NEB projects strong growth in Canadian oil and gas output

Canadian production of crude oil will increase by 60% and of natural gas by 32% during 2013-35 if markets take the supply and transportation capacity develops as needed, predicts the National Energy Board.

But those conditions combine to represent a “key uncertainty” in the NEB’s annual energy forecast.

“If these assumptions do not hold, pipeline constraints and price differentials will likely impact oil producers and the broader energy system in coming years,” NEB said.

In its reference case, the agency projects an increase in crude oil production to 5.84 million b/d from 3.66 million b/d in 2013.

Gas production in the reference case climbs to 17.4 bcfd in 2035 from 13.2 bcfd in 2013.

The reference case assumes 2035 prices of $110/bbl for West Texas Intermediate (WTI) crude oil and $6.20/MMbtu for Henry Hub natural gas.

Bitumen dominates growth in projected crude oil production, and in situ production dominates bitumen growth although mined production continues to increase.

NEB projects an increase in bitumen production from in situ projects to 3.21 million b/d in 2035 from 2.02 million b/d in 2013. Bitumen output from mines in the NEB forecast reaches 1.8 million b/d in 2029 and stays at that level through the end of the forecast period, up from 1.06 million b/d in 2013.

The NEB expects declines in production of conventional light and heavy crude, pentanes-plus, and field condensate.

Output of upgraded bitumen in the reference case rises to 1.59 million b/d in 2035 from 1.02 million b/d in 2013.

Bottlenecks and prices

Transportation capacity remains a concern as production grows because bottlenecks drive down values of production.

The NEB points out that Western Canadian Select (WCS), the marker for Canadian heavy crude, traded at an unusually large discount to Brent crude, the international marker, during 2011-12, when its price averaged $75.56/bbl. The average WCS-Brent discount in that period was $35.89/bbl, compared with $15.99/bbl during 2007-10.

A reason for the large discount was that WCS prices reflect WTI values at the hub in Cushing, Okla., where in 2011-12 the WTI price was discounted by an average $16.97/bbl against Brent because of a transport bottleneck. Before then, WTI usually traded closer to parity with Brent.

As pipeline capacity opened to take crude away from Cushing, Midwest refineries brought new conversion capacity online, and rail transport grew as a transport option, the pressure on WCS eased and brought WCS-WTI-Brent values closer to normal relationships by mid-2013, NEB said.

In its reference case, the NEB projects growth of 139% in Canadian crude available for export to 5.5 million b/d in 2035.

If transport capacity doesn’t develop as needed to support the exports, NEB adds, “there may be implications on Canadian crude oil prices,” such as the large WCS discounts of 2011-12, “and there may be implications for future production growth.”

The forecast also notes rising uncertainty about how much Canadian crude oil the US will need in view of rapidly growing supplies of light oil from low-permeability reservoirs.

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