National Energy Board

www.neb-one.gc.ca

Common menu bar

• Français
• Home
• Contact Us
• Help
• Search
• canada.gc.ca

Breadcrumb

Home > Speeches and Presentations > Speeches and Presentations 2008 > Alberta's Energy Future - Focus on Oil

Alberta's Energy Future: Focus on Oil

Presented by
Roland George
Board Member
National Energy Board

Alberta Chamber of Resources
Edmonton, Alberta

8 February 2008

Good morning.

It's certainly a great pleasure participating in this very important Alberta Chamber of Resources meeting, and sharing with you the NEB's views regarding Alberta's Energy Future.

Although my focus is on oil, I will touch upon other related matters.

Outline

After briefly discussing the NEB's role related to energy developments in Alberta, I will provide our views on big picture considerations to finally focus on the possible futures for Alberta's oil and gas industry.

These views are based on our recently released Energy Futures report which is available on our website shown on the first page of this presentation.

Key Messages

This report considers whether there will be adequate energy supplies to meet Canadians' needs until the year 2030. We have examined this question under a variety of scenarios and we can conclude that yes, Canadians will have ample energy supplies over that period. As well, the report underlines a number of important choices Canadians will have to make to meet challenges involving energy production, efficiency, and dealing with energy emissions.

The report provides a considerable amount of provincial detail, including Alberta.

What is the NEB?

Members of the NEB

The National Energy Board has 8 full time members, 2 temporary members and about 300 staff, all located in Calgary. Our decisions are based on the knowledge that people share with us during our hearings. All decisions made by the Board are intended to serve the Canadian public interest.

The NEB's role pursuant to the National Energy Board Act

External Context, Scenarios and Analysis

The future of Canada's energy markets hold a significant amount of uncertainty. The NEB attempts to address this uncertainty by examining a number of different energy scenarios.

Scenario development:

• The NEB, with the help of energy market experts, identified those factors expected to have an important and/or uncertain influence on energy markets over the next three decades.
• A number of factors were identified and grouped into three key themes, including geopolitics and the role of government, social values, and economic and market issues.
• Scenarios storylines were then constructed so that they varied along these key themes. The main assumptions, such as energy prices and economic growth projections, were also influenced by the key themes and resulting storylines .
• Two of the major issues that emerged as key distinguishing characteristics between the scenarios was geopolitical relationships and action on the environment. These are the issues that appear to be continually on the minds of Canadians. This was noted through our various information gathering exercises as well as the two rounds of consultations that we undertook in the development of the Energy Futures report.
• Across all scenarios we assume that current trading relationships are maintained and respected as well we also assumed that action on the environment will continue to progress as we move forward.
  • In Fortified Islands we explore what could happen if geopolitical tensions were to escalate and remain challenging for the next three decades.
  • In the Triple E scenario we introduce a number of energy and environmental policies to mange energy demand.
  • In Continuing Trends, we assume business as usual developments in geopolitical relationships (generally stable but allows for some increased or decreased tension at different time periods) and environmental progress (continued improvements in energy efficiency and energy intensity however no additional energy programs and policies are put into place).
• In the end, by varying the expected influence of the major themes three distinct energy scenarios were created and three very different paths for energy demand and supply emerged.

Geopolitical Context

The geopolitical context is important to Canadian energy markets.

• Crude oil is a globally traded commodity. Natural gas is continentally traded however this could change as LNG increasingly ties natural gas markets around the world together.
• The major natural gas and crude oil producers in the world are located outside of major consuming regions. For example, in 2006 the largest crude oil producing region was the Middle East whereas the largest energy consuming country was the United States. It is important to note that energy resources are increasingly being concentrated in regions of the world where there is geopolitical instability. This instability results in uncertainty and leads to shocks to global crude oil prices seemingly on a day-to-day basis as new headlines are reported.

Global Energy Demand

In addition, energy is required to drive the significant growth of developing countries, such as China and India. This has put significant upward pressure on global energy supplies to meet energy demand resulting in higher energy prices.

The geopolitical context shapes the NEB analysis largely through assumptions regarding energy prices and economic growth.

