As a data-driven organization, CAPP believes it is critical to provide the public with credible, clear and the most up to date information available. CAPP’s Data Centre is a central access hub for information and data related to the many facets of Canada’s upstream oil and natural gas sector.
Canadian Oil and Gas Industry Overview
Canada in a Global Context
- Canada is the fourth-largest global producer of crude oil and the fifth-largest producer of natural gas. It ranks as one of the least corrupt in the world, with low levels of corruption correlated to high levels of environmental performance. In an increasingly polarized world geopolitically, Canada accounts for one-sixth of the oil and gas production from countries within the Western Alliance and about 6% of global oil production.
Evolution of the Industry
- Canada has been a trailblazer in the oil and gas industry since the inception of the modern petroleum industry in the 1800s. Over the more than 160 years of operating, Canadian producers have consistently innovated to adapt to new technology and a rapidly changing global environment.
Geology of the Western Canadian Sedimentary Basin
- The country’s large land base is home to many oil and gas deposits and play types thanks to a long, varied geologic history and complex tectonics. The Western Canadian Sedimentary Basin, the largest producing basin in the country, stretches across four provinces and two territories.
Industry Structure
- Canada is unique in that, on top of a prolific conventional oil and gas industry, much of the country’s production comes from the oil sands. Both the conventional and oil sands industries have seen significant innovations over the decades, both now routinely producing oil and gas from deposits that were once considered impossible to unlock hydrocarbons from.
Product Types and Location
- Hydrocarbons include a spectrum of product types, from low-density, gaseous molecules like natural gas to high-density, viscous bitumen. All forms can be found and are produced in Canada.
Canadian Oil and Gas Production
Canada is a significant supplier of oil and gas. Canada is the fourth-largest producer of oil in the world and the fifth-largest producer of natural gas.
Natural Gas Highlights
- Competition from US shale gas starting in 2008 led to a decline in Canadian production. In 2012-13, the trend reversed with the discovery of shale gas in BC and Alberta. Canadian production has now recovered to a record high.
- Shale gas has also shifted the dominant location for natural gas production; from southern Alberta to northeast BC and northern Alberta.
Crude Oil Highlights
- Canadian oil production includes oil sands at 3.2 MMB/d (58%), conventional at 1.5 MMB/d (27%), east coast offshore at 0.2 MMB/d (4%) and NGLs at 0.6 MMB/d (11%).
- Since 2005, oil sands production has tripled, but after 2018, production growth has moderated. Production has ranged between 3.1 and 3.2 MMB/d the last few years (2021, 2022, and 2023).
- Condensate and pentanes plus production has doubled since 2014 and is currently about 470,000 B/d in 2023. The growth of light liquids is a byproduct of the prolific shale gas and oil wells.
The Economic Impact of Canadian Oil and Gas
- Conditions for the Canadian upstream oil and gas industry have been challenging since the 2014/15 downturn; however, the situation has drastically improved post-COVID with the commodity price recovery and improved pipeline takeaway, which have resulted in record-high revenue levels in 2022 and 2023.
- Oil prices have strengthened considerably since the start of 2024 and enough to offset weaker natural gas prices, and now annual revenue for 2024 is estimated at $188 billion (up 3% Y/Y). CAPEX spending should be more resilient and similar to 2023, with the equivalent of 59% of industry revenue, or $110 billion, estimated to be spent on operating expenditures (OPEX) and capital expenditures (CAPEX) combined; this is mostly spent in Canada.
- The industry’s improved health has transferred to the bottom line of provincial governments. The industry paid a record $33 billion in oil and gas royalties to provincial governments in 2022. In 2023 and 2024, over $20 billion is expected in each year.
- Over the past few years, cost inflation has erased most of the industry’s previous gains in reducing operating costs. Managing these costs continues to be an area of focus.
- The economic impact of Canada’s upstream oil and gas sector is significant. In 2023, the sector comprised over 3% of Canada’s total GDP. The Oil and Gas Extraction sub-industry is the largest goods-producing industry in Canada. It is 20% bigger than the next largest sub-industry—Engineering and Other Construction Activities—and 30% bigger than the Residential Building Construction industry.
- When direct, indirect, and induced jobs are considered, the oil and gas sector employs about 1,000,000 people in Canada. These are well-paying jobs; the average direct oil and gas worker’s total compensation is 2.3X higher than the Canadian average.
