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Defying the gloom

Canada’s oil sector is suffering, but output is still going to rise this year

CANADIAN oil output will be in a holding pattern in 2016. Next year, output will rise dramatically as new oil sands projects come on line, but what’s clear is that for now production isn’t about to slump. The only real question is by how much it will increase, if at all.

Depending on whose numbers you choose to accept, Canada this year could see a 100,000 barrel-a-day bump or a 30,000 b/d dip from a baseline of about 3.8m b/d, including condensates.

The National Energy Board (NEB), a government body, predicts overall output will top a record 4.05m b/d this time next year from 3.87m b/d in January and 3.9m b/d in June. Canadian oil production is heavily affected by seasonal variables such as weather and winter months tend to be the most active in terms of drilling and activity.

Output typically falls off in the spring as companies perform maintenance before ramping back up in the autumn. The NEB numbers include 170,000 b/d of pentanes plus, a form of NGL used to dilute raw oil sands bitumen and bring it up to pipeline specifications. A robust internal market for the product prevails in western Canada, especially in the oil sands regions of northeastern Alberta and Saskatchewan.

By stark contrast, the International Energy Agency (IEA) forecasts output will rise to 4.3m b/d this year – at the very top end of general consensus. The discrepancy comes down to specific product streams and prices.

Heavy oil will be fairly level. Although it fetches the lowest price – sometimes trading for just 50% of WTI – it’s also the lowest cost and hardest to turn off. Canadian companies such as Meg Energy, a thermal oil sands producer, have reported Q4 production costs below C$9 ($6.44) a barrel, which are among the lowest in the industry.

Mined oil sands is even harder to turn around, owing to huge fixed costs and the longer lifespan of the resource. Imperial Oil’s Kearl mine continues to ramp up on time and budget, and should add another 110,000 b/d of unupgraded bitumen, assuming no mechanical failures. The next big jump in oil sands won’t come until 2017 with the commissioning of the Suncor-Total Fort Hills project and the Canadian Natural Resources Horizon expansion, which should add another 350,000 b/d.

Conventional light oil output, by contrast, will fall off the table. Although it fetches a higher price, it is the easiest to shut in. Output depends on rig counts and drilling is down some 60%. This is sure to have an impact on final numbers. Energy consultancy Wood Mackenzie says 2.2m b/d of Canadian production is out of the money at $35/b (Brent), and the bulk is conventional wells. The NEB expects conventional output will fall this year to 0.82m b/d from 0.86m b/d at the start of the year (and more than 1m b/d two years ago).

Wood Mackenzie says conventional drillers have already shut in about 30,000 b/d of output this year.

All told, we estimate production will hold roughly flat this year, starting with the 3.89m b/d achieved at the end of 2015 and rising modestly to 3.9m b/d in the middle of the year. Without a price recovery to at least $40/b, production is unlikely to best 4.0m b/d at end-2016. The bigger jumps in Canadian supply will follow in 2017.

This article is part of an in-depth series on regional production forecasts. Next article: Flatlining in the FSU.

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