Canadian oil production is projected to surge over the next five years

Michael Babad

The Globe and Mail

Published Tuesday, May. 14 2013, 7:30 AM EDT

Last updated Tuesday, May. 14 2013, 10:38 AM EDT

Oil supply to climb Canadian oil production is projected to surge over the next five years, but with some bumps along the way, part of what the International Energy Agency calls a “supply shock” from the North American boom.

However, the Paris-based group warns today that oil sands production will be greater than current pipeline capacity can handle in the medium term, and that the discount on western Canadian oil will probably delay “incremental volumes” if it keeps up.

The report from the IEA, a forecast through to 2018, comes amid the controversy over “dirty oil,” trade negotiations with the European Union and severe pipeline constraints that have played a role in the hefty discount on Canadian oil to other world benchmarks.

Over all, the “supply shock created by a surge in North American oil production will be as transformative to the market over the next five years was the rise of Chinese demand over the last 15,” the group says in its accompanying statement, referring to both the oil sands and the projected increase from U.S. shale.

“Following several years of stronger-than-expected North American supply growth, the shockwaves of rising United States (U.S.) shale gas and light tight oil (LTO) and Canadian oil sands production are reaching virtually all recesses of the global oil market,” the IEA says in the medium-term market report.

“This North American supply revolution is not happening in a vacuum. Sustained high oil prices helped unleash it.”

The IEA projects oil sands projection to increase by 1.3 million barrels a day by 2018, raising production of total Canadian liquids to 5 million barrels a day in 2018, from 3.7 million now.

The increase in output will be limited in 2014 and 2015 given pipeline constraints, it adds, but “growth rates should subsequently pick up.”

It notes the contribution of Imperial Oil Ltd.’s Kearl project, and Suncor Energy Inc.’s Fort Hills operation.

“For oil sands production in particular, production growth is centred largely in the in situ production of bitumen, though mined bitumen production from the first and second phases of Imperials Kearl project, as well as Suncor’s Fort Hills, is also a component,” the IEA says.

“The economics of upgrading mined bitumen for production of light synthetic crude oil are challenged in light of the large volumes of incremental output occurring in the U.S.”

The discount on Western Canadian Select to other West Texas Intermediate and Brent is a trouble spot, one caused by the U.S. boom and the pipeline troubles.

TransCanada Corp.’s controversial Keystone XL pipeline to the Gulf Coast, for example, has been held up by environmental concerns in the United States and is still awaiting approval.

“Whether or not the trans-border portion of the Keystone XL pipeline is approved will affect this discount and clearly the impetus for government is there as the discount of Western Canadian Select (WCS) to other oil benchmarks reduces Alberta and Canadian government revenues,” the IEA says, notably amid an aggressive push by Canadian officials to get Keystone approved.

“Higher-cost-rail transport is an alternative option but would likely eat into producer margins, and thus might slow projects.”

Canadian oil production is projected to surge over the next five years Economic Development Oil & Gas  Saskatchewan Oil Pipelines   via Prosperity Saskatchewan

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