Booming oil production in the United States stands to place serious pressure on Canada's energy industry, forcing down prices and threatening investment plans if other export markets can't be found.
Propelled by technological improvements, the U.S. has seen a series of new plays deliver a surprising rush of new domestic crude into markets. That rush is so dramatic that it stands to vault the U.S. within striking distance of being the top global crude producer by 2017, up from third today – a change that will lessen its reliance on foreign imports.
That could have important ramifications for Canada's oil sands, which have major growth ambitions at a time when U.S. demand is expected to stagnate or perhaps even decline, if coming years bring greater adoption of ethanol and natural gas as transportation fuels.
"Now will the Canadian barrels be displaced out of the U.S.? No," Steve Wuori, president of liquids pipelines at Enbridge Inc. , told investors at a conference Tuesday. "But what is the victim? The victim is price ... It is the price punishment that takes place when you have no other market available."
In 2009, Canada's crude industry, exported nearly 2.5 million barrels per day of crude oil and refined products to the U.S., which is its only substantial export market. That market is also the destination for virtually all of the intended growth in Canadian production, with the oil sands alone expected to double output over the next decade, adding another 1.5 million barrels per day.
But the consequences of rising U.S. output could be profound, especially for companies whose ambitions are tied to high oil prices. Challenges in the North American market could be enough to slow the pace of development in Canada's oil sands.
"Over the last many decades anybody who produces oil just finds it, puts it into the pipeline and knows there's a market for it. Now, we're in a different era," said Peter Tertzakian, chief energy economist with ARC Financial. "It's a very major structural shift that is occurring. ... If you're a high-cost producer, you're going to be vulnerable."
Indeed, producers already have abundant evidence for what can happen when oil gets oversupplied. Mr. Wuori pointed to the current discount of nearly $25 (U.S.) per barrel applied to oil traded in the landlocked central parts of North America.
"That's an example of just how serious price degradation can be when you have too much supply and not enough outlet," said Mr. Wuori, for whom the coming changes provide further reason for Canada to pursue other markets. Enbridge, the country's largest transporter of crude, is a major proponent of such plans, with its $6.6-billion Northern Gateway pipeline that would bring oil sands crude to the Pacific coast for export to Asia and California.
For its part, the Canadian Association of Petroleum Producers say it believes any U.S. oil gains will be offset by declines in imports from places like Mexico and Venezuela.
"That still to our minds leaves a very significant opportunity for Canadian oil to fill in those voids that are being left by others," CAPP vice-president Greg Stringham said.
Yet forecasts suggest the growth in the U.S. will be substantial. It currently consumes 18.5 million barrels per day of oil and petroleum products. It produces 7.8 million barrels, a figure that has been steadily rising after many years of decline. This year saw the highest U.S. oil and petroleum products output in roughly a decade; July, 2011, was up 15 per cent over July, 2007.
Far more increases may yet lie in store. New shale oil plays – including most prominently the Bakken but also the Eagle Ford, Permian and Niobrara – have been a key source of growth, largely in light oil. Those alone stand to contribute about 2.6 million barrels per day to the U.S. in coming years. New plays, like the Alberta Bakken, are poised to increase that tally even further; on Tuesday, Wood Mackenzie published research showing that separate play contains an estimated 2.6 billion barrels of recoverable oil.
Earlier this month, Goldman Sachs released production estimates that show the country growing its output to 10.27 million barrels per day, which would place it within striking distance of Russia, the current top global producer.