This week the Canada Energy Regulator released its Canada’s Energy Futures 2020 report. Some oil and gas industry detractors are using its scenario projections to promote the narrative that Canada does not need to build all three major oil pipelines that are currently under construction: the Trans Mountain expansion, the Line 3 Replacement Project, and Keystone XL.
The assertion that the new capacity, particularly from TMX and Keystone XL, is an over-build and will not be filled — which the CER did not make — is flawed and misleading.
The CER report says that “major crude oil pipeline projects under construction will be able to accommodate all future production growth in both the Evolving and Reference scenarios.”
In other words, it doesn’t say that Line 3, TMX and Keystone XL are not needed. It says that under its two production scenarios, new pipelines beyond those three may not be necessary.
It’s important to note that the CER says its projections are not a forecast — they are a baseline for discussion “and do not represent the CER’s predictions of what will take place.”
Here’s where those who extrapolated from CER’s work to claim that pipelines currently under construction are not needed are wrong.
Fact: There is substantially more opportunity for Canadian oil production to grow
Future outlooks for Canadian oil production growth are often coloured by the experience of recent years, where oil sands capital spending has decreased dramatically — from $34 billion in 2014 to $9 billion in 2019 — because without new pipeline capacity, producers have for the most part been without an outlet for growth.
The pipelines under construction do two things: 1) provide market access for existing production that was either shut-in by mandatory curtailment or being transported by rail, which is more costly and less safe than pipelines, and 2) allow for new market access and potential growth.
The CER projects that oil sands production will grow in both of its scenarios. In the reference case, production increases from 3.1 million barrels per day in 2019 to about 4.3 million barrels per day in 2050, or a growth of about 1.2 million barrels per day. The “evolving energy system” scenario projects oil sands increasing to 3.7 million barrels per day in 2050, or growth of about 0.6 million barrels per day.
There is substantially more opportunity for oil sands growth than either scenario projects, and filling TMX, Line 3 and Keystone XL is unlikely to be a challenge. Consider that right now, oil sands producers have regulatory approval in hand for approximately 2.7 million barrels per day of additional capacity, according to Daily Oil Bulletin records.
With the right market conditions, Canadian oil producers are ready to grow. Prior to COVID, with the positive momentum on pipelines, the Canadian Association of Petroleum Producers reported its expectations for the first annual increase in oil sands capital spending in five years.
Fact: There is strong demand pull for Canadian oil in pipeline markets
Fundamentally, pipeline projects are designed to connect supply with demand. TMX, Line 3 and Keystone XL serve different markets, all of which are hungry for more Canadian oil.
Line 3: The Line 3 Replacement project will service the U.S. Midwest, which has long been the main market for Canadian oil. US Midwest demand continues to grow. According to the US Energy Information Administration, December 2019 set a new record for Canadian oil imports to the region, at 2.8 million barrels per day.
TMX: The Trans Mountain expansion provides Canadian oil producers with optionality. Ships on water allow producers to choose where to send sales volumes based on the most competitive buyer at the time.
There is strong global demand for Canadian heavy oil. Consider for example the recent announcement that Indian oil refiner Reliance Industries will purchase two million barrels per month of Canadian oil sands crude, and that Repsol, Spain’s largest oil company, is in talks to do the same.
KXL: As critical as the Keystone XL pipeline is to Canadian oil producers to help increase export capacity, it may be even more critical for US refiners facing dwindling and unreliable supply from other jurisdictions.
The end-point of Keystone XL, the US Gulf Coast, is the world’s largest heavy oil processing cluster, and Canada is the world’s largest producer of heavy oil. The traditional heavy oil suppliers to the US Gulf Coast, Mexico and Venezuela, have seen declining heavy oil volumes in recent years, increasing the demand draw for heavy oil from Canada.
US Gulf Coast imports of Canadian oil increased from approximately 82,000 barrels per day in 2006 to 790,000 barrels per day in 2019, according to the CER. The highest level to-date was achieved just before COVID in January 2020, at approximately 980,000 barrels per day.
More broadly, global oil demand is expected to continue rising over the next two decades. The International Energy Agency’s base case forecast sees global oil demand increasing from 97.9 million barrels per day in 2019 to 104.1 million barrels per day in 2040, while OPEC’s forecast projects that demand will increase to 109.1 million barrels per day in 2045. This is primarily driven by economic growth in India and China, and increased demand for petrochemical products.
TMX will help Canadian oil producers fill this demand, instead of ceding market share to oil-producing jurisdictions like Russia and the OPEC countries that are not as transparent or focused on environmental, social and governance (ESG) performance.
Fact: Technology development could substantially bring down oil sands GHGs
The CER notes that over its projection period to 2050 it is likely that developments beyond normal expectations will occur, including technological breakthroughs that are not accounted for in its report.
Technology is key to the balancing act between oil sands growth and GHGs, which must stay within the boundaries of Alberta’s 100-megatonne oil sands emissions cap.
BMO reports that oil sands projects have decreased GHG intensity on average by approximately 24 per cent since 2012, and now emit just 4 to 6 per cent more than the global average, from production to end use. Several oil sands projects already have below-average carbon footprints in North America, according to BMO analysts.
Canada’s Oil Sands Innovation Alliance says that efforts are continuing to reduce GHG intensity further, on the path to absolute emissions reductions.