Posthaste: Why analysts see Canada leaving more oil in the ground

Gigi Suhanic
Thu, August 4, 2022 



Good Morning!

Oilsands CEOs are likely having an ‘I told you so’ moment after a major energy research group predicted that emission cuts, among other factors, will result in some oil staying in the ground.

S&P Global Commodity Insights forecasts that oilsands production is expected to rise over the next decade by about half a million barrels a day. But before you get excited, that “substantial” increase is a drop from previous forecasts, according to the new analysis.

The energy and commodities research company said oilsands production will exceed 3.5 million barrels a day (b/d) by 2030, 17 per cent more than this year, but down 100,000 (b/d) from its forecast last year.

“The Russian invasion of Ukraine has heightened interest in the ability of Canada — and (the) oilsands specifically — to contribute more crude supply to the global oil market,” said Kevin Birn, Canadian oil markets chief analyst at S&P Global Commodity Insights. “While this has increased the incentive to raise oilsands production in the near-term, a longer-term focus on strengthening returns to shareholders as well as decarbonizing the industry continue to weigh on growth for the longer-term.”

That longer-term focus is winning out.

As the logistics of future projects become untenable, investors have shifted their attention from “volume” to “value,” and fixed firmly on dividends and share buybacks, said Birn and senior research analyst Celina Hwang.

And investors have been rewarded.

“Last year, was the single most profitable year in the history of the oilsands with the core four operators generating, on average, over $6 billion in pre-dividend organic free cashflow,” the pair said, predicting that oilsands operators could deliver more record returns to investors in 2022 if crude oil prices remain elevated.

Another force Hwang and Birn cite as working to suppress oilsands production is the federal government’s “aggressive” carbon emission reductions goals. Recently, Ottawa called for energy operators to cut their CO2 output 42 per cent by 2030, something heavy-weight industry players have described as “almost unrealistic.”

In fact, Alex Pourbaix, CEO of Cenovus Energy Inc. worried on an earnings call that the Liberals emissions plan would result in lost barrels.

Instead, oilsands producers have committed to a 30 per cent reduction by 2030 under the Pathways Alliance — a consortium of six major oilsands companies that have pledged to decarbonize production to reach net-zero by 2050.

So where to from here?

Hwang and Birn predict that 80 per cent of the production growth they are forecasting will take place over the next few years from the “ramp-up, optimization and completion of projects where some capital has already been invested” — in other words, from existing projects.

Meanwhile, almost all of those lost 100,000 b/d they attribute to new projects that will likely never see the light of day.

“The story about the Canadian oilsands today is one that is looking to be increasingly less about growth, and more about returns, output optimization and maintenance, and accelerating technologies to lower emissions to put the industry in a position to compete on carbon,” said the analysts.