Canadian oil production could fall 25% before post-COVID 'resurgence'

With an American election at this year, the chief executive of Enbridge was already expecting 2020 to be a "choppy" year for the company, since presidential candidates can have differing viewpoints on whether major pipeline projects should proceed and on the oilpatch, as a whole. 

The steps the company took to brace for any political uncertainty are now being used to gird its operations against significant upheaval in the oil and gas industry because of the COVID-19 pandemic and the glut of oil supply around the world after Russia and Saudi Arabia flooded the market.

Western Canada produces about five million barrels of oil everyday, but the volume is already dropping as oil prices hit record lows in recent weeks. The magnitude of how deep the production cuts will reach is difficult to predict, but Enbridge's Al Monaco speculates oil companies will take significant measures.

"It could see about maybe 20 per cent, 25 per cent, somewhere in that range, come off from there," said Enbridge's Al Monaco, adding the magnitude of how deep the production cuts will reach is difficult to predict.

The price for Western Canada Select, a heavy oil blend in Alberta, fell to about $4 US per barrel on Tuesday. In February it was worth more than $30 per barrel.

Demand for jet fuel has plummeted as has gasoline because of the pandemic. Diesel consumption has remained steady.

Many oil companies are having to decide whether to lower production or shutdown some facilities entirely because prices are so low.

"Anything is on the table depending on the economic circumstances," Imperial Oil executives said on Tuesday. "As we speak, we are running normal operations, but obviously we are watching everything very closely. Across the industry you are going to see volume reductions."

When the pandemic is over, Monaco expects the oilpatch in Western Canada to thrive in the coming years because oil producers will have more ability to export their product on pipelines.

Enbridge is creating additional space on its existing pipelines, while also pushing ahead with the Line 3 replacement project. Meanwhile, TC Energy expects to begin constructing the Keystone XL pipeline this summer and work continues on the Trans Mountain expansion project, which is owned by the federal government.

"We have to remember there are many projects in the oilsands that are, I would say, sitting on a shelf waiting for pipeline capacity. So once demand normalizes, the basin is going to be in good shape," Monaco said Tuesday during the Scotiabank CAPP Energy Symposium.

"Overall, once we get through this process , we're going to see a good resurgence in volume out of the basin and investment," he said.

Construction of the Line 3 replacement project is complete in Canada, although construction is delayed south of the border. The pandemic has had very little impact on the permitting process in the American state, according to Monaco, as the file is handled by the Minnesota Pollution Control Agency, the U.S. Army Corps of Engineers, and the state's Department of Natural Resources.

"Hopefully that'll all bring itself to fruition sometime in June, July. And, you know, once that's done, we'll be ready to start construction. Obviously, we've been planning for that. We've got crews ready to go," he said. "That's the game from here."

When proper approvals are obtained in Minnesota, the American leg of the project is expected to take between six and nine months to build.