Although Canada’s oil-sands rush came to an abrupt end with the global financial crisis and recession, the development of the industry will continue in the future, says the Centre for Global Energy Studies (CGES).
Prior to the financial crisis of 2008, Canada’s oil sands were the “hottest petroleum play on Earth”, according to the London-based energy think tank.
There was a plethora of mining, in-situ and upgrader projects operating, under construction and proposed – so much so that even Scottish Enterprise and Scottish Development International were trying to build market bridges for energy service companies in Scotland.
Before the crash, 12 new mines and expansions were in the planning or construction stage, along with 54 in-situ recovery projects and 16 upgraders (both integrated and merchant).
In 2007, almost C$17billion (£9.7billion) was invested in oil-sands projects (including sustaining capital), compared with less than C$2billion (£1.14billion) in 1998.
Based on a Lehman Brothers survey, oil-sands investments represented about 5% of total worldwide expenditures for exploration and production (E&P) in 2007.
Oil-sands projects currently have the capacity to produce almost 1.8million barrels per day of crude bitumen, with another 330,000bpd of capacity under construction.
CGES says in a major new study on this emerging Canadian boom that projects with an additional 5.2million bpd of capacity were in the pipeline.
However, recession fallout has led to some projects being withdrawn outright; construction to be suspended for projects involving 70,000bpd of capacity, and most other projects to be delayed.
“If all of these projects were eventually brought online, mining capacity would triple to 3.4million bpd of crude bitumen and in-situ capacity would more than quadruple, to 3.9million bpd,” says CGES.
The think tank has mapped out two scenarios in a bid to determine which way the Canadian oil-sands business might develop in the next decade or so.
In a “Love Thy Neighbour” scenario, relatively high crude oil prices following the credit crunch would allow the near tripling of oil-sands production between 2008 and 2020 despite supply costs being quite high due to strong global and Alberta economic growth and rising environmental mitigation costs.
However, production would rise at a more moderate pace under the “Beggar Thy Neighbour” model due to relatively low crude oil prices – perhaps leading to a doubling of oil-sands production.
“This is supported by projects under construction prior to the global recession; substantially lower supply costs due to moderate global and Alberta economic growth thereafter, and gradually rising oil prices,” says CGES.
The think tank researchers note that, in both scenarios, operators of proposed oil-sands projects show a strong preference for having their new bitumen production upgraded “downstream” of Alberta, partly due to substantially lower costs for out-of-province upgrading, especially when associated with established refineries.
Naturally, the Alberta government would prefer the new bitumen production be upgraded within the province to increase economic activity and employment and boost royalty and tax revenue, especially given rapidly declining natural-gas revenue due to lower prices and declining production.
Under Love Thy Neighbour, CGES suggests that the Alberta government has the option to legislate new oil-sands projects to upgrade 100% of their bitumen within the province because relatively wide quality differentials make in-province upgrading economic – but not as profitable as downstream upgrading.
This is not an option for the Alberta government in Beggar Thy Neighbour, despite being in greater financial straits, because in-province upgrading is uneconomic due to relatively narrow quality differentials through 2020.
As a result, 82% of new bitumen production is upgraded into synthetic crude oil in Alberta in Love Thy Neighbour, but only 44% in Beggar Thy Neighbour.
Interestingly, in Love Thy Neighbour, the main market for incremental oil-sands supply through 2020 is not the neighbouring US, but north-east Asia, because its refineries tend to be configured to process lighter grades of crude oil.
“The benign geopolitical environment in this scenario makes this politically palatable to the American government,” says CGES.
“Market diversification allows oil-sands producers to obtain relatively high netbacks and to hedge against discriminatory environmental laws being adopted in the US, such as the spread of California’s low-carbon fuel standard (LCFS) to other states.
“In Beggar Thy Neighbour, the main market for incremental oil-sands supply is the US, primarily because of strategic deals between oil-sands producers and refiners (in the eastern part of PADD II district) to re-tool refineries to process additional volumes of bitumen blends.
“Security of supply concerns in this geopolitically charged scenario support the sale of oil sands to the US.”
The long and the short of this highly detailed piece of CGES research is that a substantial oil-sands industry continues to develop in Canada – one that Scottish companies ignore at their peril.