During the first decade of the new century, accelerating declines in conventional Canadian crude oil production will be more than offset by strong growth in production from Western Canada’s oil sands, one of the largest known accumulations of hydrocarbons in the world. The oil sands’ share of total Western Canadian crude oil production is expected to increase from under 25 percent in 1995 to 40 percent of a higher total volume of crude oil production in 2005, and to over 50 percent by 2010.

M. Meyers of Cambridge Energy Research Associates (CERA) discussed developments in Western Canada’s oil sands at the Heavy Oil—Heavy Action Conference held in Calgary, Alberta, Canada, last December.

After years of largely unfulfilled promise, plans are being developed to invest billions of dollars to more than double production from Western Canada’s oil sands, to over 1 million barrels per day (mbd) by 2010. In CERA’s view the convergence of several factors are responsible for this surge of interest and activity:

All this oil sands development activity will have a profound effect on the volume and composition of crude oil production in Western Canada, says Meyers. CERA’s outlook is for liquid hydrocarbon productive capacity in the Western Canadian Sedimentary Basin (WCSB) to undergo a gradual increase from 2.4 mbd in 1995 to a plateau of 2.7 to 2.8 mbd from 2000 to 2010. Within this gradual increase, significant changes in the productive capacity mix will take place:

The looming condensate shortage in Western Canada signals an impending need for investment in bitumen upgrading capacity within Alberta if in situ bitumen production is to continue to grow significantly beyond the levels projected for 2000. Yet the only plant built in Western Canada to upgrade in situ produced bitumen, the financially troubled Bi-Provincial Upgrader in Lloydminster on the Alberta/Saskatchewan border, sets a precedent investors are not eager to emulate.

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WCSB crude oil production is currently processed in Western and Central Canada and in the Pacific Northwest, Rocky Mountains and Mid-Continent regions of the United States. CERA expects crude oil demand to grow slowly in these markets as a result of maturing demand for refined products and increased competition in the Rocky Mountains and Mid-Continent regions from United States Gulf Coast refineries via refined product pipeline expansions. In addition, changes in the crude oil pipeline infrastructure are increasing the capacity to import crude to the Mid-Continent and Ontario from the United States Gulf Coast and Eastern Canada, widening the array of feedstock options for refiners. Hence Western Canadian producers will be marketing the increased production from the oil sands into a highly competitive market.

The combination of increasing production from the oil sands and limited plans for refinery investment to increase the capacity to process this production will result in market pressures for a reduction in the value of bitumen blend and synthetic crude relative to light, sweet conventional crudes. For upgraded synthetic crude, the pressures are unlikely to be significant until 2001-2002, when Suncor’s large expansion and Shell Canada’s mining/upgrading projects are scheduled to startup.

According to CERA, for the next 3 to 4 years, the light/heavy crude price differential in Western Canada is likely to remain in the range of $4.50 to $5.50 per barrel.

In recent years the spot value of upgraded synthetic crude has increased in value relative to light, sweet conventional crude. In CERA’s view this premium is likely to persist through 2001-2002, as growth in production of upgraded synthetic crude from existing plants is likely to be matched by capacity creep at refineries configured to process this feedstock. However, the scheduled startup in 2002 of large capacity additions of upgraded synthetic crude is likely to lead to discounting of upgraded synthetic crude in this timeframe.

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