Is a Canadian Redemption Possible ?

Source: http://torontopubliclibrary.typepad.com/trl/2015/02/a-red-maple-leaf-against-a-blue-sky-a-quintessential-canadian-symbol-and-one-recognized-throughout-the-world-even-the-leas.html

The Canadian oil reserves currently total 172 billion barrels. These numbers render Canada only second to Saudi Arabia and Venezuela in terms of recoverable hydrocarbon. Yet, ironically, most of the hydrocarbon is in the convoluted form of oil sands. Oil sands, contrary to conventional hydrocarbons, occur near the surface; the increased exposure jettisons the volatile matter leaving viscous bitumen present in mostly unconsolidated matrix. The technological developments over the past two decades prompted oil to be viably recoverable on a grander scale. The challenges faced by the Canadian oil industry have to be dealt with fast if it desires to maintain its secure position as an energy superpower.

Most of the oil reserves in Canada lie within Alberta and Saskatchewan, in the Athabasca basin and the Peace River basin. Most of the petroleum content present in the oil sands needs to be extracted in-situ. Although oil sands are also mined for upgrading, the reservoir volume suitable for this technique constitutes less than 20 percent of the entire oil reserves.

The recent feud with Saudi Arabia over alleged undue interference in internal matters has ceased any and all trade between the two countries. Canada imported around 100,000 barrels of Saudi oil per day. Experts say that Canada will not face much problem substituting the Saudi oil for US oil. The oil bound for Newfoundland will now make its way over to New Jersey. Since the 100,000 is just a tiny fraction compared to the 3 million barrels Canada currently exports to its southern neighbour, the US will not hesitate to fill the supply gap left by the Saudis.

A major problem the players in the industry have to face is the persistent pipeline constraint. The oil produced in Canada doesn't always have robust and reliable means of transport. The proposed and projected pipelines are either cancelled due to public outcry over environmental concerns, or involved in heavy litigation. Oil transported by rail and by road inevitably proves to be risky and expensive, and as a result is not endeavoured. The Trans-mountain expansion project—if pursued—would increase the current Trans-mountain capacity up to three folds. This would prove to be a great boon for the oil companies, because Canada’s west coast is a geographical bonanza for oil transportation. The Asian market is and will always be a intensely competitive, nevertheless, a very lucrative venture for oil and gas producers.

Oil transportation south to the United States faces a similar predicament. Although the Obama administration rejected the proposal for the Keystone XL project—citing environmental concerns and possible indigenous rights violation—one of first moves the Trump administration made after taking over office was to sign an executive order to authorise construction of the major pipeline route through Saskatchewan onto Montana. Most of the opposition towards developing and enhancing oil transport infrastructure has come from the ominous environmental destruction capacity these ventures pose. The Canadian government, then, is facing and arduous challenge: to simultaneously mitigate the risks while continuing the fast paced work on the much needed midstream infrastructure.

Although the US and Canada have mutually benefited from free trade since the 70’s, for the petroleum industry, this agreement appears to be damagingly unilateral. According to the North American Free Trade Agreement (NAFTA), 75% of all crude oil products and 80% of all by-products manufactured in Canada have to be traded with the Americans. Moreover, the precarious situation of the oil transport infrastructure in Canada, gives Canadian oil producers the 30% discounted price—West Canadian Select—as compared to the standard West Texas Intermediate. The financially discouraging situation has worried the already skeptical investors, who would prefer not to sink money in a high risk low return enterprise.

If built, the pipelines would attenuate the the gap between WCS and WTI to provide more of the profit’s share to the Canadians. Furthermore, increased capacity of transport would also unlock various new areas of possible petroleum trade, specifically China, Japan andSouth Korea. Considering the active sanctions imposed on Iran, along with production outages in Libya and Venezuela, there is an indisputable supply gap to be filled in the international market. The prolific technological research and a spike in global oil prices have instigated domestic Canadian producers to lock horns with international oil producers. There has been an irrefutable surge in optimism regarding the future of petroleum in Canada; among other aspects, increased exploration and production activity elicited a 0.5% increase in Canadian GDP over the month of May. Over the same period of time, oil and gas contributed to the Canadian GDP more than banking and insurance sectors. Though these facts and figures prove to be a sure sign of the petroleum industry re-emergence, investors are still very cautious and pessimistic owing to to feeble and precarious precedences. Clearly the Canadian petroleum industry is making an impressive comeback, but it will take a lot more confidence for the investors to capitalise any time soon.