For more than 60 years, Canada’s oil and gas business has been inextricably linked to energy demand in the United States. As a result, Canada has traditionally had only one market for oil and gas—our neighbours to the south, the U.S.
In recent years, technology enhancements have led to a development of Canada’s oil and gas resources not previously thought possible, which means that our capacity to produce oil and gas may soon surpass our ability to transport these products into the U.S.
Today, the U.S. imports more oil from Canada than from any other country. However, demand in the U.S. has reached a plateau, if not declining. As their supply of local oil and natural gas continues to increase, and pipeline and oil processing capacity in key markets—such as PADD II Midwest—is becoming limited, it’s apparent that Canada needs to find other markets for both oil and gas.
While PADD III U.S. Gulf Coast can process our wealth of oil sands, without a dedicated, cost-effective transport system, we can’t get the raw materials there for processing.
It’s the emerging markets such as Asia—and China in particular, where approximately 2% of our oil is currently shipped—that we find the demand is growing, and the increasing supply in North America can fuel that demand. One of the challenges we face, however, is the need to get our crude oil and gas to tidewater in order to export it, otherwise we risk a stranded asset and a huge loss of revenue.
The Challenge for Oil
Presently, with the demand in the U.S. flattening, Canada is at or near pipeline and processing capacity for present exports with no infrastructure for increased Canadian oil production to the south, west or east. A number of factors pose likely or imminent challenges to the Canadian oil industry, including the current inability to obtain market prices; decreased demand for Canadian oil due to increased U.S. production; environmental opposition along proposed pipeline routes to the west and south; and the resistance of the British Columbia government toward planned oil routes.
Canada presently provides 24% of the U.S. import oil needs—greater than any other single provider. While U.S. production continues to increase, and annual forecasts for imported oil have declined, the expectation is that U.S. imports from Canada will remain steady. Other countries that provide oil to the U.S. may be even less fortunate as U.S. refineries will continue to have a strong appetite for the cheaper oil being shipped from Canada.
Canadian oil is largely landlocked, requiring reliable transportation systems to export both to the U.S. and further abroad. The realization of the proposed TransCanada Keystone XL pipeline to the south and the Enbridge Gateway to the western coast, offer the most cost-effective and expedited means of distribution to foreign interests. However, forecasts indicate that even if both the Keystone XL and Gateway pipelines were completed, demand would surpass distribution capabilities by 2030.
Canada’s two railroads have long suggested an alternative to pipeline distribution that has been quietly gaining in popularity. The use of rail to transport across Canada doesn’t preclude the use of pipelines but instead compliments them. The infrastructure west, east and south is already in place; capital cost is far lower and is scalable; and pure batches of the same quality could all be shipped simultaneously.
Current constraints to this proposal are linked to infrastructure—namely, railcar availability and the lack of on/off loading facilities. And though producers would pay for capacity used, the cost per barrel is noticeably higher than pipeline distribution.
The Challenge for Gas
Like the oil industry, Canadian natural gas has seen a decrease in U.S. demand for gas imports amid an increase in local U.S. production. Depressed natural gas prices in an integrated market, capital requirements for unconventional gas drilling and a variety of other factors—from having no current means to export natural gas offshore, to lack of capital required to build liquid natural gas (LNG) facilities, to shale gas depletion curves and natural gas exports from the U.S. into eastern Canada—may prove challenging.
Worldwide demand for natural gas is on the rise: 81% of the forecasted growth is expected to come from non-OECD (Organization for Economic Co-operation and Development) countries like India and China, with growth rates of 400% in China. However, forecasts from the 2012 U.S. Energy Administration’s Annual Energy Outlook suggests that Canadian gas exports into the U.S. will continue to decline between now and 2035.
Just as global demand for LNG continues to increase, so does global supply, with projected exports post-2015 coming from Equatorial Guinea, Australia, Indonesia, Russia, Canada and possibly the United States. With greater competition in the global export market, demand for Canada’s LNG is at risk of decreasing. Australia in particular poses a potential and significant challenge with dramatic increases forecast in their production of LNG well before Canadian companies can get their gas liquefied. And Australia will likely be able to lock in LNG customer prices because they’ll be first to the market.
Presently, operating LNG tankers worldwide consists of 372 vessels. Of these, 90% are fixed on a long term charter, making it difficult for new producers to gain access in the short and medium term. Of the ships currently being built, nearly all will serve the burgeoning Australian production whereas the ships that would be required for Canadian LNG production have yet to be ordered, or yard space booked to construct them.
In addition to transport concerns, shale gas depletions pose a potential challenge. According to recent reports, gas rates drop significantly after the first 100 days of production, accounting for more than 65% depletion within the first year, highlighting the need for efficient and effective extraction methods.
While Canada faces energy export challenges related to infrastructure and diminishing U.S. demand, we have a significant opportunity to capitalize on the many advantages offered by a country with abundant resources that exceed our in-country demand—a counrty with a reputation as a safe place for international investment; a country that is financially stable and open for business; a country known for its technological oil and gas innovation; a country that holds more than 50% of the world’s available oil, if we exclude oil control by national oil companies. These are just some of the reasons many foreign companies are pouring money into the Canadian energy industry. Now is the time to build this industry and tap into the growing world demand in countries such as China, India, Japan and others, and to achieve a global price for our resources. Every day that our infrastructure issues are not resolved, we lose out as a nation.