Canada to Watch from The Sidelines Amid ‘Extraordinary Times’ in Global Energy Markets

Source: Internet

 

Two major trends are unfolding in global oil and gas markets, but Canada seems unable to take advantage of the first one, and is already an unfortunate casualty of the other

Two major trends are unfolding in global oil and gas markets, but Canada seems unable to take advantage of the first one, and is already an unfortunate casualty of the other, says a new report.

First, the world’s energy demand will rise the equivalent of China and India’s current energy consumption over the next three decades — but Canada has limited direct conduits to connect those energy-hungry markets to its store of the world’s third-largest oil reserves.

The second development, which has already dented the Canadian oilpatch, is the rise of U.S. tight oil and gas that is taking dollars and focus away from the Western Canadian industry.

The global energy markets are in the midst of “extraordinary times”, writes Fatih Birol, executive director at the International Energy Agency in its annual World Energy Outlook, launched in Paris on Tuesday.

The benchmark report notes that with renewable energy technologies nipping at the heels of oil, natural gas and coal and a global push by policymakers to cut carbon emissions, juxtaposed with near-insatiable demand from a global population that will hit 9 billion within a few decades and the rise of the U.S. as the world’s largest oil and gas producer, the energy sector is experiencing disruptive times.

Amid these upheavals, Canada will likely remain a minor actor, its global plans dashed partially through self-restraint and rules, and also by its next-door neighbour who is upending global markets and disrupting Canada’s plans to export oil and gas in the process.

To be sure, the IEA expects Canadian oil production to rise — to 6.2 million barrels per day by 2040 from 4.5 million bpd in 2016, 100,000 bpd more than the IEA’s last report.

But that’s where the good news ends for the Canadian oilpatch. The Paris-based watchdog casts doubt over the state of the sector, especially as a number of high-profile players such as Royal Dutch Shell Plc. and Total SA have reduced their exposure to Alberta.

“While other major companies continue to maintain a presence in oil sands operations, it remains an open question whether the exit of these companies will impact prospects for oil sands development over the longer term,” the IEA said.

Two government initiatives to reduce greenhouse gas emissions, namely the carbon tax and the GHG emission limits, also “have implications for oil sands,” the IEA warns.

Elsewhere, Canadian shale gas development will be a casualty of rapidly rising U.S. production — not only delaying plans for offshore exports but even curtailing supply to its traditional market south of the border.

“The abundance of shale gas in the United States also affects the pace of shale gas development in Canada. Although Canada has potentially prolific shale gas plays … their estimated development cost is higher on average than in the Permian or the Appalachian Basin and they are further away from the demand hub,” the IEA said.

While the U.S. exported 100 billion cubic metres of Canadian gas in 2005, that figure fell by over a fifth in 2016.

“Over the same period, US gas companies ramped up their exports to Canada and Mexico, pushing net US imports of pipeline gas down to around 25 bcm in 2016, compared with 80 bcm some ten years earlier,” IEA economists said. “We project a continuation of these trends: imports from Canada keep falling…”

With the U.S. eating into Canada’s prospective market share, the IEA believes Canada’s liquefied natural gas export will likely not come to fruition until the 2030s — a decade longer than expected — even as LNG will usher in a “new global gas order”.

“Asia’s growing gas import requirements are largely met by LNG (by 2040), with exports from the US accelerating a shift towards a more flexible, liquid global market,” the IEA said.

The sliver of hope for Canadian oil producers is that the sector is not going to be displaced by renewable energies and the rise of electric vehicles any time soon.

“EVs are coming fast, but it is still too early to write the obituary for oil,” the IEA states, with global oil demand steady at 104 million bpd by 2040, compared to 94 million bpd in 2016, according to its most-likely scenario.

Global energy needs will rise more slowly than in the past but still expand by 30 per cent between today and 2040, the equivalent of adding another China and India.

Canada could still play a role as China’s long-held fears for its energy security means it would seek to diversify its sources of supply.

“Canada is well placed to export oil to China, although this is dependent on the construction of additional export capacity to bring inland production to the Pacific coast,” the IEA said.

If planned pipeline projects come to fruition, the United States and Canada combined could export more than 700,000 bpd to China by 2040 — a drop in the barrel in the country’s 15.5 million bpd demand.

The less-than-bullish forecast for Canadian oil and gas, means the IEA has cut the country’s investment spend in the country to US$1.08 trillion in 2040 (from US$1.68 trillion in its forecast last year) — part of a global cut in investment projections.

The U.S. shale surge could also mean an era of lower-for-longer oil prices.

While the IEA’s base-case scenario projects oil prices reaching US$83 per barrel by 2025 and as high as US$111 by 2040, a low oil-price scenario could see prices stuck in the US$50 to US$70s if electric passenger cars take off, U.S. tight oil production continues to rise and upstream costs decline.

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