Tide is turning on Canada's oil industry, but…
With oil prices and production both on the rise, Canada’s oil industry is expected to return to profitability – but constrained pipeline capacity and limited capability to expand export markets are jeopardizing Canada’s competitiveness as an oil producer, according to The Conference Board of Canada’s Canadian Industrial Outlook: Oil Extraction.
“The industry has managed to turn the tide on the downturn it has been experiencing since 2014, but the landscape is changing rapidly,” said Michael Burt, Director, Industrial Economic Trends, The Conference Board of Canada. “New pipelines that provide access to tidewater will be crucial for Canada to develop new export markets given that Canada’sbiggest export market for oil, the United States, is ramping up its own production.”
• Following three years of losses, Canada’s oil industry will be back in the black, with pre-tax profits are expected to reach $1.4 billion this year;
• Global demand for crude is estimated to remain strong, increasing at an average rate of 1.62 million barrels per day (MMb/d) in 2018, compared with 1.60 MMb/d in 2017; and
• Canada’s oil companies have become more efficient and labour requirements have weakened. The industry is expected to create just 2,150 new jobs over the next five years.
Backed by solid economic growth, global demand for crude oil is projected to increase this year. Oil markets will remain mostly balanced, with supply projected to slightly outpace demand this year and acting as a ceiling for price increases.
The report forecasts WTI to average US$59.20 over the rest of the year. Starting in 2019, however, prices are projected to rise again, along with investment and production.
Total crude production in Canada is forecast to rise by an average annual rate of 3.4 per cent between 2018 and 2022. The vast majority of that increase will come from the oil sands, while offshore production and diluent production will make up the remainder.
With prices and production both on the rise, industry revenues are forecast to increase by about 8 per cent in 2018. Costs will inevitably rise, as firms will require more materials and investments to sustain operations.
However, employment gains will be modest, and efficiency and cost-containment remain at the forefront of the industry’s priorities. This should allow the industry to be profitable this year, after suffering losses for three years in a row. Industry pre-tax profits are expected to reach $1.4 billion this year.
But bottlenecks in pipeline capacity and soaring shale oil production in the U.S. are eroding Canadian oil producers’ competitiveness. As pipeline capacity in Western Canada cannot keep up with growing production, more oil has to be shipped by rail at a higher cost.
This causes a price differential between Canadian oil prices and other global benchmarks, resulting in foregone profits for Canadian oil producers. Canada will also need to rely on new pipelines to expand into new export markets, which might soon become crucial given soaring U.S. oil production.
Total crude production in the U.S. hit 10 MMb/d in November 2017 and is forecast to surpass 11 MMb/d sometime in 2018, making it the largest oil producer in the world. This has a series of implications for Canada.
In the short run, an increased oil supply dampens the prospects for oil price growth. Canada is also competing with the U.S. for investment capital and limited pipeline capacity.
In the long run, the U.S. will likely be less dependent on oil imports.
(Conference Board of Canada)