This commentary was originally published in the Petroleum Economist’s Outlook 2018.
Gone are the frenzied days when multibillion dollar oil sands projects were sanctioned on a regular basis. These days, project cancellations and supermajor exits from Canada have been grabbing the headlines. But if you look beyond the adverse news, there’s an exciting renaissance happening in the Canadian oil and gas business. Here are some developments to watch over the course of 2018:
- Supermajor exits create new opportunities. Over the course of 2017 Shell, ConocoPhillips, Marathon, and Apache all sold major Canadian assets. Despite this seemingly negative news, it’s not the first time that supermajors have exited the Canadian oil patch en masse. In the 1990s, during a similar period of low oil prices, BP, Amoco, Texaco, Marathon, and others sold their projects in Canada. With these exits came the opportunity for Canadian companies, more focused on the home market, to purchase the quality assets that had been owned by the foreign majors. These transactions sowed the seeds for some of Canada’s largest oil and gas producers. Today’s exits are positioning Canadian oil and gas producers for a new wave of domestically driven growth.
- New techniques are making Canadian shale gas and tight oil plays highly competitive. Internationally, Canada is known for its oil sands assets. But the Western Canadian Sedimentary Basin, which spans the provinces of British Columbia, Alberta and Saskatchewan, is endowed with a spectrum of hydrocarbons; from dry gas and natural gas liquids, to condensates and lighter oils. Over the past few years, continuous improvements in completion and drilling techniques have boosted well production and economics to levels comparable to the big-name US plays.
- Growing outlets for Western Canadian natural gas. While the cancellation of Petronas’s Pacific NorthWest liquefied natural gas project off of Canada’s west coast was a setback in 2017, there are still other options for increasing the outlets for Canadian gas. By 2020, natural gas exports to the US should increase by over 1 Bcf/d, and growing domestic consumption should add almost another 1 Bcf/d of demand. Finally, despite the recent cancellation of Pacific NorthWest, other Canadian LNG projects will still advance in 2018. Canada’s competitive advantages over the US Gulf Coast include lower-priced gas and a shorter shipping distance to Asia.
- Multiple options for moving oil. Despite the cancellation of the 1.1 MMB/d Energy East pipeline project in 2017, there are still plenty of options for transporting oil from Canada. One outlet for expansion is adding additional capacity to existing pipelines. Over the past several years, debottlenecking older pipes has already added more new takeaway capacity than the entire Keystone XL project proposes to ship. Another method is to move crude oil using rail with Western Canada’s existing infrastructure. Finally, there are new pipeline projects still advancing including Kinder Morgan’s Trans Mountain pipeline expansion project and TransCanada’s Keystone XL pipeline.
- Cost cutting innovation. In Canada, low commodity prices have caused a wave of cost cutting innovation. In the oil sands, operating costs have fallen to levels that were not conceivable before the downturn. Similar to headline US plays like the Permian Basin, Canadian costs outside the oil sands have also witnessed steady and meaningful reductions. The innovation has momentum going into 2018.
- Growing oil sands, still. Canada supplies four percent of global liquids to the oil market, and production is still growing due to oil sands projects that were sanctioned before the downturn which now completing construction. The newly minted Suncor Fort Hills and CNRL Horizon Phase 3 oil sands mining projects are ramping up their production into 2018, and should push Canada’s total crude oil production near 4.5 MMB/d at the end of 2018 compared with 4.1 MMB/d in 2017. After the next several years, oil sands growth is expected to slow since no new major projects have been sanctioned since the downturn. Even then, these long-lived low decline oil sands facilities will keep Canada in the ranks as a top global oil supplier for decades to come. On top of that, unconventional liquids production is growing as well.
Downbeat headlines about Canadian oil and gas developments don’t tell the full story. The fifth-largest producer of oil and gas in the world is undergoing a renaissance.