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NorthAmOil                                    COMMENTARY                                          NorthAmOil




       Oil sands on the rebound







       Rising crude-by-rail exports and a shrinking budget deficit for

       Alberta point to improved market conditions for the province’s

       oil sands, though other obstacles remain



        ALBERTA          ALBERTA’S  oil sands appear set to enjoy  greenhouse gas (GHG) emissions intensity in
                         improved market conditions after being among  recent years in order to demonstrate that their
       WHAT:             the industries hit particularly hard by the coro-  resource does not have to be incompatible with
       The oil sands are set   navirus (COVID-19) pandemic.   decarbonisation goals, the industry continues to
       to enjoy better market   Various  indicators  are  pointing  to  this,  struggle with its public image.
       conditions after being hit   including the fact that Canadian crude-by-rail   This is compounded by the fact that new oil
       hard by the pandemic.  exports are reported to be rebounding, while  sands projects would be capital-intensive, while
                         Alberta’s budget deficit is expected to shrink.  the global oil industry remains on a mission to
       WHY:              However, the oil sands industry can expect to  rein in spending – at least for now. If global oil
       Rebounding crude-  continue grappling with several major obstacles  demand regains significant momentum in the
       by-rail exports and a   as questions remain over its future in a decar-  long term, propping up oil prices, the oil sands
       shrinking budget deficit   bonising world.             could see a new wave of investment. However,
       in Alberta are among                                   demand expectations have changed, with the
       the signs pointing to an   Rail rebound                International Energy Agency (IEA) revising its
       improvement.      Exports of crude by rail are on the rise after fall-  long-term forecast last year. The agency now
                         ing almost 40% in 2020, according to the Canada  projects that oil consumption will increase by
       WHAT NEXT:        Energy Regulator (CER).              about 750,000 bpd each year to reach 103.2mn
       This comes against the   The regulator’s data show that crude-by-rail  bpd in 2030, which is about 2mn bpd less than it
       backdrop of US President   exports averaged 172,013 barrels per day, com-  predicted in 2019.
       Joe Biden seeking to   pared with 280,272 bpd in 2019. They hit a his-  Questions therefore remain over how much
       move past the blocking of   toric high of 411,991 bpd in February 2020 but  crude-by-rail capacity will be needed in the
       Keystone XL in terms of   subsequently collapsed to an eight-year low of  years ahead. And even in the shorter term, while
       relations with Canada.  38,867 bpd in July.            oil price differentials are favourable enough to
                           Rail shipments then began a gradual recov-  spur crude-by-rail shipments, they tend to be
                         ery as more oil returned to the market following  seen as playing a supporting role in the takea-
                         a collapse in demand caused by the pandemic  way capacity picture rather than a central one.
                         in the first half of 2020. By December, crude-  This is illustrated by comments made recently
                         by-rail shipments had rebounded to 190,454  by Cenovus Energy’s CEO, Alex Pourbaix. In its
                         bpd, but year on year this was just over half the  fourth-quarter earnings statement, Cenovus
                         347,136 bpd worth of rail exports recorded in  said it had resumed crude-by-rail shipments in   The CER noted
                         December 2019.                       the final quarter of 2020 as market conditions
                           The CER noted that future levels of crude-by-  for moving Western Canadian crude to refin-  that future levels
                         rail exports depended on the pace of economic  eries in both Canada and the US improved.   of crude-by-rail
                         recovery from COVID-19, as well as on price  As of early February, barrels of Western Cana-
                         differentials. However, a recovery in the oil mar-  dian Select (WCS) crude in Hardisty, Alberta   exports depended
                         ket is anticipated to help boost rail shipments,  were trading at an $11.34 per barrel discount
                         at least in the near term. In the medium term,  to WCS at Nederland, Texas, compared with a   on the pace
                         the start-up of new pipeline capacity will likely  fourth-quarter 2020 discount estimated at $9.41
                         displace some of them, but beyond that, the  per barrel.                    of economic
                         recent cancellation of the cross-border permit   However, Pourbaix said on the company’s   recovery from
                         for the Keystone XL oil pipeline project could  earnings call that while Cenovus was working
                         mean that more rail capacity will be needed in  with its freight partners to manage costs and   COVID-19, as
                         the future if oil sands production is to expand  that “some elements of rail movement make
                         significantly.                       sense”, he saw it only playing a “modest” role  well as on price
                           There is considerable uncertainty over this,  in the company’s business unless differentials
                         however. The oil sands have been hit by an  widened out “significantly north of $15” per   differentials.
                         exodus of foreign investors in recent years –  barrel.
                         both exploration and production companies   Nonetheless, it is clear that crude-by-rail
                         and financial institutions that have sought to  shipments have at least some role to play for
                         demonstrate greener credentials. While oil  now, and appear set to continue rising in the
                         sands producers have worked to reduce their  shorter term.



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