Canadian Oil Growth at Risk of Being Stunted: Here's Why

Rimmi Singhi
The United States witnesses the lowest oil drilling rig count in the week through Jul 12 after February 2018.

In spite of the rising global oil prices and Canada's vast endowments of oil and gas resources, the oil sector of the country is likely to bear the brunt of inefficient regulations and pipeline crisis. While Canada owns the world’s third-largest crude reserves, streamlined regulatory system and energy infrastructure development are required to drive capital outlay, which would perk up the Canadian energy sector.

CAPP Issues Disappointing Capex & Output Forecasts

A recent report from Canadian Association of Petroleum Producers ("CAPP") provides a constrained outlook for Canadian oil output for the 2019-2035 time frame. Although the report forecasts Canadian oil output to grow 1.4% annually till 2035, the growth rate is less than half of what was projected by CAPP in 2014. Precisely, the Calgary-based industry body anticipates oil production in the country to rise by 1.27 million barrels a day to 5.86 million by 2035.

Capital investment for the current year in the Canadian oil sector is estimated to decline to C$37 billion from C$81 million in 2014. Notably, capital spending in oil sands is anticipated to decline for the fifth straight year in 2019, given the drilling of a fewer wells by producers.

High Costs, Pipeline Pinch & Inefficient Regulations to be Blamed

The 2014-2016 oil price crash and U.S. shale revolution hit Canada hard, quashing years of expansionary phase and a job creation wave within the country’s energy industry, especially its oil sands region. High-production costs associated with oil sands and the crude’s fall into bear market territory wreaked havoc on profit margins of most companies.

Finding development of resources too expensive, the likes of Marathon Oil Corporation MRO, Royal Dutch Shell plc RDS.A, Equinor ASA EQNR, ConocoPhillips COP et al exited Canadian oil sand deposits. These companies prefer to explore the U.S. shale plays and invest in short cycle projects, much opposed to deploying money across capital-intensive operations in Canada. All these companies carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In addition to high production costs, a major headwind for the Canadian oil industry is the lack of takeaway capacity. Pipeline construction in Canada has failed to keep pace with rising domestic oil, forcing producers to sell their products at a discounted rate. Reportedly, infrastructural bottlenecks resulted in lost revenues of C$15.8 billion in 2018.

Environmental protests are also on the rise, thereby further derailing construction. Crusaders believe that the rapidly growing movement of oil around the country is unsafe. Even though pipeline projects have been approved by countrywide review agencies, Canadian industry observers believe that it is not going to be a smooth ride.

The industry has been bogged down by various pipeline projects either getting derailed or delayed. The cancellation of major projects like TransCanada Corporation’s TRP Energy East pipeline and Enbridge’s Northern Gateway project, along with uncertainties and oppositions related to the existing ones like Trans Mountain and Keystone XL pipelines raise concerns.

Notably, prolonged delays in pipeline projects widened WTI-WCS differentials to record levels last year, prompting the Alberta government to impose production cut mandates. The production curtailment has forced a number of Canadian energy producers to trim capital expenditure budgets for 2019, as they can’t boost output growth. The pipeline shortage is increasing the dependence on railway and trucks, a highly costlier and an environmentally unsafe option for the industry, for crude transportation.

To Sum Up

Even though global oil and gas demand is fueling up, the Canadian energy sector is left on the sidelines amid unfavorable regulatory reality and pipeline crunch.

Pipelines are an integral part of the energy industry that are engaged in the transportation of oil, gas and petroleum products in an efficient manner, and help in creating additional job opportunities and a reliable fuel supply for the future. Lack of sound regulatory and environmental framework is also eroding the country’s investment climate. The country needs to bring in new pipeline projects and more efficient regulatory policies to bring investment back to the sector.

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