What is the Future of the Canadian Oil Sands?

Canadian oil sands have shaped the energy landscape of North America since before the 2008 financial crisis. 

There has been a gradual shift away from Canadian oil sands to tight oil and tight gas. This is cheaper and more effective to produce.

1. The current market climate is having an impact on Canadian oil sands

Oil sands are having a hard time in this market climate. Price pressure is very high. This is undermining the profitability of oil sands and it is uncertain when prices will return to the pre-financial crisis levels we saw in 2009. That’s when investment was flowing into Alberta. Oil sands investment is primarily driven by the price of oil. So the one factor that determines investment in oil sands has gone away. Most of Canada’s oil is produced in a single province, Alberta.

Alberta is not in a position to benefit from the growth of renewable energy as much as Quebec, which has huge hydroelectric potential. This is not to say that Alberta cannot benefit massively from renewable energy, it just means that Quebec has easier access to a stable supply of renewable energy.

Quebec started switching to renewable energy much earlier. In relative proximity to Alberta is California. California has been a major player in U.S. energy markets, but has switched to renewable energy. Alberta is thus more dependent on export markets for hydrocarbons. This is not to say that California does not produce oil, it just means that hydrocarbons are part of the energy mix in California and that California is less dependent on energy exports for its economic well-being. 

Alaska, another major player in U.S. energy markets, benefits from energy exports and is part of the United States. The fact that Alaska is part of the United States makes all the difference when it comes to energy trade within North America.

2. The shale revolution is changing the energy landscape in North America

Another factor that has had an impact is the shale revolution in the USA. There is currently a glut of natural gas and crude oil from shale deposits. These resources can be brought to market at a much lower price than oil sands. The price range does not justify these investments. As a result, very few new projects have been started in Alberta in recent years.

Still, oil sands should be seen as a backup for North American energy producers. To put this in perspective: Europe does not have this option. The European Union member states, the United Kingdom, and Norway have not experienced a shale revolution. Europe does not have an option to fall back on. Hydrocarbon resources in the North Sea are declining rapidly and the cost of maintaining offshore platforms in the North Sea is rising dramatically. Assuming that we do not need oil sands because shale resources are still abundant, oil sands remain interesting. Oil sands will be interesting when the oil price rises above 70 dollars per barrel. At roughly $100 per barrel, new production facilities become feasible.

The major oil-producing nations do not want to encourage renewed investment in oil sands. They have learned that high oil prices spur investment in alternative forms of energy, such as renewables. In the case of the U.S., high oil prices have led to a rush to invest in tight oil and tight gas operations. This has already undermined the financial position of state-owned oil companies in major oil-producing countries.

Saudi Arabia is the producer of last resort and has been able to shift oil prices in either direction if it expands or cuts oil supplies. Raising prices too high would likely not be in Saudi Arabia’s best interest, as it would encourage investment in Canadian oil sands.

3. NAFTA promotes trade between Canada and the United States. But the United States is energy independent.

Canada benefits from international trade. Trade between Canada and the U.S. is important to Canada’s oil business. The main problem is the dependence of Canadian oil producers on the U.S. market, which means that Canada must look for alternative trading partners willing to buy Canadian oil. This oil is sold through British Columbia, and the majority of oil supplies would be delivered to East Asian markets. Most of the new energy demand is coming from East Asia and the Western Pacific region. Energy demand is growing strongly there, and many countries are still industrializing and need energy to build their economies.

Canada’s participation in NAFTA forms the backbone of this trading relationship. Unfortunately, the Canadian oil business relies on the United States as its primary trading partner. When viewed from an export perspective, this is a one-sided relationship. It should be noted that U.S. energy policy has changed since the United States became energy independent

What other options do Canadian oil producers have if the United States no longer imports as much oil from Canada as it has in the past? The only major importer that could absorb such a bewilderingly large amount would be China. China has become the central player in East Asian energy markets. It seems unlikely that China will step in as oil importer of last resort. It is still much cheaper for Chinese oil importers to import oil from the Gulf rather than purchase the expensive crude from Canadian oil producers. Economies of scale and production costs matter, and oil imports from the Gulf States beat Canadian oil imports hands down.

Most of China’s oil imports are delivered through the Strait of Malacca. Historically, the Strait of Malacca has been one of the busiest waterways in the world. Passage through the Strait of Malacca is narrow, impeding global energy trade. As the economies of East and Southeast Asia continued to grow, the Strait of Malacca became congested, limiting access to one of the world’s most important waterways. This could encourage East Asian oil importers to buy more Canadian oil if they want to diversify their import portfolio. However, this would only serve as a hedge and would be a small share of the total volume.

Many thanks for the shared interest in the energy world!

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