Got Me Under Pressure, Part 2 - Potential Gas Demand Impacts of Alberta Oil Sands Supply Cuts

Significantly reduced demand for crude oil by refineries is spurring production cuts in Alberta’s oil sands, and that could lead to a major decline in demand for Western Canadian natural gas. The oil sands are the single largest consumer of natural gas in Canada, accounting for more than half of the gas used in Alberta year-round and up to 37% of the gas used nationwide. With that kind of clout, anything that affects gas consumption in the oil sands is bound to have an outsized impact on the Alberta and overall Canadian natural gas markets. Today, we conclude our series on the effects of COVID-related disruptions on the Canadian natural gas market.

When considering Alberta’s oil sands, what typically comes to mind are vast reserves, huge mining and steam-assisted gravity drainage (SAGD, or “in situ”) operations, and enormous oil production capability. What is sometimes overlooked is that oil sands production consumes massive volumes of natural gas in order to produce the heavy oil from bitumen that’s characteristic of the oil sands, or light synthetic crude oil after being upgraded from heavy oil. However, bitumen production from the oil sands is facing immense pressures on several fronts: record-low prices for Canadian heavy oil; a concurrent squeeze on the economic viability of currently operating and future oil sands projects; and logistical constraints in terms of rapidly diminishing physical capacity to store barrels both in Alberta and further downstream in the Midwest. A number of oil sands producers have already announced production cutbacks, and more supply cutbacks are likely.

In Part 1 of this series, we began our analysis of the Canadian natural gas market with a recap of the just-finished heating season’s supply-demand balance and gas storage behavior, and considered the storage scenarios that could play out this injection season (April through October). As we highlighted in that blog, the Canadian gas market, which relies on exports to the U.S. to balance, is likely to bear the brunt of oversupply in the Lower 48, where COVID-related gas demand losses could accumulate, potentially well ahead of any offsetting effects that materialize from an oil price-driven downturn in gas supply. Oversupply conditions in the U.S. likely will spill over into the Canadian market, through a combination of pushback on Canadian gas flowing south of the border and more U.S. gas flowing north into Canada. The result? More gas sloshing around in Canada and needing a home in storage. Then, factoring in the possibility of gas supply growth in Western Canada and the local demand losses from COVID closures and a slowdown in oil sands development, we concluded that gas storage in Canada could be facing a real test of capacity limits by the end of October.

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