Canadian Oil and Gas Export Infrastructure
Canada is both a significant consumer and supplier of energy. Substantial energy infrastructure has been developed over decades to gather, process, and ship energy to domestic and export markets.
Oil and Natural Gas Liquids Infrastructure Highlights
- There are more than 840,000 km of transmission, gathering, and distribution pipelines in Canada. The pipeline network delivers natural gas, natural gas liquids, and crude oil for domestic use and export.
- Canada has more than doubled its pipeline and rail flows out of the Western Canadian Sedimentary Basin (WCSB) to ~4.5 MMB/d (from ~2 MMB/d) since 2007 to accommodate oil sands growth, however, growth has ultimately been constrained due to limited egress capacity, including the cancellation of three major pipeline projects.
- The Trans Mountain Expansion Project (TMEP) is expected to be in service in Q2/2024 and will add ~590 MB/d of egress capacity, marking a major milestone for Canadian oil producers and providing tidewater access to new markets.
Natural Gas Infrastructure Highlights
- A large network of pipelines moves natural gas from producing regions in Western Canada to Eastern Canada and the United States, where Canada represents the largest foreign supplier.
- Starting in 2016/2017, constraints in regional gathering systems and export lines have limited growth and depressed prices, but recent capacity expansions have helped mitigate these issues. Canadian gas started to be exported from US LNG terminals in 2023. The first Canadian LNG export projects are under construction and will provide greater access to higher-priced international markets.
GHG Emissions
Total Industry Emissions
- Emissions from oil and natural gas in Canada fell from 192 to 189 Mt CO2e in the 10-year period between 2012 and 2021 (-2%) while production on a BOE basis grew (+37%). This divergence is the result of improving greenhouse gas (GHG) intensities.
- Total oil and natural gas emissions peaked in 2015. From the peak to 2021, emissions fell by 7%.
Sector Emissions
- Conventional production has been making substantial gains. For oil, absolute emissions were down 29% between 2012 and 2021, while emissions intensity decreased by 21% over the same period.
- Natural gas production also made significant strides as absolute emissions declined 22% between 2012 and 2021, while emissions intensity decreased by 42% over the same period.
- Oil sands have an advantage for future GHG reductions since the emissions are large-scale and in a relatively small geographic area. The Pathways Alliance, an industry group representing 95% of oil sands production, has pledged to reduce emissions to net zero by 2050 using carbon capture, electrification, energy efficiency, and other technologies.
- Conventional oil and natural gas will require a different approach given the significant number of small facilities over a large geographic region. However, considerable progress has already been achieved in reducing emissions through electrification, efficiency, fuel switching, and methane loss reduction. The industry has adopted a multi-pronged, collaborative approach through industry partnerships to develop new emissions reduction technologies, including smaller-scale carbon capture.
Canadian Refining Industry
Introduction to the Canadian Refining Industry
- Refineries are a critical piece of Canada’s energy story. Crude oil is the second largest type of energy consumed in the country, and refineries are the key step in turning the raw commodity into high-value final products. They also represent a key part of the Canadian economy. In 2023, Canada exported $20 billion worth of refined petroleum products abroad.
Industry Overview
- Across the country, Canada has 16 operating refineries (including 2 asphalt refineries) with a total refining capacity of 1.9 MMB/d, not including upgraders. Canada’s refinery capacity is primarily located in Eastern Canada, near large population centers, and in Alberta, near major oil-producing regions.
- There is a co-dependency between Canada and the United States with regard to refineries. In Canada, refineries in the east are configured to handle lighter conventional crude oil, typical of that produced in the United States. The United States now makes up nearly three-quarters of oil imports needed for Canadian refineries. In the United States, many refineries have been configured with coking capabilities to handle the heavy sour crudes typical of those produced in Western Canada. Canadian refineries have limited heavy oil refining capacity, making Canada dependent on the United States for refining these barrels.
Energy Security
- Over the past decade, Canada has strengthened its continental energy security by reducing reliance on overseas oil and increasing the share of imports from the United States. The only refinery still importing meaningful overseas oil is the Irving Oil refinery in New Brunswick.
