A Resource Giant Suffers Energy Anxiety

By Ari Charney • December 4, 2012 • Canadian Edge Weekly

From the perspective of many US investors, Canada is a resource giant whose commodities are crucial in an era of heightened energy demand and tight supply. But now that the US is rapidly developing its prolific shale plays, the Canadian energy industry is starting to suffer insecurity from its dependence on the US as its primary market for energy exports.

With an estimated 10.6 percent of global oil reserves and a nation of just 35 million, Canada’s domestic consumption alone is not sufficient to support its energy industry’s increasing production. Canada produces roughly 3.5 million barrels per day (MMbpd) of crude oil, but consumes just 2.3 MMbpd. Meanwhile, the US consumes 18.7 MMbpd, but produces just 8.1 MMbpd.

As such, the US is heavily dependent upon imports of crude oil, and about 25 percent of those imports come from Canada, which makes it the largest supplier of foreign oil to the US.

The Great White North also supplied about 13 percent of US natural gas demand last year. But with the abundance of natural gas from its shale plays, US demand for Canadian gas has rapidly declined. Imports of natural gas from Canada peaked at 10.4 billion cubic feet per day (Bcf/d) in 2007 and have since fallen to 8.5 Bcf/d in 2011. And some in the industry worry that these numbers will inexorably slide toward zero.

However, US natural gas inventories have fallen 74 percent from their April peak and are now just 5 percent above their five-year average. So supply is once again tightening. Even so, US exploration and production companies have been shifting their attention away from natural gas toward crude oil, at least until the economics of natural gas are in their favor again.

That’s left some Canadians concerned that their crude oil exports could eventually face the same fate as natural gas. By the end of August, US crude oil production had risen 10.3 percent from the prior year, with over 40 percent of that gain coming from the jump in output from North Dakota’s Bakken region. Over that same period, Bakken crude oil production increased 51.1 percent to 701,000 barrels per day.

The sudden availability of additional US crude is crowding out Canadian crude from a key export pipeline in Alberta. That’s forced some Canadian firms to transport their crude south by truck and rail. At the same time, Gulf Coast refineries, many of which are specially equipped to process the heavy crude originating from Canada’s oil sands, are retooling their operations to process the light, sweet crude produced from the Bakken.

The inability to access the US market efficiently has caused the price of Canadian heavy crude to trade at a steeper discount this year than it usually does. Western Canada Select, the benchmark for Canada’s heavy oil, has averaged a 22.6 percent discount this year to the US benchmark West Texas Intermediate. And in recent months, that discount has widened to 32.5 percent.

But such discounts could eventually narrow again, if new pipeline construction, including the Keystone XL pipeline, from companies such as Enbridge (NYSE: ENB) is able to overcome political opposition. Still, pipelines can take years to build, and any concessions made to overcome political intransigence could further slow their construction.

But in the big picture, it would take massive, new domestic crude production for the US to meet all of its demand. Even with the shale plays, it’s not anywhere near that threshold. And Canada’s proximity, as well as its political stability and history of friendly relations, means that it’s likely to continue being the main supplier of foreign oil to the US.

Indeed, Exxon Mobil Corp (NYSE: XOM), the largest publicly traded oil producer, is now counting on Canada to boost its flagging production, which is expected to show a 5.7 percent drop versus a year ago. Western oil majors are having to turn to unconventional production sources, such as Canada’s oil sands, as the oil remaining in existing fields proves harder to tap, while state-controlled oil companies outbid them for the best projects.

Although Exxon is not betting on Canada alone–it has similar projects in a number of other countries–it’s hoping that its Kearl operation in Alberta could yield 170,000 bpd. Overall, Exxon is projecting that 37 percent of its production growth through 2014 will derive from Canada’s oil sands.

So while Canadian crude oil exports face the prospect of increased competition in the US market, they’ll likely remain a key feedstock for years to come.


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