A combination of surging production from low-cost Alberta bitumen projects and stubbornly tight export pipeline capacity will keep Canadian crude oil prices volatile for the rest of the decade, energy researcher Wood Mackenzie said on Wednesday.
The prediction comes as the Alberta and Canadian governments struggle to find solutions to the problem of deep discounts in prices for the country's heavy crude oil that have pressured public finances as well as corporate bottom lines.
In recent months the discount on Western Canada Select heavy oil has shrunk considerably, to less than $15 a barrel under West Texas Intermediate from more than $40 under in January, as Imperial Oil Ltd's Kearl oil sands project has been slow to start up and as inventories in Canada have dwindled.
However, Wood Mackenzie analyst Mark Oberstoetter said the improvement is likely to be short-lived as major new pipelines to move the crude are slow to be approved and built and production from the Bakken region of North Dakota in the United States also jumps, competing for current space to market.
Oberstoetter said almost three-quarters of an expected 540,000 barrels a day of new bitumen production expected to start up in the next two years will come from projects that are already sanctioned and have a break-even oil price of $60 a barrel.
That means they are well insulated from weaker crude prices, and so have little risk of getting deferred.
"What our analysis shows is that point-forward economics for the vast majority of oil sands projects planned to start-up between now and 2015 are attractive," he said in a statement.
Some unsanctioned projects, such as the Fort Hills oil sands mining development proposed by Suncor Energy Inc and Total SA, have somewhat higher break-even levels and are at risk of being delayed given expectations of weaker bitumen prices, he said.
Suncor has said the partners expect to make a decision on Fort Hills by the end of June.
Major new pipeline proposals, including TransCanada Corp's Keystone XL to Texas refineries and Enbridge Inc's Northern Gateway to Canada's Pacific Cost, would alleviate the pipeline bottleneck, securing higher prices for Canadian and North Dakota oil, Oberstoetter said.
He pointed out, however, that they both remain controversial and could still face more regulatory or political delays. TransCanada has said that Keystone XL could be in service by 2015 if approved by this summer.
Wood Mackenzie said it does not expect meaningful expansion of North American pipeline capacity until 2014, when such projects as Enbridge's Southern Access and Tallgrass Energy Partners' Pony Express pipeline systems start up.
"The companies without a natural hedge via an accessible downstream position are the most impacted and may seek out rail as an alternative option," it said.