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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Canada’s Economic Recovery Is Being Driven By Oil

Canada’s gross domestic product grew at a faster pace than forecast in May, led by the oil and gas industry and more specifically, oil sands. Statistics Canada reported that the national GDP expanded by 0.5 percent in May, with 19 out of 20 industries booking improved results compared to April, with oil and gas posting a 2.5-percent improvement and the oil sands industry recording growth of 5.3 percent.

The oil industry was the sector that reported the highest growth in May as the benefits of higher oil prices apparently outweighed the negative effects of pipeline capacity shortage that has plagued the Canadian oil industry for a while now.

Interestingly enough, the mining sector also recorded solid growth compared to other industries such as retail, utilities, and manufacturing. Metal mining, in particular, booked growth of 4.5 percent, the second-best performer among industries, despite an investment climate that is actually discouraging additional investments, as a recent study from Fraser Institute found.

The investment climate in oil seems to be better, but not because of special government support. Canadian drillers—and especially oil sands miners—are expanding because they have no alternative to expansion after the latest downturn if they want to keep their business going after years of underinvestment.

Canada is producing record amounts of heavy oil from the oil sands. However, drillers are finding it increasingly difficult to get this oil to markets because pipelines are running at capacity and new ones are being treated by various groups as pariahs. Drillers, therefore, are resorting to railway transportation—a much riskier mode of transport for crude as recently proven yet again after an oil train derailed in Iowa spilling thousands of gallons of oil into a local river.

Until recently, production growth continued despite the pipeline capacity constraint that pressured Canadian crude into a major discount to West Texas Intermediate. Now, the Petroleum Services Association of Canada has cut its well-drilling forecast for this year to a number that will be lower than the 2017 figure. The body expects 6,900 new wells to be drilled in 2018, compared with 7,400 wells forecast in April. The 2018 figure is also 200 wells lower than that for 2017 as the pipeline shortage begins to bite. Related: The Texas Oil Boom Isn’t Creating Enough Jobs

The latest Statistics Canada figures reveal that oil and gas production as of May accounted for more than 7 percent of the country’s GDP. This is the largest portion of oil and gas in the gross domestic product since 1998 and is higher than the share of banking and insurance.

Yet, as IHS Markit economics director Arlene Kish told CBC, this impressive performance is hardly a sign of a consistent trend. The oil and gas industry, Kish noted, is notoriously volatile—as are all extraction industries—so sharp swings in this performance are a common occurrence.

Yet Kish also added "However, it is good to note, though, that non-conventional oil extraction [from the oilsands] hit an all-time high in May, and conventional oil extraction is climbing back up to the highs from 2007. So, the one basic conclusion is that demand for Canadian oil is strong."

How much this will reassure oil sands miners remains to be seen. Demand is indeed strong, what with the discount to WTI, but getting the product to market remains a challenge in the cost-efficiency department as rail transport is not just riskier but also costlier than pipelines.

By Irina Slav for Oilprice.com

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