Canadian oil sands development critical to filling growing global supply gap, finds a new CIBC World Markets report
Sep 10, 2007
OPEC, Russia and Mexico export capacity to drop 2.5 million barrels a day by 2010 TORONTO, Sept. 10 /CNW/ - CIBC (CM: TSX; NYSE) - With the world's leading oil-producing nations likely to see their export capacity drop by some 2.5 million barrels a day by the end of the decade, Canada's oil sands will be squarely in the investment sights of global energy giants, finds a new report from CIBC World Markets. The report notes that OPEC and other key oil producers like Russia and Mexico are struggling not only to grow production, but to manage their own soaring rates of domestic oil consumption. This struggle will likely see their collective crude exports, which account for roughly 60 per cent of current world oil production, to fall by as much as seven per cent by 2010. The outcome of this would be significantly higher oil prices. "One of the few areas where production can be expanded significantly is the Canadian oil sands, a vast reservoir of bitumen whose extraction and refining economics are becoming increasingly attractive as world oil prices continue to set new highs," says Jeff Rubin, Chief Economist and Chief Strategist at CIBC World Markets. "Already at over a million barrels per day, production is slated to triple over the next decade and by 2020 could well be producing over 4 million barrels per day of synthetic crude, catapulting Canada to the front ranks of oil producers." Mr. Rubin states that within the next decade, the expansion of Canadian oil sands production will surpass deep water wells as the single largest source of new global supply. He notes that unlike in many other major oil-producing countries, virtually all of the increase in Canadian oil production will be slated for exports, likely in its entirety to the U.S. market. Canada's domestic oil needs shrunk last year and are unlikely to grow significantly in the future as the Canadian economy becomes more and more subject to carbon abatement legislation and practice. This is in sharp contrast to the situation in the major oil-producing countries which are experiencing some of the highest jumps in oil demand in the world. Demand has grown at a soaring five per cent annual rate in Iran, Saudi Arabia and the United Arab Emirates over the last half-decade. Suddenly oil-producing countries are themselves becoming major oil-consuming countries. Last year OPEC members, along with independent producers Russia and Mexico, consumed over 12 million barrels of oil per day - roughly 60 per cent more than China and slightly more than all of Western Europe. As a group, they now represent the second-largest oil market, second only to the U.S. Much of this demand is driven by heavily subsidized prices that keeps a barrel of oil down to a cost of between US$10 and US$20. "With domestic consumption growth of nearly five to six per cent now standard in the Middle East, OPEC's future export capacity is increasingly called into question," says Mr. Rubin. "Particularly now that the cartel seems to no longer be able to raise production as readily as it has in the past. Saudi Arabia, by far the largest OPEC producer, is struggling to maintain a daily production rate near 9 million barrels per day, and beyond Saudi, the cartel has scant excess capacity. "Production in some of its largest fields like the Burgan field in Kuwait are already well into decline and there is widespread speculation that production at Saudi's mammoth Ghawar field may soon fall as well." The report notes similar issues in Russia and Mexico. In recent years, Russia, now the world's largest oil producer, has filled the supply gap created by OPEC's growing call on itself. But now Russia too is showing much the same trends seen in many other oil-producing countries that subsidize prices. Growth in Russian oil production has slowed abruptly from the breakneck rates of 10 per cent per year a decade ago to a much more modest two per cent. However, domestic oil consumption is now growing at a four per cent annual pace, only marginally slower than seen in many Middle Eastern domestic markets. "When you consider that Russia's oil consumption per capita is still only a quarter of that of the U.S., there is lots of headroom for future Russian demand growth," adds Mr. Rubin. "With internal demand growing at about twice the pace of production, the country's crude exports are likely to fall after 2008, with domestic demand growth claiming all of the country's production gains. And the pace of new reserve development in the country is likely to slow now that President Putin has effectively nationalized the industry and shut foreign investment out." Mexico faces even greater obstacles than Russia in maintaining its export levels. Production in the giant Cantarell field, home to half of the country's 3.5 million barrels per day of crude production, is already in the throes of rapid depletion, with production having already plunged by half a million barrels per day. Some forecasts are calling for as much as a further million-barrel-per-day production loss from Cantarell by the end of the decade. Add in high rates of internal oil demand growth and the country's export capacity looks to be lethally challenged. Mexico's crude exports, which have already been falling since 2004, could well become insignificant by 2010 - a loss of some 1.5 million barrels per day to world markets. Together Russia, Mexico and OPEC account for almost 60 per cent of world oil production, with combined output of just over 47 million barrels per day and total exports of over 35 million barrels per day. While the group as a whole should be able to maintain total production rates close to current levels, exports from the region are likely to drop to 33 million barrels a day by 2010. Exports will effectively be crowded out by soaring domestic oil consumption, charged by rapidly rising domestic incomes and by highly subsidized oil prices. "For most multinational oil firms, the world is rapidly shrinking," notes Mr. Rubin. "Increasingly they are shut out of the backyards of all the state-owned oil patches and then have to bid against those state firms in places still open for investment. Canada remains one of those few places, where governments have been content to take their share of economic rents through royalties and not be concerned about the ownership per se. "Depending on one's view of the investment climate in Kazakhstan and Nigeria, Canada represents anywhere from 50-70 per cent of the investable oil reserves in the world. Increased global reliance on high cost sources of unconventional supply will be accelerated by the decline in the export capacity of traditional oil producing countries and will soon put Canada's oil sands in the global energy spotlight." Mr. Rubin, will raise these issues and other challenges facing the energy sector in his presentation at the 6th Annual Association for the Study of Peak Oil & Gas conference in Cork, Ireland, September 17, 2007 - http://www.aspo-ireland.org/index.cfm/page/aspo6. The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/occrept62.pdf. CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.
For further information:
For further information: Jeff Rubin, Chief Strategist and Chief Economist, CIBC World Markets at (416) 594-7357, firstname.lastname@example.org or Kevin Dove, Communications and Public Affairs at (416) 980-8835, email@example.com