Alberta’s oil and gas industry has had a very, very rough year. With a major pipeline infrastructure deficit and major delays and setbacks for all new pipeline projects, with no end in sight in the near future, Canada’s once-prosperous oil sands are hurting. Canada has the reserves and they have the demand--they just have no way to get their oil to market, with their limited amount of pipelines already running at full capacity and storage tanks filled to bursting.
Because of the resulting oil and gas glut, Canada has been forced to sell off their oil at a major discount, costing Canadian producers a whopping $20 billion in lost profits last year, according to calculations by conservative think tank the Fraser Institute. The Albertan government has made efforts to ease the pain, including imposing temporary caps on production. These caps were extremely successful in the short term, but are ultimately unsustainable. Ultimately, the only fix for Canada’s pipeline bottleneck is more pipelines. Simple as that.
Unfortunately, it will be a long time before any major pipeline projects come to fruition in Canada thanks to major litigation issues and other hurdles causing endless delays on projects like the Keystone XL pipeline and the Trans Mountain pipeline.
Critics of the Alberta government’s decision to impose production caps as a temporary stop-gap pointed out that the move could have negative impacts on Canada’s oil industry in the long run and ultimately discourage investment in a sector that has government-imposed limitations for growth. Now, half a year later, the Alberta Energy Regulator, a government agency established in 2012 under oil-rich Alberta’s Responsible Energy Development Act, is forecasting that the province’s spending on oil and gas is going to plummet this year.
The Alberta Energy Regulator has released a report this week predicting that oil and gas capital spending will hit its lowest mark since 2009 later this year, saying in its annual reserves outlook that “Industry sentiment remains pessimistic because of lack of market access”. As Calgary’s JWN reports, “the combined expected outlay of $24.6 billion in 2019 is less than either the spend for conventional oil and gas or oilsands at peak in 2014, when the total reached $60.6 billion ($33.9 billion oilsands, $26.7 conventional).” Related: Climate Change Could Trigger Global Financial Crisis
It seems as if those decrying Alberta’s caps on production as investment-killers may not have been hyperbolic but were actually the right. In fact, the Alberta Energy Regulator’s report goes on to say that “continued infrastructure constraints along with production restrictions on oil from the Government of Alberta's mandated curtailment rules has caused producers to delay their capital spending programs, or even shift them outside of Alberta.”
The decrease in spending is going to be significant, “reaching a low of C$10.9 billion, a level of spending not seen since 2005” according to the Alberta Energy Regulator, which goes on to say in their report that “the decrease is expected to be mainly because of lower spending in the mining sector as projects get completed and brought on-stream, such as Suncor Energy's Fort Hills and Canadian Natural Resources Limited's Horizon Phase 3 projects.”
On the bright side, the Regulator says that spending will likely not remain at this extremely low level after this year, with total upstream capital spending increasing to $26.5 billion in 2020 and then to $29.6 billion in 2021, but these numbers are still relatively low in comparison with investment levels over the last ten years.
No matter how the Alberta government addresses the pipeline shortage in the short term, nothing is going to solve the Canadian oil industry’s flow woes except for more infrastructure as soon as possible. In the meantime, it’s looking like the only lucrative sector in Canada’s oil industry this year is in storage, as the glut continues to grow along with the timelines for the nation’s stalled pipeline projects.
By Haley Zaremba for Oilprice.com
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