Pipelines, Barrels and Energy

The International Energy Agency reports global demand for energy, including oil, is expected to grow 37% over the next 25 years. While Canada has the third-largest proven oil reserve in the world at 173 billion barrels, it currently produces only produces 3.7 million barrels of the 93 million barrels consumed every day around the world.

Oil is one of the most important sources of energy in the world, accounting for over 30% of the total primary energy consumption.

Canada is the world’s fifth largest producer of oil, according to the U.S. Department of Energy, Energy Information Administration. The Oil & Gas Journal reports Canada’s proven oil reserves at 173 billion barrels; the world’s third largest reserves after Venezuela and Saudi Arabia. Of that, 167 billion barrels are in Alberta.

The oil sands remain the primary driver of oil growth in Canada, with production reaching four million barrels per day by 2030.

The sharp drop in world oil prices over the past year is expected to slow the growth of Canadian oil production over the next two decades. CAPP estimates production of Canadian oil will increase 43% over 16 years, growing to 5.3 million barrels per day by 2030, up from 3.7 million barrels per day in 2014. However, that prediction is down from CAPP’s June 2014 forecast estimated total oil production in 2030 at 6.4 million barrels per day.

Increased transportation capacity, in all forms, is therefore needed to meet growing domestic and international demand for Canadian oil.

Production from oil sands currently accounts for 61% of Western Canada’s total crude oil production. Oil sands production will drive the overall increase in production, which is expected to grow on average by 168,000 b/d for the next five years, according to CAPP. This rate of growth is similar to that exhibited in the past five years. However, this rate of growth slows by almost a half for the last decade of the forecast as oil sands production is anticipated to reach almost 4.0 million b/d by the end of the forecast period in 2030.

Stringham understands a lot of Canadians wonder why the oil sands continue to grow even though the price of oil has dropped to a third of what it was just over a year ago.

He points out an often forgotten point: Oil sands are consumer driven.

And it’s momentum, he explains.

“All of the front costs are still there. People are still bringing on now; that goes out about three years from now and then that’s where I see the inflection point.”

Compared to 15 years ago, when the oil sands really started ramping up, Stringham believes the international dynamics are now quite different.

In the past, people were talking about peak oil and the oil sands were seen as a large resource, a type of new focus to move into and that’s where it brought a lot of the investment  seen over the past 15 years and then the technology on tight oil (shale oil) really boomed about five years ago  and then “We saw the U.S. bring on four million barrels a day compared to our one million barrels and all of a sudden our biggest customer became one of our biggest competitors.”

He foresees that the “ones that are in the pipeline will continue,” and while prices will rebound, it likely won’t be to the higher levels. The challenge is that the first things that are going to come back off the shelf will be the ones that were the first ones that went on the shelf and that will be tight oil because drilling wells can stop in three to six months and be turned back on in six months to a year. 

“The oil sands projects take four to seven years to bring back on.”

He says oil is still a growth market, but the challenges right now is this downturn really has a lot of people shocked.

The other ones right now really being stretched.”

He adds that while there is hope for a longer-term upturn, it’s not as it was back in 2007 with a relatively quick rebound. 

“They were hoping for that, but it now seems that with Iran, what’s going on in China’s demand coming down, it seems to be locking in for a longer term; I don’t want to say years and years, but it’s not going to be just months and so that’s going to have a big strain on the economy in Alberta.

Having the U.S. become such a competitor also highlights the benefit of pipeline expansion off Canada’s west coast to far eastern markets, but also to eastern Canada which continues to use offshore oil (an estimated 600,000 barrels a day or U.S. oil rather than Canadian).

Meanwhile, refineries in Eastern Canada have backed out a lot of their “foreign oil” from the Middle East and Western Africa, replacing it with American light oil that is in surplus right now, coming in by ship and by pipeline yet Canada can’t get its heavy oil across the border because of a presidential permit that won’t allow its export down to the Gulf Coast.

According to the Canadian Energy Pipeline Association (CEPA), associated economic benefits attributable to a growing energy sector in Canada will be constrained significantly if additional pipeline capacity is not built to access new markets.

Without more diverse and better access to markets, the Canadian economy stands to lose more than a $1-trillion in GDP over the next 25 years, and more than $270-billion in tax revenue over that same period. With better access to Asian markets, and if the current pipeline proposals to the west coast are approved, as well as, enhanced access to refining capacity in the U.S. and Eastern Canada, the energy sector could add more than $51-billion, every year, to Canada’s GDP and $11-billion in tax revenue each year. That’s the equivalent of paying for a four-year undergraduate education for more than 492,000 young Canadians or building eight state-of-the art hospitals. It could also be used to pay the annual salaries of 200,000 full-time primary school teachers or it could fund all of Canada’s national parks for the next 16 years.

“Energy makes up the largest sector of Canada’s export economy, and a lack of new pipeline infrastructure is impacting our ability to get our natural resources to world markets,” says Dr. Brenda Kenny, CEPA president and CEO. ”Canada’s main oil and gas customer has traditionally been the United States, but due to factors like increased oil production there, Canada needs to reach new markets. In order to compete on a global level, we need to increase the number of customers we have in order to realize the true economic value of our natural resources.”

She adds that there are several different options in finding those markets, depending on location. The west coast is a key outlet to reach Asian markets, which still need oil imports to meet demand in that part of the world, and Canada is an obvious choice in terms of supply. Europe is another option in terms of a potential new market, which could potentially be exported from the east coast. 

 “Global demand for oil and gas is obviously still very strong. It’s predicted that the growth of energy needs on a global level will call on at least as much fossil fuel use 30 years from now as we’re seeing today and possibly even more,” states Kenny. “People rely on natural gas and products made from crude oil to meet more than two-thirds of their energy needs each and every day. We use these fuels to drive our cars and fly our planes, they heat our homes and businesses and we use them to make hundreds of household products, pharmaceuticals and chemicals. Forecasts show that due to a growing and more prosperous world population, alternatives like types of renewable energy are a long way away from catching up with growing global energy demand.” 

Captions:
The Canadian Energy Pipeline Association’s map of existing and proposed liquids pipelines.
Enbridge’s crude oil storage facility.
Graphs taken from the Canadian Association Of Petroleum Producers’ Crude Oil Forecast, Markets & Transportation 2015.