Energy and the Environment

Environmental developments have an important impact on Canadian energy markets.

As increased evidence of the impacts of energy production and use around the world mounts there is a corresponding increase in the demand for environmental management.

The social value changes are being reflected in energy and environmental policies in Canada at the national level as well as at the provincial level.

The NEB considers environmental social changes in the Triple E scenario. We assume that a number of policies and programs are adopted around the world as well as in Canada. These include increased energy efficiency programs, R&D funding, changes to urban design, financial incentives, and a price on CO₂. These assumptions allow us to significantly dampen energy demand growth over the next 30.

Scenarios and Key Pricing Assumptions

I will now continue with Key Assumptions, followed by some high level Quantitative Results for Canada, and then focus on Alberta before finishing with some Overview Messages

Reference Case and Scenarios

In order to understand our results, it is important to have an appreciation of the assumptions in terms of the energy prices and economic conditions which underlie the reference case and each of the scenarios.

• The Reference Case is our best guess about the development of supply and demand in Canada based upon current decisions and policies and current economic and energy trends. It is characterized by moderate energy prices and business as usual developments. For example, natural gas prices are assumed to follow a traditional relationship with crude oil. (84% of the 6:1 Btu parity)

The scenarios are intended to address uncertainty. Uncertainty which is caused by world geopolitical and economic factors, social trends, future policy decisions, or technology developments. Each scenario is based upon a set of internally consistent assumptions, designed to test our findings. We see each scenario as plausible and don't attach a probability to the scenario.

• Continuing trends extends trends used in the reference case out another 15 years to 2030.
• Triple E scenario assumes fairly aggressive conservation goals pursued on a global level. The scenario has more moderate economic growth as a result of economic/environmental trade-offs. There is a preference given to greener fuels such as renewables, nuclear and natural gas and some form of carbon pricing is assumed. By 2030, this scenario has the lowest energy prices from a producer perspective. This is achieved through a cooperative global environment resulting in abundant energy supplies around the world, as well as comprehensive energy demand management programs, which slow energy demand growth.
• The Fortified Islands scenario focuses on North American energy security. It has the slowest economic growth and highest energy prices. These outcomes are a result of a security conscious world, where continued geopolitical tensions limit access to cheap global energy supplies. The emphasis is on developing indigenous energy sources.

Again, these scenario storylines were developed through extensive discussion with energy experts both at NEB and outside. These were further refined during the cross-Canada consultation sessions.

Crude Oil and Natural Gas Prices

Energy prices are higher than they have been historically across all scenarios.

Given that 5 years ago oil was US$26/barrel, US$58/barrel in the first quarter of this year and currently trading in the US$90 range, it is obvious that making any long term predictions on energy prices is challenging. Nonetheless we had to make some assumptions on annual average prices for our modeling work.

In two of the scenarios there will be a decline in price compared to what Canadians are currently paying. This takes place in both the Triple E and Continuing Trends scenarios. In the Fortified Islands scenario, Canadians could expect to pay more for energy than what they are paying today.

Following the general convention and reflecting the fact that energy prices are set in the global market, the prices are specified in US dollars

Canadian Supply

Now, some high level quantitative results for Canada ...

Crude Oil Supply

Total crude oil production in Canada is expected to increase in the Reference Case, as well as in all three scenarios from its existing levels. However, the increase does not come from all sources.

Conventional oil production declines in the Reference Case and the three Scenarios from the current level of 1.2 million barrels/day to as low as 0.4 million bbl/d in Triple E. Production from East Coast increases from the current levels of .31 million bbl/d to 0.4 million in the Reference Case and then declines to as low as .044 million bbl/d in Triple E.

Production from oil sands increases through the Reference Case and scenarios to as high as 4.9 million bbl/d in Fortified Islands.

Thus the Reference Case sees an increase in both East Coast and Oil Sands production. In the Continuing Trends, the East Coast production begins to decrease from the high levels in 2015.

Triple E sees a slowing in the growth of oil sands production, as well as deepening of the decline in the production from East Coast. This is a direct result of lower oil prices and costs of environmental measures. The lower price in this scenario discourages development on marginal plays, with noticeable impact on East Coast offshore and oil sands.

