High costs and transportation logjams threaten to slow the booming pace of oil sands expansion as global producers take a hard look at the expected return on their investments, the industry’s leading association said Monday.
In its annual outlook, the Canadian Association of Petroleum Producers lowered its growth forecast, compared to last year’s version, blaming increasing concerns about cost competitiveness and delays in project schedules.
Still, CAPP expects oil sands output to grow by nearly three million barrels a day, to 4.8 million in 2030 from 1.9 million last year. Conventional crude production – which had been expect to decline rapidly – is now forecast to grow by 200,000 barrels a day over the next 17 years.
There are two major threats to the forecast: rising capital costs in Alberta, and the possibility that critically-needed pipelines will not get built, CAPP vice-president Greg Stringham said in an interview.
The industry forecast comes as the federal government prepares to announce its decision with regard to Enbridge Inc.’s controversial Northern Gateway pipeline, which would carry 520,000 barrels a day of oil sands bitumen to B.C.’s coast from shipment to Asia-Pacific markets. Whatever Ottawa decides, Enbridge faces a long slog to meet regulatory conditions, consult with First Nations communities, and deal with the inevitable lawsuits that will be launched if the project gets a green light.
The industry needs some combination of new pipeline access and greater rail capacity to meet CAPP’s bullish estimate of production growth.
“Global demand for oil continues to increase and Canada’s large reserves make it an attractive supply source for markets in the United States and beyond,” CAPP vice-president Greg Stringham said in a release. “Connecting Canadian supplies to these markets, safely and competitively, remains a key priority for our industry.”
While the Harper government is due to rule on Northern Gateway, other key projects are being planned, including TransCanada Corp.’s 1.1-million barrels-a-day Energy East Pipeline, which would carry western crude to refineries and export terminals in eastern Canada, and the expansion of Kinder Morgan Inc.’s TransMountain line to Vancouver. As well, TransCanada is awaiting a decision from the Obama administration on the Keystone XL pipeline, while Enbridge is planning the expansion of its main line into the U.S.
In the short term, rail expansion will help. CAPP expects the industry’s capacity to move crude by rail will grow from 200,000 barrels a day currently to as much as 700,000 barrels within two years. But by late this decade, new pipelines will be needed. And to meet CAPP’s 2030 forecast, all of the major projects now proposed – or ones of similar size – will be required.
“The biggest uncertainty in this forecast is the timing associated with this [pipeline] capacity and whether or not they can deliver the capacity on the timelines they now propose,” Mr. Stringham said.
He added cost pressures are already starting to bite. Last week. France Total S.A. shelved its proposed $11-billion Joslyn oil sands project.
“We’re seeing capital costs continue to rise. And even in a flat-price forecast, if we see capital costs rise x per cent per year for the next 10 years, that’s going to really shrink the margins significantly.”
Arc Financial Ltd. economist Peter Tertzakian said CAPP’s forecast still appears overly bullish, given the mounting pressures on oil sands producers.
“I’m more conservative on growth in the oil sands over the long term,” he said. He said a 3-million barrel increase in production in the oil sands would put enormous strains on the province, its labour force and its environment. “I question the sustainability [of the production forecast] in the broadest sense of that word. … It would be the equivalent of adding the productive capacity of Kuwait.”Report Typo/Error