Lingering COVID impacts ease long-term oil sands growth even as production beats pre-pandemic levels
Canadian oil sands production has fully recovered from last year's "COVID-19 Shock"—the largest contraction of upstream production in Canadian history—and has exceeded pre-pandemic levels. However, lingering COVID impacts, pipeline constraints and uncertainties related to an accelerating energy transition have reduced the longer-term growth projection for oil sands.
The latest forecast by the IHS Markit Oil Sands Dialogue expects Canadian oil sands production to reach 3.6 million barrels per day (MMbd) in 2030, an increase of 650,000 barrels per day compared to 2021 levels (900,000 b/d from 2020). The previous IHS Markit forecast expected production to reach 3.8 MMbd in 2030.
"Canadian oil sands production recovered rapidly to exceed pre-pandemic levels by the end of 2020 and the outlook for longer-term growth remains substantial," said Kevin Birn, vice president and head of Canadian oil market, IHS Markit. "Nevertheless, lingering impacts from the "COVID-19 Shock," delays to critical transportation infrastructure, and rising energy transition pressures have trimmed that growth outlook from previous estimates."
Even prior to the pandemic, IHS Markit expected the coming decade to be one of sustained-but-slower growth for the oil sands, with transportation constraints such as a lack of adequate pipeline capacity and the resulting sense of price insecurity in western Canada weighing on new large-scale incremental investments.
"Although oil prices have rebounded and even exceeded pre-pandemic levels, producers are prioritizing rebuilding their balance sheets, paying down debt and returning cash to shareholders," said Birn. "These trends, which will delay a rise in upstream spending in the oil sands, factored into the reduction in the IHS Markit long-term growth expectation."
The recent cancellation of the Keystone XL pipeline is not expected to carry an immediate impact on the latest IHS Markit outlook. However, pipelines continue to be a source of uncertainty that factors into the overall outlook. If Enbridge Line 3 and Trans Mountain pipeline, as well as other announced optimizations, are able to proceed as planned pipeline export capacity may be adequate to keep the market balance. However, in the absence of Keystone XL pipeline, there is the potential for high levels of export pipeline utilization which would leave little room to absorb any system upsets and could contribute to regional price volatility.
While the economics of existing oil sands operations will continue to prove attractive and resilient, uncertainties about the pace of energy transition and future demand factored into the new IHS Markit outlook. Although the industry has driven down the price at which new thermal oil sands projects can breakeven into a range similar to that of U.S. shale, the longer lead times and greater upfront out-of-pocket expense required to bring new oil sands projects online are likely to disincentivize new oil sands projects compared to shorter-cycle shale.
However, less emphasis on longer lead time, more capital-intensive new projects suggests that the outlook for oil sands is also increasingly resilient. More than 80% of the growth in the new IHS Markit outlook is expected to come from the ramp-up, optimization and completion of projects where some capital has already been invested. Nearly two-thirds alone is expected to come from just the ramp-up of existing operations.
IHS Markit believes there is potential for higher production principally from debottlenecking and optimization projects of existing operations. These improvements have significant advantages such as much shorter development cycles, more modest capital requirements, and can often lower operating cost while increasing output. Some possible optimizations being developed—such as the deployment of solvents that can reduce the steam intensity of thermal operations—have the potential to support higher levels of output with little to negligible levels of absolute GHG emissions.
"Still, there is also upside potential to our current outlook," said Celina Hwang, director, North American crude oil markets, IHS Markit. "The flat, no decline aspect of oil sands assets means that existing operations provide a stable platform where growth can be more readily achieved. A greater degree of project debottlenecking and optimizations than currently anticipated could provide that growth, especially since those types of improvements tend to emerge organically from learning by doing or operating."