According to a recent 10-year production forecast by business information provider IHS Markit, Canada’s oil sands will experience large production growth through 2019. While the next two years will witness an additional half-million barrels hitting the market, all signs point to a deceleration of growth in 2020.
“Rising Canadian oil sands production comes at a critical time for the heavy oil market,” wrote to Kevin Birn, executive director, IHS Markit, and author of the study. “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.”
The last few years saw a decline in production from large heavy oil producers in the Western Hemisphere, Mexico and Venezuela, where production has fallen by more than 1 million barrels per day (MMbbl/d). During this period, “Canada has been the primary source of material heavy oil supply growth in the world,” Birn said.
The completion of ongoing oil sands projects combined with new investments in capital efficiency projects promises a strong growth towards the end of the year. This growth in oil sands, however, is expected to be less certain after 2019 which depends on uncertainty of further investment decisions.
Birn further explains that uncertainty over global crude oil benchmark prices has a strong hold on the timing of future investment decisions. However, an additional uncertainty looms over oil sand producers due to inadequate pipeline takeaway capacity which influences the value of western Canadian crude oil over and above global benchmarks.
“Pipeline constraints have exacerbated price discounts for western Canadian heavy oil relative to global benchmarks. Over the past 12 months alone, the difference in price compared to a barrel of West Texas Intermediate (WTI) has fluctuated just under $10 per barrel to more than $30,” Birn said. “This sort of price volatility is weighing on investment decisions in western Canada and will likely continue to do so until greater certainty can be achieved.”
Despite challenges and uncertainties, IHS Markit continues to forecast growth in the Canadian oil sands market. Birn explained the reasons for this projection is partly based on 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.”
IHS Markit expects 1 MMbbl/d output over the next decade. Half of this growth will be achieved by recently completed projects, resumption of several projects that were deferred during low prices, and new investments into capital efficiency projects. The other half is projected to be achieved by projects yet to be sanctioned.
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