Canada, The Unexpected Winner in the Global Oil Boom

The Trans Mountain Expansion Project, now finally completed and operational after years of delays, is changing the fortunes of the oil sands.
Canada’s oil sands producers have started ramping up production last year in anticipation of the start-up of exports through the TMX pipeline.
The production increases in the oil sands are the result of the expansion of operational projects with existing infrastructure.

Canada’s oil output is booming as producers ramp up projects and extraction amid expanded market access and narrowing discounts of the Canadian heavy crude to the U.S. benchmark.

The Trans Mountain Expansion Project, now finally completed and operational after years of delays, is changing the fortunes of the oil sands producers in Alberta, giving them access to markets in Asia and the U.S. West Coast.

Constrained for years due to insufficient egress, Canada’s oil now has nearly 600,000 barrels per day (bpd) of additional market access. The expanded Trans Mountain pipeline is tripling the capacity of the original pipeline to 890,000 bpd from 300,000 bpd to carry crude from Alberta’s oil sands to British Columbia on the Pacific Coast.

And producers are taking advantage of this. They began ramping up production at the end of last year in anticipation of the Trans Mountain Expansion (TMX) start in the first half of this year. Canadian oil firms now get more bang for their buck as the discount of Western Canada Select (WCS), the benchmark for Canadian heavy crude sold at Hardisty in Alberta, has narrowed relative to the U.S. crude oil benchmark, West Texas Intermediate (WTI) in recent weeks.

Moreover, the production increases in the oil sands are the result of the expansion of operational projects with existing infrastructure, so the capital expenditure – which is very high for this type of crude extraction – has been lower than for building projects from scratch.

The rise in Canada’s oil sands output, mostly thanks to the Trans Mountain Expansion, is making the country one of the top non-OPEC+ contributors to growing global supply this year, alongside the United States, Guyana, and Brazil.

Some analysts even forecast that Canada could be the single largest source of oil supply growth, ahead of the U.S. or Guyana.

“Barring any unforeseen circumstances, Canada could be the largest source of increased oil supply across the globe in 2024,” Marc Ercolao, economist at TD Economics, wrote in a report earlier this year.

This year, output growth in Canada could be 300,000 bpd –500,000 bpd, “putting the nation in the running to be the largest source of global oil supply growth,” Ercolao said.

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Global oil supply growth estimates vary based on differing projections from forecasters and agencies, but Canadian oil could account for 25–67% of incremental supply in 2024, the economist noted.

“Canada should be able to capitalize on higher prices paid for our oil as well as the forthcoming ability to get Western oil reaching international markets,” Ercolao added.

Increased Egress, Higher Prices

TMX is set to boost the price of Canada’s heavy crude oil for years to come, top executives at the major energy firms say.

In 2023, WCS was valued at an average of US$17.90 per barrel less than WTI. Early in 2024, that discount had widened to about US$18.50 per barrel before narrowing to less than US$13 per barrel in early April 2024, just before TMX entered in service, data from Canada Energy Regulator (CER) showed.

Crude oil production has been growing in western Canada, with Alberta hitting record-high production of 4.53 million bpd in December 2023. TMX is set to increase total western Canadian crude oil export pipeline capacity by 13%, helping to relieve capacity constraints on export pipelines, the regulator noted last month.

Overall, the capacity of the expanded Trans Mountain pipeline will represent 17% of the total pipeline export capacity available to Canadian crude oil shippers, CER said.

While the biggest Canadian oil producers reported a mixed bag of Q1 earnings this spring, all of them expect TMX to boost Canada’s oil prices and to be a major asset for the industry for years to come.

Drew Zieglgansberger, Executive Vice-President and Chief Commercial Officer at Cenovus Energy, said, “We’re pretty excited on behalf of the industry and Canada to have another great asset available to us.”

Oil Sands Firms Outperform U.S. Shale Producers

Investors have welcomed the renewed optimism in the industry and the higher returns to shareholders Canadian producers have started to offer.

The four largest oil sands producers in Canada have seen their stocks gain 37% in the past 12 months, while the index of the biggest U.S. oil and gas firms has trailed this average gain by 19 percentage points, according to data compiled by The Wall Street Journal.

While oil-sands projects are more capital-intensive and need years to start-up, they can pump crude for years and decades, unlike the shale formations in the U.S.

“Oil sands are costly to produce, but there’s no shortage of the resource,” Wells Fargo equity analyst Roger Read told the Journal.

Things are looking up for Canadian producers, at least in the near to medium term. And Firms have started to reward shareholders.

Canadian Natural Resources, for example, said in its Q1 earnings release last month that “Commencing in 2024, we are returning 100% of free cash flow to shareholders, as per our free cash flow allocation policy, and continue to manage the allocation on a forward-looking annual basis.”

By Tsvetana Paraskova for Oilprice.com