Keystone approval only part of solution for Canada’s energy sector, CIBC report claims

TORONTO—While approval of the controversial Keystone XL pipeline is important to Canada’s oil and gas sector the project is no quick fix, according to a new report from CIBC World Markets.

According to CIBC chief economist Avery Shenfeld, a combination of rising shale oil prospects in the United States, a shift in consumption growth to Asia and a growing list of oil producing countries open to foreign participation pose challenges if Canada is to maximize the value of its resource base.

“Keystone will improve access (in the U.S.) and put a cap on adverse price differentials for Western Canadian producers,” Shenfeld said in a statement.

“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.”

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 to $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 market, the report warns.

“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,” Shenfeld said.

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,” Shenfeld added. “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,” CIBC senior economist Peter Buchanan writes 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.”

Buchanan notes that today, there are many places seeking investment to develop and expand production.

He writes that 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.

Shenfeld believes 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,” Shenfeld said.