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‘My plea to the oil sands industry is to increase the productivity and reduce the carbon footprint by having access to cleaner technologies for production processes,’ International Energy Agency executive director Fatih Birol said.

F. Carter Smith/Bloomberg

Canada's oil sands sector represents a crucial global supply to meet future crude demand, but only if producers can simultaneously drive down costs and slash greenhouse-gas emissions, the head of the influential International Energy Agency said Thursday.

IEA executive director Fatih Birol visited Ottawa on Thursday to meet Natural Resources Minister Jim Carr and release the Paris-based agency's review of the country's energy policies. With its vast resources, Canada will be "a cornerstone of the global energy market for many years to come," even as the world transitions to a low-carbon economy, he said in an interview.

But there are major risks and challenges to maintaining a world-class oil and gas industry, particularly as low-cost producers flood global market with crude and liquefied natural gas.

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"My plea to the oil sands industry is to increase the productivity and reduce the carbon footprint by having access to cleaner technologies for production processes," Mr. Birol said. "The world needs oil. If they don't get the oil from Canada, they will get it somewhere else." He said that if low oil prices persist for too long, exporters from the politically volatile Middle East would gain a stranglehold on the market, thereby undermining the energy security of industrialized nations.

The IEA chief insists long-term growth in the oil sands can be consistent with Canada's efforts to meet its climate-change commitments to reduce greenhouse-gas emissions by 30 per cent below 2005 levels by 2030. But only if the industry can dramatically reduce its emissions per barrel. "It is extremely crucial that they make more use of advance technologies," he said. "This may well increase the cost of production a bit but it is a key asset-protection strategy for them." Otherwise, producers will continue to face opposition to infrastructure needed to reach markets and political pressure in their key markets, he added.

Like many private-sector forecasts, the IEA expects crude prices will rise off the floor later this year and begin increasing significantly in 2017, when declines in non-OPEC production – mostly in the United States – and growing global demand bring the market back into balance. It predicts prices will rebound to $80 (U.S.) a barrel by 2020.

The current slump is sowing the seeds of its own eventual rebound, the IEA chief said. Capital expenditures in the global industry fell 24 per cent in 2015 and are poised to decline at least another 17 per cent this year, a two-year drop that is unprecedented over the past 30 years.

At the $80 level, most oil sands projects would be profitable, Mr. Birol said. But in the meantime, projects are being cancelled, meaning oil sands production will flat line for a while after 2020.

Between 2015 and 2020, the agency expects oil sands production to grow by 800,000 barrels a day, and then pause until producers can regain confidence.

That's in line with a forecast released Thursday by RBC Dominion Securities that pegged production growth to 2020 at 760,000 barrels a day – well down from bullish growth projections of one million barrels that the bank had previously expected. The RBC report cited cancelled and deferred projects by Cenovus Energy Inc., Royal Dutch Shell PLC, Suncor Energy Inc. and others. It now expects production from northern Alberta to hit 3.1 million barrels a day by 2020, and plateau there for several years.

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It's a sharp reversal. In recent years, oil sands production grew at an annual rate of 10 per cent. Now, the bank sees output climbing at a slower annual clip of 6 per cent before levelling off. "Once oil prices recover to levels which support the sanctioning of new projects, oil sands growth will take years to surface," analyst Greg Pardy said in the report.

For now, some oil sands producers have sought to claw back costs at existing plants rather than sink money into uneconomic projects.

Exxon Mobil Corp. said in securities filings that its average costs per barrel of bitumen have dropped by 41 per cent from a year ago to $19.20U.S. a barrel. The company is expanding output at its massive Kearl mine with its Canadian subsidiary, Imperial Oil Ltd.

At its Horizon bitumen mine, Canadian Natural Resources Ltd. said recently that it shaved $9 (Canadian) a barrel from its 2015 operating costs compared to 2014. Chief financial officer Corey Bieber told investors last month that more savings are possible as competition for labour and materials evaporates.

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