Last week two right-wing parties in Canada's oil-rich Alberta province signed a tentative agreement to merge, creating a unified front to oppose the ruling New Democratic Party. The Progressive Conservative and Wildrose parties will unite to challenge the NDP in 2019's provincial election, a promising prospect for the local oil industry, hit hard by the global slump in oil prices and a massive C$10.3 billion ($7.57 billion) deficit. The political merger is the latest in a long series of industrial and political moves to put Canada back on the oil production map.
The merger is certain to push policies aimed at cutting costs for the oil and gas industry. Jason Kenney and Brian Jean, leaders of the PC and Wildrose parties, respectively, have both made promises in the past to get rid of local environmental regulations that pose challenges to the energy sector. They have pledged to pedal back initiatives such as carbon taxes and closures of coal-fired plants among other policy changes.
A more fuel-friendly administration would be welcome to many in Alberta, home of Canada's oil sands and the biggest exporter of crude oil to the United States. The region's economy has suffered in the wake of plummeting oil prices and the swift rise of crude production in Texas and New Mexico.
Just in the last year the oil industry has poured more than $25 billion into deals in the Permian basin, a vast swath of land in West Texas and New Mexico, bumping the Canadian oilsands' place at the top of North America's petroleum production. The Energy Information Administration predicts that in the next year U.S. oil production will approach 10 million barrels per day. This marks an incredible chapter for the U.S. who less than 10 years ago, in 2008, was looking at a national output of five million barrels and declining.
Part of the Permian's incredible production value lies in its stacked oil-bearing formations, which allow each rig to tap into up to eight different zones instead of a single pool. Another factor is its location. The geology of Western Canada's oil sands is on par with the Permian, but the geography simply can't measure up. Whereas the Permian lies a stone's throw away from the Gulf Coast refineries, Alberta is at the end of the pipe. This cross-continental distance makes for huge price tags on shipping oil and gas, not to mention the political and environmental difficulties of constructing new pipelines, putting the Canadian energy industry at a distinct disadvantage.
Canada's oil industry is making a charge, however, to put themselves back on the map by ramping up oil sands production this year. The Canadian Energy Research Institute has said that they expect production to increase by 595,000 barrels per day this year and by another 203,000 per day in 2018. Many projects started long before the oil price crash of the last two years are just coming online in 2017, promising strong figures for the once-waning region.
Chicago investment research firm Morningstar released a report last week predicting that Gulf Coast refineries can expect an influx of Canadian oil, as they are equipped to handle heavy crude that is not produced in the U.S. Midwestern refineries that had configured themselves to process heavy Canadian oil, the report notes, are now at capacity, making the Gulf Coast the "most obvious market".
It remains to be seen if Canada's uptick in production is sustainable, as many international extractors have fled the region after its sustained slump. Whereas many oil giants rushed to Alberta during its boom for its decades of promised production, the industry has changed. Now, with the ability to put up and take down rigs to match the market and a new unpredictability in oil price, many global giants are more interested in versatility than long-term projects.
For this reason, giants like Royal Dutch Shell and ConocoPhillips are transitioning away from the oil sands, marred by high production costs and low crude prices, and toward U.S. shale. Oil companies have collectively sold $24 billion in oil sands drilling rights in the last five months according to energy research firm Wood Mackenzie. Just last week Conoco-Phillips publicly parted with its most valuable in a $13.3 billion deal with Calgary-based Cenovus Energy.
As oil prices are recovering, many Canadian companies are seizing the opportunity to undergo mergers and acquisitions to stay afloat. Big energy companies are finally increasing spending and rehiring staff, but are still having a hard time bouncing back from the depression, increasing the incentive to make deals.
Canada is trying their hardest for a comeback, with political and corporate mergers as well as ramped up exports, but with the production powerhouse that is the Permian basin and no guaranteed end in sight to OPEC's flounderings, the instability of crude prices on a global scale could continue making it be hard to compete.
By Haley Zaremba for Oilprice.com