Under the Fortified Islands scenario, high oil prices and preference for indigenous sources provide a further boost to oil sands production. The decline in the East Coast production also slows down as satellite pools are developed.

The notable growth in oil sands supply assumes timely development of markets and transportation infrastructure

In response to the higher crude oil supply, there is an increase in oil exports.

Light and Heavy Oil Net Exports

Canada is a net exporter of crude oil and the largest supplier of crude oil to the United Sates. Although there is some expansion of refining capacity in Canada, supply outpaces domestic demand by a considerable margin, except in the TE scenario.

Total exports levels reach 3.4 MMB/d by 2030 in the CT scenario, and 4.4 MMb/d in the FI scenario.

Natural Gas Supply

One of the most significant changes on the supply side is the steep decline in the natural gas production from the Western Canada Sedimentary Basin (WCSB).

The mid-range prices in the Reference Case and Continuing Trends are not high enough to prevent the decline in natural gas production.

However, the high prices in Fortified Islands result in increase in production from northern, offshore and unconventional gas sources.

The production in Triple E declines steeply due to the low prices. However, there is an influx of liquefied natural gas (LNG) imports which compensates for reductions from Canadian basins. This contributes to over half of Canadian requirements by 2030

Results for Alberta

Now, let's focus on the oil related results for Alberta.

Oil Sands Economics

Oil sands supply is driven by economics. This slide is meant to provide some background on how we have considered economics in our oil sands supply projections.

The top table shows our estimates for capex for integrated mining and in-situ recovery. Costs have risen dramatically in recent years, which has had a significant impact on project economics. It's been about one year since our analysis for the EF report was done, the values in red are current estimates based on news releases and presentations by industry and energy analysts, and indicate about a 25% increase.

We can think about oil sands economics (ROR) as being determined by the oil price, operating costs, and capital costs:

• FI: ROR is highest in this scenario because of the high oil price. Revenues are offset, however, by higher fuel costs (OPEX) and escalating CAPEX as activity is driven by attractive returns.
• CT: Attractive ROR driven by a moderate oil price and costs. Fuel prices and environmental costs are moderate and industry activity is at a healthy level leading to reasonable (historical?) capital costs.
• TE: ROR is lowest in this scenario because of the low oil price. OPEX is moderate since the costs of environmental stewardship have increased (carbon credits, water treatment), fuel costs are lower, however. Reduced industry activity has resulted in lower demand for labour and materials, resulting in reduced capital costs.

Oil Sands Historical CAPEX

This chart shows the extent to which the oil sands industry is gaining momentum. Capital spending (CAPEX) is expressed in as-spent C$. The spending level for oil sands projects for 2006, including sustaining capital, is just over $14 billion. CAPEX for 2007 is estimated at about C$17 billion, if the oilsands production forecasts are accurate, spending will be at level or above for the foreseeable future.

Illustrative of this momentum is the recent announcement by Suncor to increase their production by 200,000 b/d at a cost of $C21 billion.

Labour Requirements - Wood Buffalo Region

Associated with the momentum of oil sands growth is the increasing demand for and competition for labour. This charts shows some labour demand data compiled by the Regional Infrastructure Working Group. Oil Sands industry direct employment in the Wood Buffalo region, both operations related and construction related, is expected to nearly double between now and 2010, reaching about 26,000 jobs.

Oil Sands

Oil sands production in the CT scenario is basically an extrapolation of the Reference Case; the economics are considered to be sufficiently robust to allow active expansion of oil sands production.

In the TE scenario, producers respond to the lower oil price track, with no new projects coming on and production decreasing marginally after 2018. After a period of adjustment, slow growth resumes.

In FI, with higher oil prices, emphasis on security of supply and less stringent environmental conditions, oil sands production expands rapidly.

By 2030, production levels range between 2.8 and 4.8 million barrels per day over the 3 scenarios.

The expansion of existing upgraders, plus the implementation of new upgrading projects, including merchant upgraders, allows the proportion of upgraded bitumen to remain relatively stable at near 65 percent after about 2010.

