Review of 2009 & Outlook to 2030

Executive Summary

The Global Recession.

Years of sustained economic growth came to a sudden end in fall 2008 when the US-lead financial crisis triggered the worst economic slowdown since the Great Depression of the 1930s. The effects of the crisis were far reaching and no country was left unscathed. The Canadian economy shrank 2.6% in 2009, the most since 1982.

Energy supply and demand are pillars of modern economies. It follows that the global economic recession had real and tangible impacts on Canada’s oil and gas industries, which are the focus of this report. Many of the key developments discussed in this section reflect the picture of a broader, economy wide recession.

The global recession started to affect industrial demand for natural gas and petroleum products towards the end of 2008, however this is masked by the annual data. The recession’s full effect was more pronounced in 2009, when industrial demand for natural gas plummeted 8.4% in the US. Canadian industrial demand proved to be much more resilient and only fell by 1%.

Oil and Gas Price Review

The price of Canadian crude oil is set in a global oil market. Similarly, Canadian petroleum product prices reflect international crude oil prices and other factors such as seasonal demand and inventory levels. However, natural gas prices are more continental in nature, and are affected by markets in Canada and the US.

Crude Oil and natural gas prices peaked in July 2008 at $US 133 per barrel and over $US 13/MMBtu respectively. Prior to the recession of late 2008, crude oil prices were pushed higher and higher, by growing concerns over supplies, OPEC production cuts, and geopolitical uncertainties in some key producing regions¹. Growing demand, particularly from Non-OPEC Asian countries like China, pushed oil prices higher, as did the devaluation of the US dollar against some key currencies, such as the Euro. Besides those “fundamental” factors, a major increase in large institutional investment (e.g. banks, hedge funds and insurance companies) and speculators is likely to have supported the spike in prices. The soaring oil price pushed refined petroleum products and natural gas prices ever higher as well.

Of note, the price of crude oil is the largest component in the price of refined products, such as gasoline, and product prices usually rise with the increase in the oil price. Natural gas is a product which can sometimes be substituted for petroleum products such as heavy fuel oil, and its price is somewhat influenced by the price of crude oil.

Within a year of their summer/fall 2008 peaks, both crude oil and natural gas lost 80% of their value on the market. Oil bottomed out at $30 per barrel in late December 2008 and natural gas averaged only $US 2.84 in September 2009.

Plummeting energy prices were the result of:

• The US financial crisis;
• The fall in equity markets; and
• Lower industrial production and lower energy demand.

Producer export revenues and cash flow declined, as did drilling rates and investments in the oil and gas industry.

In 2009, Canadian oil and gas drilling rates declined by half from 2008 levels, and global investment in the petroleum industry declined 19% in this same period.

As economies emerged from the recession, the price of crude oil clawed its way back and settled in the $US 70-80 range in the last quarter of 2009. Oil prices rose with the expectation that the global economic recovery would support increased oil demand. To the end of 2010, crude oil prices have remained fairly stable, in the $80-90 range.

Natural Gas

Natural gas prices have recovered to a much lesser extent. Improvements in horizontal drilling technology and multi-stage hydraulic fracturing are helping to unlock enormous natural gas reservoirs across North America. Shale gas has emerged as the new low-cost supply option and it is being characterized as a “game-changer”. Despite declining production in each of the last three years, the Western Canada Sedimentary Basin (WCSB) is no longer thought to be in permanent decline. Vast shale resources, particularly in Northeastern British Columbia, offer the possibility of increased domestic production over the long term.

Shale gas development is well established in the US and is growing quickly in Canada. Shale gas is providing a renewed optimism that North America now has an enormous and secure source of natural gas for decades to come. The burgeoning shale gas development comes on the heels of tremendous investments in Liquefied Natural Gas (LNG) import terminals.

Abundant shale gas, and abundant LNG import and regassification capacity, may act as a ceiling for natural gas prices and contribute to a lasting decoupling of oil and gas prices. Relatively low natural gas prices are fuelling efforts to expand natural gas’s market share, including in new applications such as transportation.

Natural Gas Paradigm Shift

For years industry spoke of the natural gas drilling and production treadmill, whereby more and more drilling was required to sustain production. During 2001-2006, North American natural gas production stagnated and prices spiked up and down as demand changed, leading us to describe this as a “supply limited market”. Unconventional production is changing the story. Nowhere is this more clear than in the US in 2009, when natural gas drilling collapsed (down 44%) and yet overall production grew by 3%. The strength in natural gas production is due to the shift towards horizontal wells targeting shale gas, which are typically much more productive than traditional vertical gas wells targeting conventional production. Similar trends could emerge in Canada as unconventional gas development grows in the future. Clearly the North American natural gas market is no longer supply limited, but is in a period of relative abundance.

