Canadian oil sands: US demand will sustain future growth – IHS

Canadian oil sands account for 0.14% of global GHG emissions

The Canadian oil sands will continue to grow in coming years, despite lower crude oil prices and other “headwinds,” says a new report from consultancy IHS Inc.

Oil sands growth will to a large extent be based on a simple fact that is unlikely to change in the near to mid-term: American refineries require almost three million b/d of heavy crude, which in the past was primarily supplied by Venezuela and Nigeria.

The IHS report says that while the long-term path of oil sands growth will be linked to the pace and scale of the global oil price recovery, the fundamentals that have supported oil sands growth in the past remain in place – including

“While trajectory of longer-term oil sands growth beyond 2020 is not assured (for instance, the impact of some new government policies remains uncertain), the pillars of past growth—innovation, collaboration and stable investment climate in Canada (not to mention U.S. heavy crude demand)—certainly remain,” said Kevin Birn, director for IHS Energy.

Oil sands growth, which previously rose 1.2M b/d from 2005 to 2014, is expected to add an additional 800,000 b/d of new production by 2020. Canada would remain the third largest source of supply growth in the world through that period (a rank it has held since 2005), according to IHS.

The report, entitled Why the Oil Sands: How a Remote, Complex Resource Became a Pillar of Global Supply Growth, is a research project of the IHS Oil Sands Dialogue. Drawing on previous IHS research into specific aspects of the oil sands, the report provides a historical context of oil sands growth over the past decade and a half and discusses the reasons that growth continues.

“A review of oil sands development over the years shows a history of growth, even when headwinds to production emerged,” said Birn.

“Oil sands growth has propelled Canadian production higher, and Canada now produces more oil—conventional, unconventional and oil sands combined—than every member of OPEC except Saudi Arabia.

Among the attributes supporting continued Canadian oil sands growth are the enormous scale of the resource—oil sands are the third largest source of proven reserves in the world (about 170 billion barrels) and the only reserves of this scale outside OPEC—and its location in a stable jurisdiction.

Openness to private capital and proximity to the world’s largest economy are also factors that support future growth, according to IHS.

The IHS report says that growth of Canadian oil sands supply will continue through the medium term despite headwinds that include lower oil prices, cost escalation, environmental scrutiny and uncertain timing of new pipeline capacity to access new markets.

Slower growth from the lower price environment is emerging from a slower pace of construction, declines from more conventional Canadian oil sands production, and delay in unsanctioned projects where significant capital has not been spent. Yet, the report concludes growth is expected as a result of both existing projects and those under construction where significant capital has already been spent.

“Certainly growth would have been greater had prices remained high, but there is sufficient inertia in the system from projects already underway to carry growth to nearly 2020,” Birn said. “Those projects where significant capital has been invested will continue to operate and proceed to completion.”

Environmental concerns related to oil sands include regional impacts as well as greenhouse gas (GHG) emissions. Though oil sands account for just 0.14 percent of worldwide emissions, their share of domestic emissions in Canada has grown with production.

While GHG intensity of oil sands production ranges from one to 19 per cent higher than the average barrel of crude consumed in the United States, other crude oils can have a similar level of GHG-intensity. The IHS report notes that some of the more recent oil sands projects have trended closer to the U.S. average as a result of innovation and experience.

Uncertainty of new pipeline capacity (Keystone XL being the most notable example) has, in the past, contributed to price discounts as high as $30 per barrel, the report says.

The increase of rail transport for oil sands (from no notable movements in 2010 to nearly 190,000 b/d towards the end of 2014) has eased transportation bottlenecks and alleviated the price discounts. However, moving crude by pipeline—which is generally less expensive and more predictable—remains the preferred option by producers and refiners alike.

Previous IHS research found that construction and operation of the Keystone XL pipeline would not have a material impact on GHG emissions. The study concluded that complex refineries on the U.S. Gulf Coast that are designed to process heavy crudes will continue to demand types of crude that have a similar GHG intensity to oil sands, meaning that the U.S. will continue to import crude oil of similar quality from offshore sources such as Venezuela if additional supply of oil sands were not available.