- US oil production could peak at around 12.1 million bpd in 2023.
- Even if they manage to drill more wells, U.S. producers will likely be stuck with oil they can’t transport.
- Conversely, Canadian oil production looks much more positive in 2023.
Thatlast week i wrote that I wondered about whether the EIA’s forecast for US oil production growth in 2023 was realistic. Based on industry sentiment in America’s largest oil-producing region, I concluded that production growth of nearly 1 million bpd was unlikely given the constraints and existing sentiment.
US oil production stagnates
Earlier this week I had the opportunity to speak with API’s Chief Economist, Dr. Dean Foreman. He told me some additional reasons why the US oil industry will probably not live up to the EIA’s growth forecasts. He explained that while growth in 2022 has been strong, production is currently stagnant at around 12.1 million bpd.
While the US may see some growth in Texas and Louisiana, where infrastructure, regulations and land ownership are more conducive to growth, little or no growth is expected in Colorado, New Mexico, Wyoming and North Dakota.
Drilling in these states is all low compared to pre-pandemic levels, and there are no signs that it will improve. State regulations in Colorado have stifled oil production in that state, and the moratorium on new leases for oil drilling on federal lands has had a major impact in New Mexico, Wyoming and North Dakota, where the federal government owns a lot of land.
The lack of new intrastate pipelines also hurts the development of these regions, as it is too difficult and too expensive to get the extra oil drilled in these regions to refineries or to the coast for transport. Texas and Louisiana do not face these problems as they have many refineries and export facilities within their borders.
Canadian oil production
In contrast, Canadian oil production looks much more positive in 2023. According to the EIA forecast, 40% of the 2.4 million bpd of non-OPEC production growth will come from Canada, Brazil, Guyana and Norway.
EspeciallyEIA Note that the growth of Canadian oil :
“Will be bolstered by projects to improve distribution bottlenecks, including the start of the TransMountain pipeline expansion project.”
The Canadian Energy Regulator (CER) provides data of a similar nature to the EIA for Canadian oil.
CER recently released two forecasts for Canadian oil production – one in which global oil demand is lower due to the implementation of climate policies (Scalable Policy Scenario) and another based on higher oil demand and higher oil prices (Current Policy Scenario).
According to current political scenario, Assuming a price of $70 per barrel for the entire forecast period, Canadian oil production is expected to increase to 5.42 million bpd. For reference, CER has pegged Canadian production at 5 million bpd in 2021. (Note that CER only accounts for in this forecast and does not include NGLs or LPGs, as does the EIA).
The areas of growth in Canadian oil production are primarily in the oil sands regions. The oil production there is very different from that of the shale oil regions of the United States. In Perm, for example, companies do not need a long development period or large initial costs to start drilling wells and producing oil.
On the other hand, that oil sands production requires more time and initial investment. But once that investment is made, wells have a much longer lifespan than wells drilled in shale oil regions, so production in Canada is not as responsive to price conditions as it is in Texas.
Final result
Canadian oil producers have already made the necessary investments to produce in the oil sands, and Canada has invested in new pipeline capacity to transport oil from the center of the country to the coast for export. That means oil production in Canada is less susceptible to the problems plaguing U.S. oil producers — inflation in drilling costs, pressures on shareholder value, regulatory uncertainty, lack of pipeline capacity and federal lease moratoria.
Canadian oil is likely to grow at a higher rate than the expected path in the current CER policy scenario because the price of Brent has been higher than the $70 per barrel level. barrel as its forecast assumed.
In fact, Brent is expected to remain at least $10 above this price in 2023. Since Canada already has the infrastructure to transport oil onshore for export, it should be easier for the country’s producers to increase production if the market is suitable. By contrast, many American producers will be stuck with oil they cannot transport if they drill more wells and increase production.
It appears that the Canadian oil industry is poised for greater growth in 2023 than its American counterpart. However, traders should not expect Canada to be able to fill the supply void that sluggish US oil production will leave in 2023.
Disclosure: The author does not own any of the titles mentioned in this article.