Alberta Oil Production - CT Scenario

Oil sands production in the CT scenario is basically an extrapolation of the Reference Case; the $50 oil price is considered sufficient to allow active expansion of oil sands production.

In the TE scenario, producers respond to the lower oil price track, with no new projects coming on and production decreasing marginally after 2018. After a period of adjustment, slow growth resumes.

In FI, with higher oil prices, emphasis on security of supply and less stringent environmental conditions, oil sands production expands rapidly.

By 2030, production levels range between 2.8 and 4.8 million barrels per day over the 3 scenarios. The average annual growth rate between 2015 and 2030 in FI is 3.1%, versus 2.5% in CT.

Alberta Oil Markets

This slide illustrates the crude oil flows ex-Alberta, estimated for 2007. Roughly 80% of Alberta production is shipped out of the province, with total exports of 1.4 MMb/d day split between:

• B.C - 35 Kb/d
• Sask - 150 Kb/d
• Ontario - 125 Kb/d
• Offshore West Coast - 15 kb/d
• Padd I - 50 Kb/d
• Padd II - 815 Kb/d
• Padd III - 70 Kb/d
• Padd IV - 220 Kb/d
• Padd V - 115 kb/d

Total Crude Oil Supply

By 2030, total crude oil production in Canada ranges between 3.1 and 5.6 MMb/d across the 3 scenarios.

In the Reference Case, production reaches 4.1 MMb/d by 2015.

In the TE scenario, production declines after 2015, due to stagnating oil sands development and declining East Coast and WCSB production.

Overview Messages

I would now summarize the key results in these overview messages.

Overview Messages

Canadian energy markets are expected to function well with energy prices balancing energy supply and demand.

Energy prices are expected to remain higher than historical levels due to international demand-supply factors. In the scenarios we examined, the price of oil ranges between US$35-$85 in 2005 dollars, as compared to US$20 in 1990.

Despite the higher energy prices, the energy demand is expected to increase with growth in the economy. The pattern of energy consumption is largely predetermined by the make-up of the existing stock of energy-using devices such as buildings, appliances, cars, industrial motors. As the stock turns over, and is replaced by new and more efficient stock, the energy efficiency will improve. This is further bolstered by penetration of new technologies, which generally promote cleaner combustion. These efficiency improvements partially offset the growth in demand.

Energy demand management initiatives will also play a key role in dampening this growth.

Overview Messages

With well functioning energy markets, appropriate signals will generate ample supply of energy. Based on our study we feel that Canadians will have adequate supply to meet their needs.

Fossil fuel and conventional energy sources will continue to be the dominant source of supply. However, non-fossil fuels and non-conventional hydrocarbons will play a bigger role.

A significant example is the growing share of oil sands, which will likely require changes to refineries.

Energy exports constituted 20% of total Canadian exports of all goods and services in 2005. Total net exports of energy are expected to increase through the forecast period. However, the growth rates vary by energy commodity and scenario. The net exports of oil reach new heights led by the increase in oil sands production. There is also an increase in electricity exports. Natural gas exports decline dramatically in two of the three scenarios.

Overview Messages

With well functioning energy markets, appropriate signals will generate ample supply of energy. Based on our study we feel that Canadians will have adequate supply to meet their needs.

Fossil fuel and conventional energy sources will continue to be the dominant source of supply. However, non-fossil fuels and non-conventional hydrocarbons will play a bigger role. A significant example is the growing share of oil sands, which will likely require changes to refineries.

A significant example is the growing share of oil sands, which will likely require changes to refineries.

Energy exports constituted 20% of total Canadian exports of all goods and services in 2005. Total net exports of energy are expected to increase through the forecast period. However, the growth rates vary by energy commodity and scenario. The net exports of oil reach new heights led by the increase in oil sands production. There is also an increase in electricity exports. Natural gas exports decline dramatically in two of the three scenarios.

Overview Messages

Questions?

We will now open the session to your questions.

 

Primary navigation (left column)

Date Modified:

2011-10-28