Canadian oil sands regain financial favor

Emerge from behind fading shale shadow to find place on buy lists; Trudeau changes to clean fuel standard could aid heavy oil

Gary Park

for Petroleum News

As the United States turns its back on the shale industry that propelled the U.S. into the ranks of the world’s biggest producers of oil and gas, the Canadian oil sands are emerging from the shale shadow, bolstered by upbeat outlooks from Wall Street equity analysts.

Depressed for years by high production costs and beaten up by environmental critics, most of the big oil sands players are suddenly on the buy lists of firms such as Morgan Stanley and Goldman Sachs. Adding to that positive note, the top bitumen producers, Suncor Energy, Canadian Natural Resources, MEG Energy and Imperial Oil, have forecast higher output in 2021.

Prime Minister Justin Trudeau’s decision in early December to narrow the scope of Canada’s Clean Fuel Standard by including liquid fossil fuel but leaving out solid and gaseous fuels is also seen as an encouraging prod for the Canadian heavy crude sector.

The eight largest oil sands producers by market value posted a combined free cash flow of C$1.4 billion in last year’s third quarter compared with C$163.7 million from the top eight U.S. exploration and production companies, based on data assembled by Bloomberg.

In addition, BMO Capital Markets forecasts that exports of Mexico’s Mayan heavy crude to the U.S. will decline by 70% over the next three years, narrowing the price gap of Western Canadian Select (the oil sands benchmark) and West Texas Intermediate to US$5-$7 a barrel this year from about US$12 a barrel in late 2020 and recent record spreads of up to US$30.

Goldman Sachs said demand for WCS climbed after OPEC countries cut output of their heavier, higher-sulfur grades, extending another helping hand to Canadian bitumen.

But it’s not all plain sailing for the oil sands, which face a continued and expanded buffeting from banks and investors which shunned the sector because of concerns over high carbon emissions.

Even there, however, some help is on the way according to a study by researchers at the University of Calgary, University of Toronto and Stanford University which says new techniques for producing bitumen from steam-based oil sands plants can reduce per-barrel carbon emissions by 14% to 19%.

The study was funded by Innovates and Emissions Reduction Alberta, two provincial government agencies, said oil sands greenhouse gas emissions are already 35% lower than previously reported, moving the sector down the road to its widely-held destination of net-zero emissions by 2050, or earlier.