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Fear not the U.S. oil boom: Canada's oil sands have an inside edge

Shell Oil's Deer Park refinery and petrochemical facility (background) in Deer Park, Tex.

David J. Phillip/The Associated Press

With U.S. energy production grabbing an enormous amount of attention these days, it is becoming easy for investors to take a pass on the Canadian oil sands.

But don't write off companies like Suncor Energy Inc. and Canadian Oil Sands Ltd. just yet: According to Standard & Poor's, Canadian oil production still has a solid export market in the United States – a bullish view on a sector that has a lot of skeptics right now.

To be sure, U.S. oil output has been dazzling observers. Just last week, the Statistical Review of World Energy reported that U.S. crude oil production rose to nearly nine million barrels a day last year, up more than one million barrels. In percentage terms, that's the biggest increase in the world.

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Canada's output rose a respectable 7 per cent last year, the world's fourth-biggest increase. But the gains fail to impress when you consider that Canadian oil needs an export market, and historically the energy-starved United States has been at the top.

However, Michelle Dathorne, an analyst at Standard & Poor's, believes that the U.S. market is nowhere close to surrendering that role, simply because the country's refineries are geared to handling Canadian bitumen.

Canadian crude is high density stuff, and U.S. oil refiners have spent billions of dollars upgrading their facilities to process it – conversions that are unlikely to be reversed any time soon.

"In addition to the estimated cost to convert or reconvert facilities, there are likely still concerns regarding the sustainability of U.S. tight oil production, given that it is a relatively new development," Ms. Dathorne said in a note.

"As a result, we believe U.S. refiners will continue to include heavy crude in their input mix, with a significant portion of this crude supplied from Canada."

Canadian energy stocks have been struggling in recent years. The S&P/TSX oil and gas index has drifted sideways for four years and is more than 40-per-cent below its peak in 2007.

The price of crude oil takes some of the blame. It has bounced between $80 (U.S.) and $100 a barrel for most of the past three years amid a sluggish global economy and slowing economic growth in China.

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But rising U.S. oil production – part of what the International Energy Agency believes is "as transformative to the market over the next five years as was the rise of Chinese demand over the last 15" – is surely acting as an additional weight on Canadian energy stocks, given that some observers are already discussing the need for Canada to find new export markets.

Ms. Dathorne believes that the U.S. Gulf Coast is the best market for Canadian production though, and one that shouldn't vanish with the rise of U.S. production. After all, the Canadian oil sands have a key advantage: They are massive.

At 135 billion barrels of established reserves, Canadian oil sands are about 10 times the size of U.S. oil reserves within Eagle Ford Shale, Bakken Shale and Permian Basin.

It's difficult to turn off the taps on a resource that large when oil remains a critical energy resource, and one that should become far more visible when the global economy returns to health.

"We believe that there is room in the U.S. market for both tight oil and heavy Canadian crude," Ms. Dathorne said. "In addition, the flat production profile and long reserve life index associated with [the oil sands] provide greater visibility and stability relative to the U.S. tight oil plays, which mitigates a key risk with any long-term project."

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