Failure to build needed oil sands pipelines – particularly Keystone XL – could result in persistent price discounts and slow expansion of the sector, even as North American production booms, the International Energy Agency warned Tuesday.
In a forecast that portends downward price pressure in the coming years, the international agency said supply growth – fuelled largely by North America – will outstrip the increase in demand over the next five years, resulting in a buildup of global spare capacity that is typically associated with weak crude prices.
"North America has set off a supply shock that is sending ripples throughout the world," said the agency's executive director, Maria van der Hoeven. "The good news is that this is helping to ease a market that was relatively tight for several years."
The forecast calls for North American supply to rise by 3.9 million barrels a day over five years, or nearly two-thirds of the total non-OPEC increase of six million barrels a day, and nearly half of the global total of 8.4 million barrels a day. Global demand will rise by 6.9 million barrels per day.
However, the big risk in the optimistic scenario for North America remains the need to build pipeline and other oil field infrastructure, as well as environmental concerns about the hydraulic fracturing used to unlock prolific tight oil formations. Without new pipelines – especially from landlocked Alberta – "bottlenecks could pressure prices lower and slow development," the agency said.
The IEA forecasts that production in the oil sands will grow by 1.3 million barrels per day over the next five years, bringing Canadian output to five million barrels a day by 2018. But the ramp-up in production will be slow over the next two years, due in part to a lack of export infrastructure that has resulted in a significant discount on Canadian crude. Most of the increase will come from in situ projects, though the start-up of Imperial Oil Ltd.'s Kearl mining operation will be a significant factor.
The differential between Western Canada Select and the benchmark West Texas Intermediate has averaged $25 (U.S.) a barrel so far in 2013.
"Although some analysts forecast that the differential will not impact existing production volumes, this Report reckons that incremental volumes are likely to be delayed if the discount persists," the IEA said. "Whether or not the trans-border portion of the Keystone XL pipeline is approved will affect this discount."
Canada is also experiencing sharp growth in its production of light tight oil, which will exacerbate the shortage of export pipeline capacity.
Meanwhile, oil-and gas-producing countries, including Russia and China, are looking to copy the North American experience with light tight oil, though the state-owned companies are less nimble and innovative than independent, private-sector firms that sparked first the shale gas and then the tight oil revolution in the United States.
Still, if the technology succeeds in unlocking resources around the world, it could lead the world to radically re-evaluate the amount of crude reserves available.
While forecasting strong non-OPEC production growth, the IEA warns the continued political volatility will undermine the capacity of the Organization of Petroleum Exporting Countries, with the notable exception of Saudi Arabia.
"Increased violence by Islamist extremists and militants, combined with political instability across much of north and west Africa since the start of the 'Arab Spring' in 2011, is changing the equation for acceptable risks for international oil companies. Project delays are already apparent in Algeria, Libya and Nigeria," the report said.
As a result, almost all of OPEC's increased capacity is expected to come from Iraq, which has ambitious plans
for expanding production but also face enormous political obstacles to achieving those plans.