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Canadian Oil Industry to Outgrow U.S. Peer in 2023 

Published 26/01/2023, 10:09 pm
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  • U.S. oil production could be flatlining at about 12.1 million bpd in 2023
  • Even if they manage to drill more wells, U.S. producers would likely be stuck with oil they cannot transport
  • Conversely, Canadian oil production looks much more positive in 2023
  • Last week, I examined whether the EIA’s 2023 forecast for U.S. oil production growth was realistic. Based on industry sentiment from the largest oil-producing region in the United States, I concluded that production growth of nearly 1 million bpd was unlikely, given existing constraints and sentiment.

    U.S. Oil Production Flatlining

    Earlier this week, I had the opportunity to speak to API’s chief economist, Dr. Dean Foreman. He shared some additional reasons why the U.S. oil industry is unlikely to meet the EIA’s growth forecast. He explained that although growth in 2022 was strong, production is currently flatlining at about 12.1 million bpd.

    While the U.S. may see some growth from Texas and Louisiana, where infrastructure, regulations, and land ownership are more conducive to growth, little to no growth is expected in Colorado, New Mexico, Wyoming, and North Dakota.

    Drilling in these states is all weak compared to pre-pandemic levels, and there is no indication it is going to improve. State regulations in Colorado have stifled oil production there, and the moratorium on new leases for oil drilling on federal land has had a major impact in New Mexico, Wyoming, and North Dakota, where the federal government owns many lands.

    A lack of new intrastate pipelines is also harming new development in these areas because it is too difficult and expensive to transport any more oil drilled there to refineries or to the coast for transport. Texas and Louisiana don’t face these issues because they have many refineries and export facilities within their borders.

    Canadian Oil Production

    On the other hand, Canadian oil production looks much more positive in 2023. The EIA’s forecast expects that 40% of the 2.4 million bpd of non-OPEC production growth will come from Canada, Brazil, Guyana, and Norway.

    In particular, the EIA notes that Canadian oil growth:

    “Will be driven by projects to improve distribution bottlenecks, including the start-up of the TransMountain pipeline expansion project.”

    The Canadian Energy Regulator (CER) provides data similar in nature about Canadian oil to the EIA.

    CER recently released two forecasts for Canadian oil production – one in which global oil demand is lower due to the implementation of climate policies (Evolving Policies Scenario) and one based on stronger oil demand and higher oil prices (Current Policies Scenario).

    According to the Current Policies Scenario, which assumes a $70 per barrel price for Brent oil for the duration of the forecast, Canadian oil production is forecast to increase to 5.42 million bpd. For reference, CER measured Canadian production at 5 million bpd in 2021. (Note that CER only includes crude oil in this forecast and does not include NGLs or LPGs as the EIA does).

    The growth areas for Canadian oil production are largely in tar sands regions. Oil production is very different there than it is in the shale oil regions of the United States. In the Permian, for example, companies do not require long development time or large upfront costs to start drilling wells and producing oil.

    On the other hand, tar sands production requires more time and investment upfront. However, once that investment is made, the wells have a much longer lifespan than wells drilled in shale oil regions, so production in Canada isn’t as responsive to price conditions as it is in Texas.

    Bottom Line

    Canadian oil producers have already made the investments needed to produce in the tar sands, and Canada has invested in new pipeline capacity to move oil from the center of the country to the coast for export. This means that oil production in Canada is less sensitive to the issues impacting U.S. oil producers—drilling cost inflation, pressure to return value to shareholders, regulatory uncertainty, lack of pipeline capacity, and federal leasing moratoriums.

    Canadian oil is likely to grow at a rate higher than the trajectory predicted in CER’s Current Policies Scenario because the price of Brent has been higher than the $70 per barrel its forecast assumed.

    In fact, Brent is likely to remain at least $10 higher than that for 2023. Because Canada already has the infrastructure in place to transport oil to the coast for export, it should be easier for the country’s producers to increase production if the market is conducive to this. In contrast, many U.S. producers will be stuck with oil they cannot transport if they drill more wells and increase production.

    It appears that the Canadian oil industry is primed for more growth in 2023 than its U.S. peer. However, traders shouldn’t expect Canada to be able to fill in the gap in supply that stagnating U.S. oil production will leave in 2023.

    Disclosure: The author does not own any of the securities mentioned in this article.

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