Canadian Oil Production to Surge by 2030

Technology, strong oil demand, and high prices are expected to propel Canadian oil production to record heights over the next 20 years, according to the latest Canadian Association of Petroleum Producers (CAPP) forecast.

The CAPP’s 2012 Crude Oil Forecast, Markets & Pipelines outlook states that Canadian crude oil production will more than double to 6.2 million barrels per day (bpd) by 2030, while conventional oil production will add a substantial amount of crude to the country’s overall production moving forward.

Production from offshore Atlantic Canada accounted for 9 percent of the country’s crude output in 2011 and is expected to average approximately 220,000 bpd over the next decade; analysts are forecasting that the start up of the Hebron project in 2017 will help to offset production declines from existing projects.

The outlook, released last week, adds that Canadian oil sands development will remain the main driver for the country’s future growth due to “the addition of several new projects reflecting growing producer confidence.”

CAPP also expects Eastern Canada’s production to decline from 273,000 bpd last year to around 90,000 to 100,000 bpd by the end of the forecast period, presenting an opportunity for Alberta producers. “There is … much interest in improving connectivity to western Canadian supplies for all Canadians,” CAPP said in the report. “As such, a number of projects to increase pipeline access from western Canada to eastern Canadian markets are being contemplated.”

Oil sands potential

This year producers will spend $20 billion on oil sands development – $1 billion more than originally anticipated, the association said. If Canada maintains this level of development its crude production will rise to the level of Iran, the Organization of the Petroleum Exporting Countries‘ second-largest producer, by 2020.

“Resurging growth in Western Canadian conventional oil production and new oil sands investments are driving the positive outlook,” said Greg Stringham, CAPP vice president of markets and oil sands. “Canadian oil is clearly on the global stage and this forecast growth will put Canada in the top three or four oil producers in the world.”

Much of this new production is expected to flow east as refineries in Ontario and Quebec source feedstock domestically rather than purchasing offshore supply at higher premiums. Production growth will be aimed at displacing imported supplies, and will go to the US Gulf Coast and Asian markets.

Not all good news

Meanwhile, bullish oil sands forecasts have been met with skepticism, with some analysts forecasting that Canadian producers are facing forced slowdowns, or even project cancellations, as a result of a glut of new production in the United States.

“North Dakota’s Bakken play is competing directly with the oil sands and mounting downward pressure on Canadian crude prices, as pipelines and refineries in the Northern U.S. become increasingly congested,” said energy consultant Wood Mackenzie. “As a result, a number of future oil sands projects and phases become more prone to delay.”

Oil sands projects display high break-even levels

The firm also warns that the recent dip in crude prices has led to a scenario whereby some oil sands plants are nearing break-even levels; the prospect of continuing low prices is of “serious concern” for the industry.

“Oil sands projects display some of the highest break-evens of all global upstream projects,” it said. “The potential for wide and volatile differentials could result in operators delaying or cancelling unsanctioned projects.”

The firm highlights that new oil sands mines require prices near $80 per barrel to break even, adding that an upgrader – a “pre-refinery” that transforms heavy oil into lighter crude that can be further refined into diesel and gasoline – requires prices above $100 per barrel. With current benchmark North American oil prices at $84 per barrel, analysts say Alberta producers are exposed to even lower prices, with Canadian crude fetching just $64 per barrel as they face increasing competition.

Industry observers also warn that increasing price differentials between West Texas Intermediate (WTI) and Western Canada Select are considered a major threat to the oil sands. Western Canada Select heavy blend for July last sold for $25 a barrel less than benchmark WTI – still historically wide for a time of year when asphalt demand normally increases.

In a recent report, CIBC World Markets analyst Andrew Potter noted that Canadian synthetic crude, the upgraded oil sands product that traditionally sells at a premium to WTI, is currently trading at 6 percent below the benchmark. He suggested that pricing uncertainty, coupled with increasingly uncertain pipeline capacity, has added to growing concerns. “If macro conditions continue to deteriorate we would not rule out a short-term pullback into the $70/bbl range,” he noted.

Junior company news

Horn Petroleum (TSXV:HRN) confirmed the start of drilling operations on the Shabeel North well in Puntland, Somalia.

The Shabeel North well is targeting Upper Cretaceous Jesomma sands, which had good oil and gas shows in the Shabeel well 3.5 kilometers to the south. Petrophysical analysis of downhole electrical logs in the well indicate a potential pay zone of up to 12 to 20 meters, with an average porosity of 18 to 20 percent,  the press release states.

PetroMagdalena Energy (TSXV:PMD) has entered into an agreement with Pacific Rubiales Energy (TSX:PRE). Pacific Rubiales offered to acquire all of PetroMagdalena’s issued and outstanding common shares for $1.60 per share in cash.

Sundance Energy (TSXV:SNY) announced that it has begun the equipping and tie-in of the well drilled on its jointly-held Alexander First Nations Permit in Central Alberta.

The Sundance ALEX 16-11-56-27 W4M well was drilled vertically to a depth of 1,306 meters and encountered sweet, light oil in both the Alexander and Detrital sands. The Alexander sand swabbed 7.6 barrels per hour (bbl/hr) of oil and the Detrital sand swabbed 2.7 bbl/hour of oil for 10 hours. The final swab rates for the combined zones totaled 10.3 bbl/hr of oil (247 barrels of oil per day).

Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.