Crude Oil

The shift towards unconventional production also holds on the oil side. New technology, successfully employed in shale gas developments (including horizontal drilling and multi-stage fracture stimulation) has successfully been employed in the Bakken oil formation in Saskatchewan, and more recently in the Pembina oil field in Alberta. In addition, it’s now clear that Canada’s mature oil fields could be revitalized, using unconventional production techniques.

Oil Sands

By early 2009, with the recession driving crude oil prices down, $100 billion in oil sands projects were on hold. However, oil prices subsequently recovered following the recession, and oilsands investments and developments are now once again back on track for rapid growth. Within the last year, rising petroleum prices have prompted the re-start of a variety of oil sands mining and in-situ projects including: Suncor Energy's Firebag expansion, Imperial Oil’s Kearl project, Cenovus’s Narrows Lake project, Devon Energy's Jackfish expansion, and ConocoPhillips and Total’s Surmont project.

By 2030, oilsands production is expected to account for up to 90% of Canadian production. The shift towards unconventional production has long been anticipated as 97% of Canada’s proved oil reserves are in the form of oil sands. New processes and improvements in efficiencies are also helping to curb the expected demand for natural gas per barrel of oilsands produced.

Refined Petroleum Products

Overall, demand for refined products in Canada slowed down in 2008 along with the worldwide economic slowdown, and continued to decline in 2009. In fact, demand in 2009 was 6% lower than in 2008 at 96.5 billion litres, the lowest since 2002.

In 2009 Canadians consumed 42.3 billion litres of gasoline, an increase of 0.6 billion litres over 2008, a year when gasoline consumption had dropped by 0.5 billion litres.

Domestic sales of diesel fuel in 2009 were 26.0 billion litres, 8% lower than the year before. In 2007 and 2008 diesel demand had increased, a reflection of the strong growth in the Canadian economy and a growing proportion of diesel-powered vehicles in the fleet.

Demand for heating oil, or light fuel oil, totalled 3.4 billion litres in 2009, 0.4 billion litres or 10% below 2008. This mainly reflects the loss of share to natural gas and electricity in the space heating markets of Ontario and Quebec.

Canadian refinery capacity has increased slightly over the last decade – despite the closure of the Petro-Canada refinery in Ontario 2005. The refinery utilization rates have been dropping steadily since 2004, declining more significantly in 2009 because of lower demand for oil products, poor refining economics stemming from the economic downturn, and unscheduled refinery shut-downs.

Canadian gasoline prices in 2009 and 2010 were less volatile than in 2008, averaging 95 cents a litre in 2009 and $1.04 in 2010, down from the $1.14 registered in 2008. Diesel fuel prices averaged 90 cents per litre in 2009 and $1.01 in 2010, compared to $1.25 per litre in 2008.

Resource Size and Adequacy

Unconventional resources are also helping to stem concerns about Canada’s long term ability to satisfy its energy needs. Canada’s proved oil reserves are now the third largest in the world at 174.2 billion barrels (Bbl). On account of Alberta’s oil sands, Canada now has at least 175 years of remaining crude oil reserves, at current production rates.

New estimates for natural gas resources are being developed to account for shale gas. North America is now thought to have over 100 years of natural gas supply at current production rates, largely on account of shale gas. It’s clear that Canada has abundant oil and natural gas for long-term energy needs.

Outlook to 2030

Crude Oil

The crude oil price outlook to 2030 (from expert consultants and energy forecasters) shows a tendency towards rising prices. However, there is no consensus, which is not surprising given the variety of factors which can influence the price of oil.

A survey of Canadian crude oil production forecasts shows considerable variability particularly in the long-run. However, all of the forecasts show a clear shift towards the oil sands and a decline in Canada’s conventional oil production. All of the forecasters expect that the decline in conventional oil production will be more than offset by rising oil sands production.

Overall, Canada’s oil sands production could more than triple by 2030. Canada has a large and growing net surplus of crude oil. The domestic market for oil sands production could grow with rising production. Surplus Canadian crude oil production will help meet the demands for oil in the US market, and could possibly be exported to a new market in Asia.

Natural Gas

A survey of expert consultants and energy forecasters show that North American natural gas demand is widely anticipated to increase by about 1% per year through to 2030. Canadian natural gas production is expected to continue a slow decline or remain stagnant until 2013 or 2014, after which production begins to rise slowly, due to unconventional gas development. Combined with Canadian natural gas demand growth, this implies a continued drop in Canadian natural gas exports to the US. The expected impact will be continuing declining natural gas exports to the US.

Natural gas prices are inherently hard to predict, even more so at a time when enormous supplies are on the verge of hitting the market. However, according to the forecasters surveyed, natural gas prices will gradually increase over the Outlook period to 2030. Natural gas is expected to continue trading at a considerable discount to crude oil on an energy content basis throughout the forecast period. Forecasters expect crude oil and natural gas prices to remain decoupled on an energy-content basis and for the price differential to widen somewhat.

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