Tide turns for Canada’s oil industry, but pipeline issues a constraint

OTTAWA — Canada’s oil industry is returning to profitability as prices and production rise, but there are challenges ahead because of constrained pipeline capacity and limited capability to expand export markets. These factors are jeopardizing Canada’s competitiveness as an oil producer, says The Conference Board of Canada’s Canadian Industrial Outlook: Oil Extraction.

“New pipelines that provide access to tidewater will be crucial for Canada to develop new export markets given that Canada’s biggest export market for oil, the US, is ramping up its own production,” said Michael Burt, director, industrial economic trends for the Ottawa-based think tank.

The report notes after three years of losses, Canada’s oil industry will be back in the black, with pre-tax profits expected to hit $1.4 billion this year. Global demand for crude is estimated to remain strong, increasing at an average rate of 1.62 million barrels per day (MMb/d) in 2018, compared with 1.60 MMb/d in 2017. And companies have become more efficient, lesseninglabour requirements. The industry is expected to create just 2,150 new jobs over the next five years.

Solid economic growth is driving rising global demand for crude oil this year. The report says oil markets will remain mostly balanced, with supply projected to slightly outpace demand this year and acting as a ceiling for price increases. WTI is projected to average US$59.20 over the rest of the year. But starting in 2019, prices will rise again, along with investment and production.

Total crude production in Canada is forecast to rise by an average annual rate of 3.4% between 2018 and 2022. Most of that increase will come from the oil sands with offshore production and diluent production making up the remainder.

The report sees industry revenues increasing by about 8% this year. Costs will also rise with the need for more materials and investments to sustain operations. However, employment gains will be modest, and efficiency and cost-containment remain at the forefront of the industry’s priorities. “This should allow the industry to be profitable this year, after suffering losses for three years in a row. Industry pre-tax profits are expected to reach $1.4 billion this year,” according to a release.

The Conference Board warns bottlenecks in pipeline capacity and soaring shale oil production in the US are eroding Canadian oil producers’ competitiveness. Because pipeline capacity in Western Canada can’t keep up with growing production, more oil has to be shipped by rail at a higher cost. The resulting price differential between Canadian oil prices and other global benchmarks, is eating into Canadian oil producers’ potential profits. New pipelines will also be needed to expand into new export markets, as US oil production soars.

Click here to access the report.