Ottawa Citizen

More volatil­ity for oil sands in 2013

- By Jeff Lagerquist Fi­nan­cial Post jlagerquis­t@na­tion­al­

Canada’s oil sands will face un­prece­dented op­por­tu­ni­ties and mas­sive chal­lenges in 2013 as bil­lions of dol­lars hang in the bal­ance. Lim­ited ac­cess to for­eign mar­kets, in­fra­struc­ture and labour con­straints, and de­creas­ing de­mand from the United States threaten the $4.93 tril­lion in rev­enues that the Cana­dian En­ergy Re­search In­sti­tute projects in a best-case sce­nario over the next 25 years, pri­mar­ily by sell­ing oil to Asian mar­kets.

“It’s go­ing to be a very in­ter­est­ing year. I think 2013 is go­ing to be even more volatile, if that can be imag­ined,” said An­drew Pot­ter, an oil and gas an­a­lyst at Cana­dian Im­pe­rial Bank of Com­merce.

The 16 new oil sands projects slated to break ground over the next four years will ex­ac­er­bate a mar­ket al­ready starved of labour.

The Pe­tro­leum Hu­man Re­sources Coun­cil of Canada says the in­dus­try will need to fill 9,500 jobs in the next three years, but an­tic­i­pates that up to 36% of those po­si­tions will not be filled.

West­ern Cana­dian oil pro­duc­ers, un­able to reach Pa­cific Rim or east­ern seaboard mar­kets, are slow­ing down a num­ber of projects as the in­dus­try bat­tles with reg­u­la­tors north and south of the bor­der over in­fra­struc­ture devel­op­ment.

“There are a lot of in­vestors and com­pa­nies in Canada that have de­cided to put oil sands devel­op­ment on hold be­cause they are not able to get it to mar­kets, but more im­por­tantly they are not get­ting a good enough price,” said Pierre Fournier, a geopo­lit­i­cal an­a­lyst at Na­tional Bank Fi­nan­cial.

While new plays in the oil sands are prof­itable with oil be­tween US$80 and US$90 a bar­rel, U.S. shale oil pro­duc­ers gen­er­ate prof­its at US$60 or US$70, ac­cord­ing to a re­cent report by Na­tional Bank.

Both Sun­cor En­ergy Inc. and Cana­dian Nat­u­ral Re­sources Ltd. pulled back on growth in 2012. Sun­cor will re­duce spend­ing by nearly $1 bil­lion in 2013, ac­cord­ing to a bud­get re­leased ear­lier this month.

“Canada ex­ports out of West­ern Canada and im­ports into East­ern Canada be­cause the north-south pipe­line sys­tem is vir­tu­ally full. Cana­dian pro­duc­ers are suf­fer­ing big dis­counts off of West Texas In­ter­me­di­ate ( WTI) prices while east­ern Canada is busy buy­ing im­ported oil at higher Brent Oil prices,” said Barry Munro, Ernst and Young’s Cana­dian oil and gas leader.

East­ern Canada im­ported roughly 680,000 bar­rels per day in 2011.

While the U.S. re­mains the No. 1 cus­tomer for Cana­dian en­ergy ex­ports, the so-called “un­con­ven­tional hy­dro­car­bon rev­o­lu­tion” has un­locked U.S. re­serves once thought to be un­eco­nom­i­cal or unattain­able through im­proved tech­nol­ogy. At the same time, higher fuel-ef­fi­ciency stan­dards and a chang­ing en­ergy mix that in­cludes more nat­u­ral gas are putting a sig­nif­i­cant dent in the de­mand for Cana­dian oil.

Re­main­ing de­pen­dent on a sin­gle mar­ket leaves Canada’s oil sands vul­ner­a­ble to the con­se­quences of the U.S. turn­ing to a new sup­ply, alternativ­e en­er­gies or suf­fer­ing eco­nomic chal­lenges that would limit de­mand growth.

“We have his­tor­i­cally taken for granted that there would al­ways be a mar­ket for our oil and nat­u­ral gas. Cana­dian nat­u­ral gas pro­duc­ers have had to live through the very harsh lessons of the shale gas boom in the U.S. The same thing is go­ing to hap­pen with oil,” Mr. Munro said.

An­a­lysts agree ex­port­ing West­ern Cana­dian oil to the Pa­cific Rim via the west coast of Bri­tish Columbia would be most eco­nomic based on dis­tance and the rapidly grow­ing Asian mar­kets. En­bridge Inc.’s North­ern Gate­way pipe­line and Kinder Mor­gan Inc.’s Trans Moun­tain Ex­pan­sion (TMX) would see more oil shipped out of B.C.

