Production of crude from Canadian oil sands will rise by 1 million barrels per day (bbl/d) between now and 2025 despite a likely halt in construction of new projects, analytical firm IHS said in a new report.
IHS expects projects begun before oil prices started to collapse in late 2014 to be complete by 2018, with new construction discouraged by market volatility. Growth will be driven until 2020 by the ramp-up of the new facilities.
“We expect oil sands producers to focus future investments in the coming years onto their most economic projects—which we expect to be expansions of existing facilities,” said Kevin Birn, a Calgary-based IHS director who specializes in oil sands, in a statement. “Expansions of existing facilities are better understood, quicker to first oil and lower cost to construct. It is less risk at a lower cost.”
Lowest-cost oil sands projects can break even at US$50/bbl, IHS estimated in late 2015, but while the price of West Texas Intermediate has flirted with $50/bbl recently, “the pace of future recovery is likely to be more moderate than the preceding six months,” Birn wrote in a blog.
Birn attributes the easing to very high levels of oil in storage, the possibility that U.S. tight oil producers could respond to higher prices with a ramp-up of their own, and the notion that OPEC members may continue to optimize production.
Doubts about future pipeline takeaway capacity add uncertainty to price forecasting in western Canada. The permit denial by the U.S. State Department of TransCanada Corp.’s Keystone XL Pipeline last November, and substantive delays on that company’s Energy East Pipeline and Kinder Morgan Inc.’s Trans Mountain Pipeline expansion could slow the crude oil price recovery.
What plays into oil sands producers’ favor is the near-absence of production declines, a unique characteristic among both conventional and unconventional oil plays. A continuous infusion of investment is required in most plays just to keep production flat.
“In the oil sands,” Birn wrote, “the absence of production declines means that each investment in new oil production results in growth.”
That means that once the resource has been identified, the risk is significantly reduced. “While capital intensive, these projects provide diversification for operators with higher exploration or above-ground risk portfolio projects,” Peter Argiris of Wood Mackenzie wrote in a blog in October 2015.
Argiris also noted that oil sands producers tend to be large and well-capitalized, and thus better able to handle price volatility.
“We’ve seen some casualties over the past year among smaller operators that, while successful in securing capital and starting projects, were unable to remain liquid and weather the downturn in prices,” he wrote.
So growth will come, Birn believes, but it will be different from accustomed growth from shale plays because costs will be lower. It will also be more modest, hampered by price volatility and pipeline availability.
“The impact of lower prices will play out over the first half of the next decade,” he wrote, “as a long aftershock of reduced investment will slow supply additions through this period.”
Joseph Markman can be reached at jmarkman@hartenergy.com and @JHMarkman.
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