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
    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
    "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 -
    The complete CIBC World Markets report is available at:

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For further information:

For further information: Jeff Rubin, Chief Strategist and Chief
Economist, CIBC World Markets at (416) 594-7357, or Kevin
Dove, Communications and Public Affairs at (416) 980-8835,