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Canadian rocky road to recovery

Oil output is still ticking higher, but depressed prices and persistent pipeline problems are weighing on the industry

For an aspiring global energy superpower—in the words of its former prime minister—Canada isn't feeling particularly muscular these days.

As 2018 dawns, the country is battling a malaise of spending cuts, flagging investment, lower prices for its heavy crude and nagging delays to key infrastructure projects that will surely preclude any meaningful recovery over the next 12 to 18 months.

All leading indicators—from rig counts and drilling levels to stalled pipeline approvals—are pointing to another tough year of austerity and cutbacks as international majors continue to head for the exits, especially in the oil sands. Toss in continuing uncertainty over the fate of the North American Free Trade Agreement (Nafta) and carbon taxes and it's easy to see why Canadian oil executives have a decidedly pessimistic view of 2018.

Instead of Christmas cheer, they were handing out layoff notices. Barely a week before Christmas, on 14 December, one of Canada's largest oil sands producers, Cenovus Energy, sacked 700 full time positions or 17% of its workforce, including two senior vice-presidents.

Cenovus said the cuts were necessary to help pay for its lavish C$17.7bn ($14.26bn) acquisition of ConocoPhillips' Canadian assets last May. Indeed, Conoco joined Shell, Statoil and Total in a full-scale retreat from the oil sands in 2017. Alberta's rising cost of carbon-the province's carbon tax jumped 50% on 1 January to C$30 per tonne-hasn't helped in an already difficult investment climate.

The message is that the oil sands are no longer a surefire ticket to growth, and the era of unbridled expansion is over.

A rising tide doesn't float all boats

Although global oil prices rebounded in late 2017 to levels not seen since the 2014 crash, Canada has yet to cash in on the upturn because its brand of heavy crude trades at significant discounts to the US' WTI benchmark. Since August, the differential has more than doubled to $25 a barrel, negating any benefit of higher global crude prices. Even as WTI topped $60/b heading into 2018, benchmark Western Canadian Select (WCS) was fetching the equivalent of $35/b after factoring in currency effects—barely enough to break even for oil sands producers.

The reason is simple: too much supply chasing insufficient capacity to get it to markets in the US and abroad. Canada's politicians continue to quibble over pipeline approvals to the country's east and west coasts.

Despite receiving National Energy Board (NEB) approvals, KinderMorgan's 0.9m b/d TransMountain Expansion has yet to break ground. The project was held up after the municipality of Burnaby, a Vancouver suburb, defiantly withheld vital construction permits despite being ordered to hand them over by the national regulator.

Likewise, TransCanada's Keystone XL was dealt a huge setback on 19 December when Nebraska regulators voted by a 5-0 margin to reject the company's request to amend a route application for the 0.83m b/d conduit to the Gulf Coast. The Nebraska regulators had previously rejected the company's preferred route through the state in favour of a longer and costlier path. After seven years of delays and the prospect of continued litigation, some analysts are speculating that it will never get built despite full backing from President Donald Trump.

Even rail capacity has been insufficient to pick up the slack. There simply aren't enough rail cars to be had and the railroad companies have been slow to catch up with demand, further exacerbating price differentials.

The situation isn't likely to improve as even more oil sands barrels come online this year. Suncor Energy produced some 20,000 b/d from its newly commissioned Fort Hills mine in the fourth quarter of 2017, a figure it expects to ramp up to nearly 200,000 b/d by the end of 2018 which will undoubtedly add to a growing bubble of supply north of the 49th parallel.

Adding insult to injury

Uncertainty around Nafta renegotiations, which are set to resume in Montreal in late January, are adding to the gloom. The outcome of the sixth round of talks could make-or-break the future of the 23-year old trade pact and with it, the future of Canadian oil exports to the US.

The flow of Canadian oil isn't going to dry up anytime soon. But the conclusion of a trade deal—or lack thereof—will have huge implications for future Canadian exports to the world's largest energy market. Oil executives are less worried about the flow of crude than tightening restriction on future cross-border services and investment needed to bring those barrels to fruition.

Given that the US is poised to become the world's largest oil producer in 2018—some estimates suggest it had already topped 10m b/d by the end of 2017—there's a strong chance US negotiators might not see Nafta as being important to ensuring oil supply. That's what is keeping Canadian negotiators, and oil executives, up at night.

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