Despite lower oil prices and other challenges, growth in Canadian oil sands will continue and remain one of the top sources of global supply growth in coming years, according to a new report by IHS Inc. (NYSE: IHS).
Oil sands growth, which previously rose 1.2 million barrels per day (Mbd) from 2005 to 2014, is expected to add an additional 800,000 barrels per day (b/d) of new production by 2020. This would keep Canada the third largest source of supply growth in the world through that period (a rank it has held since 2005). IHS will release its complete oil sands production forecast later this month.
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 Kevin Birn, director for IHS Energy. “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 oil sands growth are the enormous scale of the resource – oil sands are the third largest source of proven reserves in the world and the only reserves of this scale outside OPEC – and its location in a stable jurisdiction. Openness to private capital and proximity to the US are also factors that support future growth, the report says.
The IHS report says that growth of 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 oil sands production, and delays in unsanctioned projects (projects where significant capital has not been spent). Yet, the report concludes that growth is expected as a result of both existing projects and those under construction where 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 under way 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 and greenhouse gas (GHG) emissions. Though oil sands account for about 0.14% of worldwide emissions, their share of domestic emissions in Canada has grown with production. While GHG intensity of oil sands production ranges 1–19% higher than the average barrel of crude consumed in the US, other crude oils can have a similar level of GHG intensity. The report notes that some of the more recent oil sands projects have trended closer to the US average as a result of innovation and learnings over time.
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 toward the end of 2014) has eased transportation bottlenecks and alleviated the price discounts. However, the report notes that 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 US 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 US will continue to import crude oil of similar quality from offshore sources, such as Venezuela, if additional supply of oil sands were not available.
The new report concludes 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.
“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 US heavy crude demand) – certainly remain,” Birn said.
The IHS Oil Sands Dialogue convenes stakeholders in the oil sands to participate in objective analysis in the benefits, costs, and impacts of various choices associated with Canadian oil sands development. Participants include representatives from governments, regulators, oil companies, pipeline companies, academia, and nongovernmental organizations. IHS is solely responsible for the content and conclusions of the research.