Approval of Keystone pipeline only part of the solution for Canada's energy
Growing U.S. production, shift to Asian markets and increased competition for
investment pose challenges for Canadian industry
TORONTO, April 3, 2013 /CNW/ - While the approval of the Keystone pipeline is
important, it alone is not going the fix the challenges facing Canada's oil
and gas sector, finds a new report from CIBC World Markets.
"Keystone will improve access stateside and put a cap on adverse price
differentials for Western Canadian producers," says Avery Shenfeld, chief
economist at CIBC. "But recent developments in the global oil industry—from
Venezuela to Iraq, from North Dakota to Mexico, from California to
China—suggest that Keystone is just one of several important pieces of the
puzzle for Canada's energy sector.
"Three key trends—rising shale oil prospects stateside, the shift in
consumption growth to Asia, and a growing list of oil producing countries open
to foreign participation—all pose challenges if Canada is to maximize the
value of its resource base."
The report notes that shale oil has gone from a negligible share of U.S.
production five years ago, to almost a third today. At $40-60 a barrel, the
full-cycle costs of U.S. shale oil are well below that of a conventional oil
sands mining operation, but above most Middle East production. This oil is
also now competing for the same channels used to transport Canadian crude to
"Growth in U.S. shale output, coupled with a much softer trajectory for medium
term demand growth stateside, put America's net import requirements on a
collision course with Canadian plans to ramp up its output by a further two
million barrels a day over the balance of this decade," adds Mr. Shenfeld.
As a result, Canada's traditional advantage from being right next to the
world's largest oil importer is unlikely to last much longer. In fact, it is
forecast that China will displace the U.S. as the world's top importer of oil
in 2013. Only a decade ago, the country produced more oil than it consumed.
"The world will still need Canada's crude, given still ample demand growth
ahead for Asia, and we doubt supply-demand conditions will permanently sustain
prices below Canadian project break-evens," says Mr. Shenfeld. "But it's
increasingly important that Canada move on one or more of the alternative
pipelines to get our product headed Asia's way. Canada's own central and
eastern oil markets are another option, but longer term demand growth there is
also likely to be lackluster."
The report notes that global competition is also changing the energy sector
with countries like Iraq, Mexico and Venezuela now focused on developing
production for export.
"Canada was once among only a handful of countries welcoming foreign capital
in the oil sector," writes Peter Buchanan, a senior economist at CIBC, in the
report. "Just over a decade ago, nearly three-quarters of global oil reserves
were effectively off limits to major global players, due to state-run firms,
outright prohibitions, security or other considerations."
He notes that today, there are many places seeking investment to develop and
expand production. Not only in the U.S., but now Iraq is rebuilding, Mexico is
looking more open to inflows of foreign capital and expertise, and the winds
of political change could at some point see the same swing in Venezuela.
Mr. Shenfeld believes that clarity on the pipeline front is critical to
attracting the capital—both domestic and foreign—needed to finance the
growth in Canadian production. He also believes governments will need to do
more to bring in needed investment.
"The policy implication for Canada is that while Ottawa has imposed some new
restraints on oil sands activity by foreign state-owned enterprise, other
measures on the policy dial may have to move the other way. With more
competition for investor dollars, deficit-fighting federal and provincial
governments may have less room to manoeuvre in setting taxes and royalties
than was earlier the case.
"Both pipelines and reasonable royalties will be critical to avoid killing the
The complete CIBC World Markets report is available at:
CIBC's wholesale banking business provides 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
Avery Shenfeld, Chief Economist, at 416-594-7356,email@example.com; or
Kevin Dove, Communications and Public Affairs at
SOURCE: CIBC World Markets
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CO: Canadian Imperial Bank of Commerce
-0- Apr/03/2013 11:25 GMT
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