The Thrill Is Gone - Market Realities Weigh Heavily on the Canadian Oil Sands

Production volumes in the Alberta oil sands continue to inch up as production expansion projects sanctioned in better times — almost all of the projects small in scale — come online. However, several major pipeline projects remain on the drawing board; taken together, they would appear to provide far more pipeline takeaway capacity than the oil sands will need. Which raises two questions: how much incremental pipeline capacity is needed, and which pipeline project or projects are most likely to advance? Today we continue our series on stagnating production growth in the world’s premier crude bitumen area, the odds for and against a rebound any time soon, and the need (or lack thereof) for more pipelines.

Production in Alberta’s oil sands region is gradually rebounding after devastating wildfires that forced output scale-backs and temporary shutdowns of some production facilities, terminals and pipelines. It may be a while before life—and production—in the oil sands are back to normal, but Canada’s National Energy Board, producers and others expect the region’s output to continue to rise (if only gradually) the next few years, reflecting long-term oil sands expansion projects committed to when oil prices were more than double what they are today. There are very different views, though, about whether the oil sands will eventually need more takeaway capacity in the form of new or expanded pipelines. Today, we continue our look at the oil sands post-wildfires with a review of existing and proposed pipeline capacity.

Wildfires are notoriously unpredictable and, sure enough, as soon as the worst seemed to be over in the Fort McMurray, AB area, new flare-ups in mid-May threatened oil sands production areas north of the city. Thanks to heroic efforts by Alberta fire crews, no production area has experienced any significant damage (so far at least—fingers crossed), but a few work camps have been destroyed or damaged, and will need to be rebuilt. Good news is trickling in though, such as Imperial Oil’s May 19 announcement that it has restarted limited operations at its Kearl oil sands site. If, as everyone hopes, the wildfires are brought under control within the next few days, it seems likely that oil sands production will ramp up gradually over the next few weeks, and that by mid-summer Alberta’s output might be close to the 3.1 MMb/d that the province was producing before the fires were sparked.

Crude oil production in the Western Canadian Sedimentary Basin (WCSB) has risen by more than 50% over the past seven years to about 4 MMb/d, driven by new projects and expansions in the oil sands of Alberta. And while growth has slowed since the 2014-15 downturn in crude oil prices, oil sands output is expected to continue climbing — particularly over the next year as the new, 194-Mb/d Fort Hills project ramps up toward full operation. Most forecasts put total WCSB production at near 5 MMb/d by the mid-2020s. But while Western Canadian crude oil supply has been rising, there has been only a modest expansion of pipeline capacity out of the region, and lately takeaway constraints have had a devastating effect on the price relationship between benchmark Western Canadian Select (WCS) and West Texas Intermediate (WTI). Today, we continue our series on Canadian crude and bitumen production, existing and planned pipelines, and the effects of takeaway constraints on pricing, this time focusing on the supply side of the story.