Canada’s Finance Minister Joe Oliver was in a downbeat mood Jan. 16 in delivering his government’s well-worn refrain that Western Canada’s crude producers desperately need to diversify outlets for their landlocked production.
But his speech coincided with the introduction of a pair of Enbridge pipelines in the U.S. Midwest and South that will plug most of the gap that Keystone XL was supposed to fill, while making an end-run around the White House.
Because the lines draw crude from Enbridge’s existing array of pipelines that cross the international border they do not require the Presidential Permit that has stalled XL.
Many of those around Oliver were deriving their first hope in a long time and realizing that not all is lost in the XL quagmire, with the Flanagan South and Seaway Twin links representing what was described as the industry’s “first large-volume, full-path solution” for shipping heavy crude and possibly picking up some Bakken crude in the process to reach the Gulf Coast refining region with its heavy oil refining capacity.
However, Oliver almost appeared to be operating in a vacuum when he told an industry luncheon in Calgary that “without improved access to global markets, Canadian crude prices will continue to be both lower and more volatile than those prevailing globally, translating into heightened uncertainty and poor economic growth.”
“The differential which Canadian oil and natural gas generate versus the world price represents an annual drain on our economy of tens of billions of dollars. If we do not access new markets, our resources will be stranded and a huge opportunity will be lost,” Oliver continued.
“More than that, the Canadian economy will suffer a major decline, which will affect every region in the country from coast to coast. It would be foolhardy in the extreme for us to sit on the sidelines and watch our neighbor (the United States) prosper while we settle for mediocrity and decline.”
Those were the words of a man who is now wrestling with Canada’s economic outlook amid the deepest uncertainty in many years in crude markets that have forced him to delay release of his 2015-16 budget at least one month to April.
Oliver’s somewhat troubled mood was exacerbated with the release of a 2015 forecast by the International Energy Agency which included Canada among those countries that will lead the decline in production growth.
The IEA expects Canadian output will reach 4.3 million barrels per day this year, about 95,000 bpd below the previous month’s forecast.
Rickford more optimistic
But Oliver didn’t show any signs that he is operating on the same wavelength as his colleague, Natural Resources Minister Greg Rickford, who said on a conference call from Texas that although production “will be scaled back somewhat” it is expected to rise “slightly at least through this year.”
Rickford delivered his view in Freeport, Texas, where he celebrated the opening of Flanagan South from Pontiac, Illinois, to Cushing, Oklahoma, and Seaway Twin from Cushing to the Houston area.
He found great comfort in the fact that the new pipelines will double crude shipments from Western Canada to the Gulf Coast by more than 400,000 bpd this year, and that the new Seaway system is designed to provide peak capacity of 850,000 bpd, surpassing the planned XL volumes.
Even better for Enbridge, the company’s various market access initiatives will open up 1.7 million bpd of new refining markets.
An energy partnership
“Marrying up Canadian crude with U.S. refining capability is a true continental strategy and a competitive advantage for North America,” Enbridge Chief Executive Officer Al Monaco told reporters in Freeport.
“In the bigger picture, Canadian crude in the Gulf Coast will support energy security on this continent,” he said.
“Access to the best markets. Efficient, safe and reliable transportation. Energy security. These factors were always important, but are even more so given the current oil-price environment and the geopolitical risks we face,” said Monaco.
He said the “linchpin for (Enbridge’s) market access strategy” is the prospect of Canadian heavy crude, which trades at a discount to U.S. light, competing against “waterborne imports” to the Gulf Coast.
Alberta Premier Jim Prentice, who was among those at the opening ceremony, said completion of the two pipelines “creates the first large-volume, direct link of Canadian crude to the U.S. Gulf Coast, where North America’s largest concentration of heavy oil refineries is located.”
“The pipeline network will provide jobs, economic growth and energy security to North America. It is another important link in the world’s most successful energy partnership and increased energy trade will benefit Canadians and Americans alike,” he said, in what was likely a tune-up of the message he will attempt to deliver in Washington, D.C., in February.
Rickford said the U.S. will remain an important customer for Canada’s oil, even as it develops huge volumes of crude in North Dakota and Texas.
But he said Canada is eager to exploit other opportunities in Europe and the Asia-Pacific region, the home bases for many companies that have “invested heavily” in Canada’s energy sector, notably the oil sands, attracted by resources and political and economic stability.
Oliver offered a less rosy assessment, warning that the “vast amounts” of shale oil and gas discovered in the Bakken, Eagle Ford and Permian Basin plays could mean the United States “will need us less and less.”
Driven by economics
In a new report, Calgary-based investment banker Peters & Co. said the incremental barrel of new crude production over the past few years has come mostly from the Alberta oil sands and the three big U.S. resource plays, none of which is in a position to reverse production growth.
“In the United States, it will take some time before sufficient drilling activity is curtailed and in Canada we estimate that production growth from the oil sands will average about 300,000 bpd over the next two years.”
The report said economics require a drop in production, noting that while West Texas Intermediate at US$60 a barrel is the theoretical breakeven point for many plays, prices in the $70 to $80 range are realistically essential to give companies a reasonable return and help finance activity.
WTI prices of $54 to $60 mean many producers in the United States and Canada will face rising debt levels, resulting in further cuts to capital spending and dividends across the sector, the report said.
Peters said it will “take at least a few months to work through storage gluts in North America and elsewhere and for declines from unconventional plays to become more evident,” posing a key question about the timing of a price rebound.
Scotiabank commodities analyst Patricia Mohr said it will take a sharp slowdown of about 30 percent to level out production, suggesting that is “not inconceivable” given what occurred in 2008.
Mohr said oil prices could start to turn around in the second quarter because current prices do not cover the cost of production.
