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Can the world do without Alberta oil?

Can the world do without Alberta oil?

The Fort McMurray wildfire in May never did damage any of northern Alberta’s sprawling oil sands facilities, but the precautionary shutdown it triggered sent a brief shiver through world oil markets.

The operative word is brief, though, because a glut of production combined with soft demand mitigated the market’s fear Alberta bitumen crude might be unavailable.

Still, about a million barrels a day of bitumen-sourced oil – roughly 25 per cent of Alberta’s total conventional and non-conventional production – was affected by the shutdown and evacuation of several operations.

Added to production problems in Nigeria, markets were briefly jittery in late May as fire threatened oil sands facilities. Those concerns lifted quickly, said Jim Burkhard, vice president of oil market research at the consulting firm IHS Markit.

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“After a week or two we knew that production was going to come back on stream,” he said. “Facilities weren’t damaged.”

Benchmark prices, which were around US$30 a barrel near the beginning of 2016, settled around in the US$40 range except for a brief June foray to US$52.

“That was because it became clear that Alberta production is going to return,” he said. “The Alberta return was one of the factors that blunted the upward trajectory of oil prices in the last few months.”

Also read: Canada wildfire rages near oil sand facilities, extending shutdowns

The affected operations all should be back to pre-fire production by the end of the year, Dinara Millington, vice-president of research at the Canadian Energy Research Institute at the University of Calgary, said in an interview. It may take until sometime in 2017 for that crude to make it to market, she said.

Oil prices didn’t move much in fire emergency

The fact oil prices barely moved due to the emergency raises the question of just how much the world would care if Alberta production magically disappeared.

It’s a hypothetical question, perhaps, but not altogether unreasonable. The pressure is on to cap expansion of oil sands production and exports to fight climate change. That, coupled with international efforts to move to climate-friendly energy sources and away from hydrocarbons, suggests demand for oil sands crude may flatten and decline in the longer term.

“The global economy is on a long-term trend of declining oil intensity,” Burkhard said, explaining that improvements in energy efficiency have cut the amount of oil needed per thousand dollars of economic output.

The long-term trend is for growth in oil demand to separate from growth in global economic demand.

“The idea of having a peak in world oil demand in the next decade is not a fantasy. It’s not guaranteed to happen, either, but it’s more plausible now than it was, say, 20 years ago.”

But the significance of Alberta’s oil production, roughly 80 per cent of which now comes from oil sands, extends beyond its barrels of oil, Burkhard said.

Also read: Canadian oil prices little changed, production shutins increase

Canada is the world’s fifth largest oil producer and ranks second behind the resurgent U.S. oil sector in supply growth, he said.

“When we look out at the next five to 10 years there’s two regions that have the potential to be big players in satisfying world oil demand growth,” said Burkhard.

“One is the Middle East, the other is North America. There aren’t too many regions or countries around the world that have the potential to increase production significantly.”

Forecasts by groups such as the International Energy Agency suggest world oil demand – now around 100 barrels a day – will continue to grow in the foreseeable future.

“So the direction of Canada’s oil production, whether it’s up or flat or down a little bit will have an impact on the oil market,” said Burkhard.

Canadian producers looking abroad for markets

For most of its history, the Canadian oil patch has exported its production to the United States. But the U.S. market now is glutted with domestic production from shale-oil fracking operations. Canadian producers how see overseas markets, especially China and India, as the most promising for growth.

Fitful efforts to build pipelines to tidewater on the east and west coasts, plus the U.S. government’s rejection of the Keystone XL pipeline project, have bottlenecked export efforts.

But Millington and Burkhard pointed out Canadian bitumen crude is finding its way into the U.S. thanks to the availability of pipeline capacity that used to handle conventional oil and new connections into the U.S. Midwest.

Also read: What Canada will look like with $40 oil

Efforts are being made to get that supply to the U.S. Gulf Coast, which has unused heavy oil refining capacity and would provide an opportunity to export production outside North America now that the U.S. has lifted along-standing ban.

Alberta’s other defining characteristic as an oil producer, said Burkhard, is its resilience. While conventional oil production is on a steady decline, the province’s bitumen crude offers consistency, unlike shale oil that requires “a treadmill of activity” to maintain or increase production, he said.

Oil sands operations are similar to manufacturing plants or mineral mines. They require high initial capital investment but then offer consistent long-term output.

“Once you bring a facility into operation they don’t have year-to-year declines like you do in a conventional field,” said Burkhard. “You have a plateau of production that could last 30 years …

“As long as prices stay above operating cost it’s one of the world’s most resilient sources of supply.”