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Canada’s oil industry, beset in recent months by deep discounts for heavy barrels and facing the prospect of chronic rationing of space on pipelines and mounting opposition to export conduits, is predicting a sharp increase in future production. Canadian crude output is forecast to jump to 6.7 million barrels by 2030, or 500,000 barrels over and above last year’s expectations, from 3.2 million barrels daily in 2012, the Canadian Association of Petroleum Producers also observed that the closely watched supply forecast sees oil sands capital spending reaching $23 billion in 2013, on par with 2012.
Latest and Current Trends
Foreign interest in Canadian oil and gas exploration and production companies is expected to remain strong; however, future projects are likely to require more creative structures. The Canadian federal government has recently announced a new policy stating that exposure to Canadian oil sands deposits for foreign enterprises will be subject to more restrictive governmental scrutiny; this will likely lead to more joint ventures with domestic partners as opposed to takeovers of Canadian oil companies. An increased focus will also be placed on whether transporting oil by rail. According to Stikeman Elliott, there is an increased expectation of shipments of crude oil by rail across North America which will continue to grow in 2014, and also noting that five new loading terminals in Western Canada are being constructed to move as much as 450,000 barrels per day of heavy crude by the end of 2014.
Rail loading capacity in Western Canada is estimated to increase to more than 900,000 barrels per day from 225,000 by year’s end. And amid a muted global M&A market, the total value of Canadian oil and gas transactions hit a record high in 2012, largely impacted by CNOOC’s $17.7 billion acquisition of Nexen, which according to several reports states it is China’s largest foreign acquisition to date, and the $5.1 billion acquisition of Progress Energy Resources by Malaysia’s Petronas. A combination of domestic and foreign interest, availability of financing and attractive targets suggests the sector will continue to drive Canadian Merger &Acquisition scene. Canada’s shift from a continental to a global energy player will bring new market and geopolitical dynamics into play, including a range of new competitors.
Challenging Environment in Canada Oil and Gas Industry
The market is overly-negative on Canadian oil companies. A lack of pipelines has caused fear that oil production will have no way of getting to market. But the industry has managed to get a surprising amount of oil out via train and there is also optimism that at least one of the two main pipelines proposed in Canada will see the light of day. The market is not yet realizing the significant impact of rail capacity. Several years ago, the amount of oil shipped by rail was zero, but by the end of 2013 we had the capacity to transport 375,000 barrels of oil per day by rail. There is an expectation that the industry continue to build that aggressively, with capacity set to reach 900,000 barrels per day by the end of 2014. Effectively, Canada will have built the equivalent of a 1 million barrel per day pipeline in four years, although the transportation cost comes out at around twice that of a pipeline. The growing Canada’s oil industry will also require new pipelines, and transporting it either to the East or West coast, where it can be sold on the international market. The Northern Gateway pipeline, which would send oil to the West coast of Canada, may not materialize because of issues concerning its path through First Nations lands.