Yesterday (June 5, 2012) the Canadian Association of Petroleum Producers (CAPP) published their annual long-term outlook for Canadian crude oil production. CAPP is the voice of Canada’s upstream oil and natural gas industry. The report is good reading, and if you’ve got the time check out the 45 page full report. http://www.capp.ca/getdoc.aspx?DocId=209546&DT=NTV Otherwise, in today’s blog we’ll highlight some of the report’s most interesting findings and provide some color commentary.
Let’s start with crude oil production. We’ve already talked here about the expected growth in Canadian crude oil production (see Independence Day – US and Canada Crude Oil Self Sufficient in 5 years ). But most of that growth was the super-heavy crude oil from oil sands. That’s still the big growth driver, but this report also puts the spotlight on what the report calls “conventional” crude oil production. In this context, conventional is non-oil sands production using horizontal drilling and advanced hydraulic fracturing techniques. Conventional Canadian crude production is forecast to grow from 1.1 MMb/d in 2011 to 1.3 MMb/d by 2020, reversing a long-term declining trend. Most of the conventional production comes from Alberta and Saskatchewan and is expected to be light crude oil.
Even with the resurgence of conventional production, the real growth engine is oil sands. In the new CAPP forecast, oil sands production rises from 1.6 MMb/d in 2011 to almost double at 3.1 MMb/d by 2020, 4.2 MMb/d by 2025 and 5.0 MMb/d by 2030. Oil sands development is higher than previously forecast due to new production projects. By 2025, the combined western Canadian production from both conventional and oil sands development in this forecast is 5.5 MMb/d, about 885 Mb/d higher than CAPP’s number last year. For a clearer understanding of Canadian Oil sands and how it differs from regular crude see It’s a Bitumen Oil – Does it Go too Far?)
Canadian Crude Oil Production Forecast, June 2012
The CAPP report includes a great graphic (see chart) of forecast production growth that summarizes the story. Although conventional crude production is growing before 2020, it is the expected growth in oil sands production that jumps out in the picture. Note that production in eastern Canada is not significant.
What does this mean for Canadian producers? Canadian production in 2011 was just over 3 MMb/d. Canada exported roughly 2MMb/d (all to the US) and refined about 1MMb/d of this crude. Except for a couple of small expansions over the next couple of years, Canadian refinery demand is projected to be flat. Thus all of the production growth will need to leave the country --- there will be a total of 5 MMb/d of Canadian crude to export by 2030. No wonder the second half of the CAPP report is a careful assessment of where Canadian producers are going to sell this crude and how they will deliver it.
Since 2004, Canada has been the largest importer of crude oil into the U.S. The CAPP report provides a comprehensive PADD by PADD review of Canadian imports to the US. The figure below gives a great visual summary of Canadian crude imports against other sources of US supply.
As the production growth ramps up, Canadian producers have two problems that will weigh heavy on the markets. The first is that their traditional market for export barrels – the US – is not growing. In fact, growth in US production is escalating. On the surface, that puts Canadian barrels in direct competition with both US producers and waterborne imports. But it really won’t work that way. Since most Canadian exports to the US are heavy crude and most US shale production is light crude, it really means that Canadian production won’t be competing heads up with US producers. They have other international producers in their sights – and that means Venezuela and Mexico.
That 5 MMb/d big green slice of PADD III pie in the graph below is the bull’s eye target for Canadian producers. These are the barrels they want to replace. (From a US perspective, it seems like replacing heavy crude from Chavez with heavy crude from our friendly neighbor to the north is a very good thing. Perhaps we should mention that to our politicians.)
Canada and US Market Demand for Crude Oil in 2011 by source
The second problem for Canadian producers was not spelled out in so many words in the report, but it was between the lines. Canadian producers and the Canadian government learned something about their brother to the north during the Keystone pipeline fiasco. US politicians were willing to make Canadian crude imports into a political football, batted back and forth for short term political advantage. For that reason, it has become a “national imperative” to diversify Canada’s crude oil customer base. Since the US is its only customer now, it is pretty clear what “diversify” really means.
It means Asia. CAPP pegs Asia as world’s fastest growing energy market with China and Japan as the second and third largest markets in the world (after guess who). Japanese demand for crude oil as a source of power generation has also increased somewhat in order to make up for some of the lost nuclear generating capacity as a result of Fukushima. China is growing rapidly, and Brazil is going after that market. Canada can compete for those markets just as soon as pipeline and export dock capacity is built.
Unfortunately that won’t be for a while. The Enbridge Northern Gateway Project would move barrels from Alberta to Kitimat, BC (the same port where LNG exports are planned). At best this pipe would come online in 2017. Kinder Morgan’s Trans Mountain Expansion project would increase the capacity of the existing Trans Mountain system by 450 mb/d, bringing the total capacity of the system to 750 mb/d. Again, the completion date is 2017. Both of these pipelines face considerable resistance from environmental and First Nations groups.
So for the time being, Canadian producers are stuck with the US as their only customer. They are talking about a couple of projects to take crude to Eastern Canada where refiners use significant waterborne imports. The problem is that most of those are light sweet refineries, not heavy crude refineries.
So it all gets back to that question of pipeline capacity and the ability for Canadian producers to move their product to market – the US market. If work on some additional export capacity doesn’t start sometime soon, the Canadian crude oil stampede might be reigned in. And that would be unfortunate for both Canada and the US markets.
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