- Refineries in Eastern Canada depend on production from Canada and the United States, and any curtailment of production would cause an energy shortage. Over the past several years, the Michigan State Government threatened to stop the operation of a key Enbridge pipeline segment (Line 5) that would have resulted in an energy shortage in Eastern Canada. In December 2023, however, state officials approved a tunnel under the Straits of Mackinac. A final approval from the US Army Corps of Engineers would allow Enbridge to proceed in building the tunnel and ultimately continue operating the pipeline.
Sustainability
- Canada has 22 operating ethanol/biodiesel biorefineries, with three large renewable diesel facilities completed or under construction.
- Several policies have been enacted to lower GHG emissions at Canadian refineries and in the fuels. In Canada, the Clean Fuel Regulations, which came into force in summer 2023, should increase the adoption of alternative, lower-carbon fuels such as biofuels.
Natural Gas Market Fundamentals
Summary of Natural Gas Market Fundamentals
Due to technical and economic challenges in global trade and transportation, natural gas markets tend to be more localized than the crude oil market, even with the recent growth in LNG. As such, the United States dynamics tend to dictate the Canadian natural gas market.
US Natural Gas Supply
- Based on the latest monthly Short-Term Energy Outlook from the US Energy Information Administration (EIA) for April 2024, US dry natural gas production is expected to average 103.58 Bcf/d in 2024, down 0.2% or 0.22 Bcf/d from 2023 levels. The EIA has lowered its US supply outlook due to lower natural gas prices that have resulted in production curtailments. In recent years, supply growth has been driven mainly by gas-focused plays in the Appalachia and Haynesville regions following the shale revolution and a significant associated gas growth from the Permian, an oil-focused play.
US Natural Gas Demand and Net Exports
- On the demand front, the EIA is forecasting average US natural gas demand of 89.92 Bcf/d in 2024, up ~0.8 Bcf/d relative to 2023 (+0.9% Y/Y). Driven by LNG, net exports are expected to increase by 16.39 Bcf/d by 2025, resulting in a forecasted total supply deficit of approximately 0.6 Bcf/d.
US Natural Gas Storage
- In North America, warmer-than-average temperatures were experienced during winter 2022/2023 and 2023/2024, leading to weak heating demand, which caused high natural gas storage levels that now sit well above 5-year averages. According to the latest three-month temperature outlook from the National Oceanic and Atmospheric Administration (NOAA), warmer-than-average temperatures are forecasted across much of the Lower 48 through June 2024. Warm weather in the summer months leads to increased demand for electricity generation via air conditioning and cooling systems.
Natural Gas Benchmark Pricing
- The primary benchmark pricing hub for natural gas sold in the United States is Henry Hub, located in Louisiana, while in Canada, the primary benchmark pricing hub is AECO, located in Alberta. Numerous factors can influence pricing at a particular hub, such as regional supply/demand, transportation costs, pipeline constraints, storage capacity, and/or weather.
- Looking ahead, based on futures pricing, Henry Hub is expected to average US$2.37/MMBtu in 2024 before increasing to US$3.12/MMBtu in 2025 in tandem with increased LNG export capacity in the United States. In Canada, AECO is expected to average C$1.80/GJ in 2024 before increasing to C$3.12/GJ in 2025, underpinned by the start-up of LNG Canada Phase 1 and an acceleration of LNG exports in the United States.
Crude Oil Market Fundamentals
Global Crude Oil and Liquids Supply
- Based on the latest short-term forecasts (at the time of this publication) from the International Energy Agency (IEA) and the US Energy Information Administration (EIA), global crude oil and liquids production is global crude oil and liquids supply is expected to average 102.7 MMB/d and 104.5 MMB/d in 2024 and 2025, respectively. OPEC is expected to account for roughly 30% of the total supply in 2024, compared to about 70% for non-OPEC countries. OPEC’s voluntary supply cuts remain critical to maintaining market balance into 2024. Based on its latest agreement, the group is expected to maintain current supply cuts to June 30th, 2024.
Global Crude Oil and Liquids Demand
- Global crude oil and liquids demand is expected to average 103.0 MMB/d and 104.3 MMB/d in 2024 and 2025, respectively. Average global demand growth is expected to slow in 2024 to 1.1 MMB/d year-over-year, compared to 2023, which was up roughly 2.3 MMB/d relative to 2022.
