Canada more bearish than bullish

Canadian government low-balls oil sands volumes by 2020; concerned about rising consumption, increase in greenhouse gas emissions

Gary Park

For Petroleum News

In releasing the first long-term projection of energy supply and demand in Canada since 1999, the Canadian government has taken some of the steam out of forecasts for oil sands production.

Although emphasizing that its outlook is not a prediction, just “one of many possible energy outcomes for Canada,” Natural Resources Canada has suggested oil sands production will grow to 2.9 million barrels per day by 2020, well short of most forecasts by governments and industry organizations.

The Canadian Association of Petroleum Producers has set a range from 3.27 million bpd in a “constrained case” to 4 million bpd in a base, or unconstrained case.

The “constrained case” is tied to four factors — labor constraints, shortages of supplies (mainly steel), lack of pipeline capacity and insufficient refining capacity, which causes the association to lean more these days towards that forecast.

Natural Resources Canada, NRCan, whose report was based on a general consensus on economic assumptions among federal departments as well as provincial and territorial governments, pays special attention to the growing energy consumption in the oil sands sector and the prospects of a significant increase in greenhouse gas emissions.

Under the NRCan scenario, emissions would climb to 825 million metric tons (megatonnes) in 2010, 253 megatonnes above Canada’s Kyoto commitments, and grow to 897 megatonnes in 2020, with nearly 60 percent of the increase originating in the petroleum sector, largely the production and refining of bitumen.

Energy consumption by the industry, dominated by the extraction, processing and transportation of oil sands production, is forecast to account for 14 percent of Canada’s output by 2020 from 11 percent currently.

Petroleum producers’ association concerned about report

CAPP Vice President Greg Stringham told the Globe and Mail he was concerned that the gloomy report could harm Canada’s reputation in the United States as a reliable, long-term source of energy.

Because many analysts already believe Canadian natural gas production has gone into decline, the Canadian industry faces a challenging time protecting its reputation as a stable source both domestically and in the U.S., he said.

Stringham also said the industry anticipates its need for natural gas will drop as the sector switches to bitumen residues to fuel the extraction process.

NRCan estimates conventional light and heavy crude volumes will peak this year at 1.48 million bpd, then drop in Alberta at an average annual rate of 3.5 percent for light crude and 5 percent for heavy to 95,000 bpd and 220,000 bpd respectively by 2020.

Natural gas is forecast to peak at 6.6 trillion cubic feet in 2011 and shrink to 5.3 tcf by 2020, assuming that the Mackenzie Gas Project goes ahead at 1.2 billion cubic feet per day.

NRCan said Alberta, which holds 81 percent of conventional gas in the Western Canada Sedimentary basin and “almost all of the coalbed methane,” is expected to see its gas output shrink from last year’s peak of 4.9 tcf to 2.7 tcf by 2020, although coalbed methane could grow strongly to 600 billion cubic feet a year. Stringham suggests the report has underestimated the prospects for coalbed methane.

Newfoundland gas not expected to reach market before 2020

In other conclusions, NRCan says:

• Saskatchewan’s crude oil production will drop from 451,000 bpd (80 percent heavy) in 2004 to 327,000 bpd in 2020, based on an assumption that the remaining resource potential is 2.7 million barrels of heavy oil and 1.1 billion barrels of light. The province’s gas production is forecast to plummet to 70 billion cubic feet per year by 2020 from the current 261 bcf.

• British Columbia gas output will grow modestly to 1.1 tcf in 2011, then ease off to just under 1 tcf by 2020, although its share of natural production will grow to 19 percent from 15 percent. That projection is based on an ultimate gas potential of 50 tcf for B.C., but does not take into account 35 tcf of coalbed methane potential, which is scheduled to come on stream in 2007 and grow to 20 billion cubic feet in 2020.

• Offshore Newfoundland oil production is expected to drop to 134,000 bpd after 2007 from a peak of about 415,000 bpd, although NRCan is counting on the stalled Hebron/Ben Nevis development starting in 2011. Newfoundland’s several trillion cubic feet of discovered gas is not expected to reach market before 2020.

• The Sable offshore gas project in Nova Scotia should remain in the 150-210 bcf per year range through 2020.

• Crude oil prices, in 2003 dollars, are forecast to decline to US$45 per barrel by 2010 and remain constant thereafter.

Alan Greenspan not among doubters

“We in the United States trust you,” the former chairman of the U.S. Federal Reserve Board told 2,500 people who paid C$300 each to hear him in Calgary on Oct. 6.

“When you make a contract we believe it ... it doesn’t have a Russian signature on it,” he said, in a thinly veiled reference to the seizure of western assets and the cancellation of commercial deals that has occurred in Russia.

Greenspan said it was hard to emphasize the importance of that level of trust.

“When we’re locked into your crude capabilities we’re taking a huge risk, but because your signature is trustworthy we’re willing to do that,” he said.

As part of the discussion, Sherry Cooper, chief economist at investment bank BMO Nesbitt Burns, said the U.S. view of Canada as an ally should not be underrated in a world where energy is a matter of national security and Canada is among the few with the capacity to meet growing demands. Most of the others are in unstable, hostile or volatile regions, she said.

Because there are so few countries producing oil that can be trusted, Canada will “always be a very, very important economy for the United States,” Cooper said.

Greenspan said industries and consumers worldwide are paying higher oil prices because of the uncertainties created by political disruptions to crude supplies.

He said there is a “so-called terrorist premium, which is a fairly large number.”

On the pressures to reduce greenhouse gas emissions, he cautioned that imposing limits on energy consumption will reduce the standard of living.

To that end, he argued that nuclear power must be considered to fuel the development of Alberta’s oil sands to solve the “enormous” use of natural gas.

—Gary Park