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Canada’s Oil & Gas Industry: The Rise of the Oil Sands

oil sandsCanada as a source of crude has many advantages for United States industry. The countries are close geographically and like the U.S., Canada has a stable democracy with a good human rights record. Also, people in the U.S. have a favorable opinion about doing business with the Canadians—be it oil or otherwise. For example, a recent Harris poll released by the Canadian Association of Petroleum Producers (CAPP) found that people in the United States felt the U.S. should get more of its oil imports from Canada, and the U.S. government should support the use of oil from Canada’s oil sands.

 

At the same time, oil and gas are profitable industries for Canada: Nationwide, the Canadian upstream oil and gas industry is expected to generate an estimated $115 billion in annual revenue, $20 billion in royalties, land sales and taxes, and $50 billion of investment into infrastructure and jobs in 2011, according to a recent report from the Calgary-based private equity firm ARC Financial Corp.

 

RESOURCES

oil sands fig1Figure 1. Oil sands will account for an ever-greater share of Canadian oil production over the next two decades. (Source: CAPP)While Canada has both conventional oil deposits and oil sands, the balance of production is increasingly leaning toward oil sands. As Travis Davies, manager of Media & Issues for CAPP explains, conventional crude oil production is expected to “remain fairly flat over the near term” while “the lion’s share of production growth in Canada is coming from oil sands.” (His prediction is shown graphically in Figure 1, which is taken from the CAPP publication: “Crude Oil: Forecast, Markets & Pipelines.”) This represents a significant opportunity for those companies supplying to the industry. >

As Slavko Stuhec, general manager, Canada Oil & Gas, Flowserve Flow Control, points out, “The increasing global demand for oil, especially from stable regions of the world, drives continued exploration and development.”

What’s more, indicators predict the price of crude will stay high for some time. While several drops below $100 per barrel occurred this spring, Robb Sharp, Canadian sales manager for Flowserve’s Limitorque line of electric actuators, points out that such fluctuations are commonplace. His comments are backed up by Fatih Birol, chief economist at the International Energy Agency. In a April 28 interview on CNN Money’s “Strategy Sessions,” he said: “There may be zigzags up and down, but the main trend is: oil will be more and more expensive, unless the consuming countries, such as U.S. and China, find a way to use less oil, especially in the transportation sector, cars, trucks and jets. I don’t see this as happening in the next few years to come.”


GAS LAGS BEHIND

Things are not as rosy with natural gas, for the most part because the rapid growth of the U.S. shale gas industry has depressed prices. “The whole gas industry has been turned on its head in the last four or five years,” says CAPP’s Davies. As a result of this development, North America has “gone from a place of … looking at substantial amounts of liquid natural gas imports to ways to export it,” he says.

This is not to say Canada does not have plenty of gas shale of its own. Estimates of shale gas within the Western Canada Sedimentary Basin resource, for example, vary from 86 trillion cubic feet (Tcf) to over 1,000 Tcf, according to the government of Alberta. But up to now, there has been limited production of this shale with most of the activity focused on research & development.

oil sands fig2Figure 2. Canadian natural gas production is forecast to change little over the next decade. (Source: CAPP).In Canada, Davies continues, “people are having a hard time justifying spending the capital on the gas supply when there’s so much of it on the market.” With this abundant supply, the only hope for higher prices is increased demand, he says, either from higher levels of domestic consumption for electricity and fleet vehicles or from exports, particularly to Asia. In fact, the ARC financial report says that in Canada, the industry is expected to be 80% reliant on oil by 2015. Just five years ago, that mix was 55% oil/45% gas. Figure 2 shows expected changes in gas production from the available sources; note that shale does not seem to be a factor.


SOURCES OF OIL

Conventional crude oil deposits in Canada are primarily in the western provinces, the Northwest Territories and Atlantic Canada, which CAPP says contributed about 10% of Canadian production in 2009. As stated earlier, however, production from conventional sources is expected to decrease over the next few decades.

Oil sands, on the other hand, are expected to grow in production. According to “The Impacts of Canadian Oil Sands Development on the United States’ Economy” by Canadian Energy Research Institute (CERI) reserves in place in 2009 were at about 1.7 trillion barrels, with about 10% of that or 170 billion barrels (bbl) recoverable. These reserves are located almost entirely in Alberta spread out over more than 140,000 square kilometers.

Of the total Canadian crude production of 2.8 million bbl per day in 2010, 1.5 million or 54% were from oil sands, according to CAPP. By 2015 total production is expected to reach 3.3 million bbl per day, with 2.2 million or 58% from oil sands. By 2020 those numbers are expected to increase to 3.9 million bbl per day total, with 2.9 million bbl per day or 74% from oil sands, as shown in Figure 1.

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