Global Crude Oil and Liquids Supply/Demand Balance
- Based on the latest monthly IEA Oil Market Report (Apr 2024), a tighter supply/demand is now expected through 2025 as a result of heightened geopolitical tensions abroad and sustained voluntary supply cuts from OPEC+. Most supply growth is expected to be driven by non-OPEC countries, namely the United States, Brazil, Guyana, and Canada.
- Crude oil prices have rallied to start 2024, with WTI hitting ~US$87/B in April driven by a tightening supply/demand outlook. Looking ahead, based on the futures market, the average price for WTI in 2024 and 2025 is US$81.06/B and US$75.59/B, respectively.
WCSB Supply and Egress
- The amount of egress capacity out of the Western Canadian Sedimentary Basin (WCSB) influences Canadian crude oil prices. The Trans Mountain Expansion Project (TMEP) is poised to be in service in Q2/2024, adding 590 MB/d of pipeline export capacity, which will have a positive impact on Canadian crude oil differentials.
Canadian Consumption of Domestically Produced Crude Oil and Natural Gas
Canada consumes a mix of domestic production and imports for both crude oil and natural gas, with the United States being the dominant foreign supplier. Canada and the United States are highly integrated with supply delivered through a complex pipeline network that intertwines both countries.
Crude Oil Consumption Highlights
- In 2023, approximately 1.25 MMB/d of Canadian refinery crude oil receipts were domestically sourced, equating to 73% of total refinery receipts.
- Canada’s reliance on crude oil imports to meet refinery needs has declined by roughly 50% to ~0.46 MMB/d in 2023 since peaking at ~0.93 MMB/d in 2004. This is primarily a function of the closures of import-dependent refineries in Eastern Canada, but also due to pipeline changes that have improved connectivity to domestic sources.
- Canada’s refining complex is predominantly designed to process lighter-grade crude oils. Consequently, Canada’s heavy oil sands barrels are mostly exported to complex coking refineries in the United States.
Natural Gas Consumption Highlights
- In 2022, according to Statistics Canada data, Canadian natural gas demand was 12.9 Bcf/d. Net of natural gas imports, the implied consumption of domestically produced natural gas was 9.8 Bcf/d or ~76% of total demand.
- The industrial sector is Canada’s largest natural gas consumer, accounting for ~7 Bcf/d or 54% of total demand in 2022.
- Provinces in Western Canada meet demand needs with domestic production. However, changes in North American supply/demand dynamics have led to an increased reliance on US natural gas imports for Eastern Canada and a loss in market share for Canadian gas producers in this region.
Canadian Exports of Crude Oil and Natural Gas
Crude Oil Export Highlights
- After meeting domestic refining needs in Western Canada and Ontario, almost all Canadian crude oil production is exported to the United States. Limited access to tidewater ports, specifically in Western Canada, prevents oil from being sold abroad. For context, Canada exported over 80% of its total oil supply to the United States in 2023.
- Canada is the United States’ largest foreign crude oil supplier, making up ~60% of all United States imports in 2023, equating to roughly 5X the next biggest supplier, Mexico. Canada’s dominant position is due to our trade history, geographic proximity, integrated pipeline infrastructure, and compatible heavy crude oil.
- A lack of new pipeline takeaway capacity in recent years has ultimately limited the export potential for Canadian crude oil. The forthcoming Trans Mountain Expansion Project (TMEP) will increase Canadian oil exports to the US West Coast. TMEP will also present an opportunity to ship oil to Japan, India, and SE Asia.
Natural Gas Export Highlights
- The North American shale revolution has altered the natural gas supply/demand dynamic, turning Canada’s sole export market, the United States, into its main competitor. In 2023, Canada exported roughly 45% of its natural gas supply to the United States. From 2010 to 2021, natural gas exports to the US decreased by 18% due to increased natural gas production in the northeast US, its main competitor.
- In Canada, tight gas plays in the Montney, Deep Basin, Duvernay, and other northwest Alberta and northeast BC areas offer significant development potential. Like oil, the growth of gas exports has been limited by pipeline constraints and the inability to tap into global markets via LNG.
- Compared to the other top natural gas-producing countries, Canada has significantly lagged in the growth of its natural gas exports. Post 2025, LNG exports from Canada’s West Coast and the US Gulf Coast will be of sufficient volume for Canada to expand into global market opportunities.