Tran­sCanada Corp.’s Key­stone XL pipe­line, which was de­nied the per­mit it needed to cross the U.S. bor­der ear­lier this year, would pro­vide ac­cess to U.S. Gulf Coast re­finer­ies if the U. S. State De­part­ment ap­proves it next year. Pro­pos­als are also un­der­way to ad­dress East­ern Canada. Re­vers­ing En­bridge’s Line 9 pipe­line from Sar­nia, Ont., to Mon­treal would ad­e­quately fuel re­finer­ies in Mon­treal and Que­bec City. A new pipe­line that con­tin­ues from Mon­treal to Saint John, N.B., could serve the Irv­ing re­fin­ery and al­low ex­port by su­per­tanker, although noth­ing has been pro­posed.

“T he in­dustr y is well aware of the pipe­line bot­tle­necks. I think ev­ery­one is work­ing from the same playbook in terms of urg­ing gov­ern­ments to move on pipe­lines. As we get closer to higher ca­pac­ity, in­vestors start to no­tice how tight the sys­tem is,” Mr. Pot­ter said.

As the oil sands con­tinue to ap­pear on the radar of in­ter­na­tional in­ter­ests, par­tic­u­larly in Asia, an in­flux of for­eign cap­i­tal prom­ises to bankroll new projects and in­fra­struc­ture.

In the wake of the CNOOC’s (China Na­tional Off­shore Oil Corp.) $15-bil­lion takeover of Cal­gar­y­based Nexen Inc., Prime Min­is­ter Stephen Harper promised sim­i­lar deals would be “ex­tremely un­likely” to be ap­proved in the fu­ture, caus­ing wide­spread spec­u­la­tion over the role of state-owned en­ter­prise in the Cana­dian re­source sec­tor.

“We will still see the sta­te­owned en­ter­prises be­ing the ma­jor source of fi­nanc­ing. The big change with the rules is ob­vi­ously the elim­i­na­tion of the pos­si­bil­ity of an out­right M&A re­lated to oil, but we still left the door open to joint ven­tures,” Mr. Pot­ter said.

While the deal does noth­ing to di­ver­sify Cana­dian oil ex­ports, “it does send a mes­sage that Canada is look­ing be­yond the U.S., at least fi­nan­cially,” Mr. Fournier said.

Given the cli­mate of un­cer­tainty, many oil sands de­vel­op­ers are break­ing up large projects into smaller, more man­age­able stages to con­trol risk. Steam-as­sisted grav­ity drainage (SAGD) projects are cre­at­ing new op­por­tu­ni­ties for smaller play­ers in the mar­ket and al­low­ing larger firms to be­come leaner.

“If you look at the evo­lu­tion of the oil sands, in the early days ev­ery­body went and did their own thing, which led to se­vere cost in­fla­tion and se­vere labour short­ages. There is an op­por­tu­nity to achieve greater over­all success through more thought­ful devel­op­ment,” Mr. Munro said.

Ef­forts like the Cana­dian Oil­sands In­no­va­tion Al­liance and Pe­tro­leum Tech­nol­ogy Al­liance Canada are en­cour­ag­ing tech­no­log­i­cal col­lab­o­ra­tion be­tween com­peti­tors.

“I’m not aware of any other in­dus­try in the world that has moved so ag­gres­sively to share amongst all of the par­tic­i­pants to ben­e­fit the in­dus­try as a whole,” Mr. Munro said.

In 2013, it could be tech­no­log­i­cal col­lab­o­ra­tion, en­vi­ron­men­tal ini­tia­tives and care­ful rep­u­ta­tion man­age­ment that will win the hearts and minds of Cana­di­ans in po­lit­i­cally chal­leng­ing lo­ca­tions like Bri­tish Columbia. Work­ing be­yond reg­u­la­tory stan­dards of en­vi­ron­men­tal ste­ward­ship may prove to be crit­i­cal in gar­ner­ing a so­cial and po­lit­i­cal li­cence to de­velop new pipe­line in­fra­struc­ture and se­cure Canada’s po­si­tion among the world’s oil-pro­duc­ing elite.

 ?? HANDOUT / NEXEN ?? Part of the steam-as­sisted grav­ity drainage unit at Nexen’s Long Lake, Alta., up­grader. SAGD projects are cre­at­ing new op­por­tu­ni­ties
for smaller play­ers in the mar­ket and al­low­ing larger firms to be­come leaner.
HANDOUT / NEXEN Part of the steam-as­sisted grav­ity drainage unit at Nexen’s Long Lake, Alta., up­grader. SAGD projects are cre­at­ing new op­por­tu­ni­ties for smaller play­ers in the mar­ket and al­low­ing larger firms to be­come leaner.

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