While Alberta was slower to embrace tight and shale oil drilling than the other provinces, its oil output from both conventional oil plays and bitumen from oil sands operations have accelerated in recent years and are projected to continue to grow throughout the forecast period. Alberta, which has been the dominant source of Canada’s oil and gas output for many years, is projected to remain the king of oil supply.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

Given the increased production forecast, the challenge for Canada’s oil industry will be how best to get the additional supply to market. A key consideration is where the oil will flow – south to the U.S. or exported to Asia. As mentioned previously, approvals for the Keystone XL and Northern Gateway pipelines remain in doubt. Exhibit 6 shows all the existing and proposed pipelines in North America.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

The dilemma for the oil industry is that the existing pipeline capacity is nearly full, limiting the ability to boost production. The lack of export options is partly to blame for Canadian oil selling at a discount to Brent and West Texas Intermediate oil in the United States. As shown in Exhibit 7, if Canada’s oil output grows as projected, by 2014 there will be no surplus pipeline capacity to move additional oil production.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

The solution to the tight pipeline capacity situation is the increased use of rail transportation. Exhibit 8 shows the volume of oil exported by rail and how it has grown during the past two years.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

If additional oil output moves by rail, the CN Railroad will clearly be the beneficiary. The railroad has a substantial network allowing it to move increased oil production from western Canada to refineries both in Canada and the United States.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

For CN to be able to move more oil, additional oil loading facilities must be built. The CAPP report shows where existing and potential oil loading facilities are located. It also shows which sites could support unit train loading facilities. At the present time, there are six terminal projects underway that will be operational in the second half of 2013 or in 2014. These terminals will be able to move nearly 300,000 barrels a day of output.

Musings: Canadian Oil Forecast Highlights Challenges Facing Industry

The CAPP 2013 oil forecast points to Canada being able to boost its conventional and oil sands output by meaningful increments over the next 18 years, much like forecasts project significant U.S. production growth. Unfortunately, as U.S. domestic oil production grows, Canadian output is at risk of being squeezed out of that market. If Canada decides it wants, and is able, to tap into other international oil markets, the U.S. could ultimately be the big loser.



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