Oil prices set to rise sharply, unless new projects are approved

Oil prices are set to rise sharply starting in 2020 if new energy investments are not made this year.

That was the message of the International Energy Agency as the CERAWeek energy conference kicked off in Houston. There's a worldwide glut of oil now, and the IEA said that supply looks adequate for the next three years, thanks to rising production from U.S. shale producers and Canadian oilsands projects that were sanctioned before the oil price crunch began.

However, oil investments dropped sharply in both 2015 and 2016, and if that trend continues into 2017, there will be a problem in three years.

"We have seen two years in a row of huge declines in upstream investment. If this is the case in 2017, if we don't see substantial rebound, we may well see that the market tightens around 2020 and the spare production capacity shrinks," said Fatih Birol, the chairman of the IEA, at a news conference in Houston.

Oil investment globally was $450 billion US in 2016. The IEA is hoping to see that increase by 20 per cent, a further $90 billion US in 2017. In 2016, oil investment in Canada was estimated at $37 billion, and the Canadian Association of Petroleum Producers expects it to rise to $44 billion in 2017.

Birol made reference to 2008, when prices spiked to more than $140 US per barrel, saying that without new investment, the oil market could be tighter in 2022 than it was in 2008.

"At that time, the share of spare production capacity to global oil demand was close to four per cent and in this picture, the spare production capacity will be less than two per cent," he said.

The IEA does not see peak oil — the point at which global demand will reach its highest point and then decline — coming in either the short or medium term.

Birol pointed out that one-third of global oil demand growth will come just from Asian trucking. He named China and India as drivers of growth and predicted that oil export trade routes will also shift, something that may cause problems for Canada.

Getting oil to Asia

"We are seeing that the Canadian crude needs an outlet outside of Canada, If it all goes to the U.S., or if we get pipelines to bring it to the markets where the demand for crude will be needed, most notably Asia, it will depend on getting the infrastructure approved in time," said Toril Busoni, an oil market analyst with the IEA.​

Al Monaco, the chief executive of Calgary-based Enbridge, was a keynote speaker on Monday. Multiple Canadian politicians will be speaking at CERAweek, but Monaco is only Canadian energy executive taking the main stage.

After the purchase of Spectra Energy, Enbridge became the largest pipeline company in North America and Monaco emphasised the integration between the Canadian and U.S. energy markets.

Enbridge was not successful in getting approval to build the Northern Gateway pipeline project and said it had no new plans for a West Coast pipe. As a result, the company is very dependent on the U.S. to get oil to market.

Monaco pointed out that the U.S. refineries on the Gulf Coast are a huge market themselves, with eight million barrels per day of capacity, around 40 per cent of which is engineered to refine heavy Canadian crude.

Shipping from the Gulf Coast

"So it's a natural marriage between the countries," he said. "But, it will continue to be important for Canada to expand its markets wherever it can."

One way that it can do so is to ship oil to the U.S. Gulf Coast, to then be exported out of the United States. In February, Monaco said prices were high enough that Western Canadian producers were able to do so economically.

"The U.S. and Canadian continent has amazing resource potential," he said. "As a continent, I think we need to look at export markets. What other industry do you know where you don't have connectivity and ability to move your product off the continent?" 

'Having... the ability to export out of the United States, that's a huge improvement for Canadian producers."