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Alberta’s oil sands producers have some very ambitious output forecasts that could see them producing about a sixth of what OPEC now pumps out on a daily basis by the end of the decade. But there are some potentially nasty roadblocks that could force the Canadian producers to slash millions of barrels per day from those targets, not the least of which is transportation.
“Oil sands companies that are making big capital allocation decisions have to be that much more confident in the macro environment to hit the button,” Andrew Potter, managing director, institutional equity research at CIBC World Markets Inc., told the Financial Post.
But confidence is in short supply as events appear to have conspired against Canadian producers. The higher-cost oil sands have to compete with U.S. and Canadian tight oil for pipeline access. In addition, the dreaded double discount on Canadian crude compared with oil produced elsewhere has restrained profits and new pipeline plans are being put in question by environmentalist opposition and warring provinces.
“In a market that is oversaturated, there will no doubt be rationalization and the first projects to get squeezed will be those with higher supply costs and a riskier capital profile,” wrote Mr. Potter in a note to clients. “Unfortunately, higher-cost oil sands projects seem like the first to get rationalized.”
Production estimates vary. In its more conservative outlook, the Canadian Association of Petroleum Producers (CAPP) forecasts oil sands production will rise by 180,000 barrels per day each year to reach a total of 3.2 million bpd in 2020. The companies themselves have a more generous collective estimate of a 380,000 bpd rise every year to hit five million bpd. CIBC believes a more likely production growth estimate would be an added 270,000 bpd per year.
All of that assumes an array of planned pipelines don’t bog down in regulatory quagmires – which is crucial as Canadian bitumen, tight oil and Bakken crude jostle for increasingly scarce pipeline access.
“When plotted against planned pipeline capacity, it becomes abundantly clear that not all company planned oil sands projects can proceed,” Mr. Potter notes.
“Even if Keystone XL, TransMountain, Northern Gateway and the tentative TransCanada West Coast Line were all built, there would still not be enough pipeline capacity to handle planned growth through 2020.”
CIBC estimates suggest that producers will have to scale back production forecast anywhere between 1.7 million bpd and 2.4 million bpd if market access is restricted.
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