Every day there is a new report about how fast oil and gas production is growing in the U.S. As we continue to develop our resources here at home, we require fewer and fewer imports from abroad. This trend has started to have an impact on our very close neighbor, Canada.
Canadian exports were down 2% in the third quarter, the largest drop since 2009, with energy-specific imports down 6.4%. Oil and gas extraction also fell 1.4% in the third quarter. These numbers, combined with the delay of -- and potential complete dismissal of -- the Keystone XL pipeline project, has many Canadians questioning the country's dependence on the U.S. for exports.
Canada sends 99% of its oil exports to the United States. Through most of this year, though our overall foreign imports declined, we continued to import as much oil from our northern neighbors as we have in the past. In fact, the Energy Information Administration said that we actually slightly increased our Canadian imports through the first eight months of the year to 2.5 million barrels per day, up from 2.2 million bpd last year.
However, by September that number finally started to come down, and it is expected to continue to fall as U.S. oil production continues to climb, a reality that some predict could leave Canada with a whole lot of oil and no one to sell it to.
The situation is even more precarious for Canadian natural gas exports, 100% of which are sold to the U.S. Canada is the third-largest dry gas producing country in the world, but as with its oil, the country needs to find another market for this product -- and fast. Our overall Canadian natural gas imports have been declining since 2007, and have fallen off 7% this year, compared to last year. With each passing month, more gas is produced in the U.S. and our demand for Canadian exports shrinks. Year to date, U.S. natural gas imports have accounted for a mere 8% of consumption, the lowest percentage in 20 years.
Not only are we buying a lot less gas, but American production has wreaked havoc on the world of Canadian infrastructure. As U.S. gas supplies push into markets traditionally dominated by midstream outfit TransCanada (NYSE: TRP ) , volumes on the company's Mainline system have dropped off precipitously. Shipments have plummeted 70% over the last five years, and analysts expect that without some sort of drastic measure, the pipe will be running at one-third its capacity by 2014.
Rising costs, future production
The Mainline pipeline system represents 15% of TransCanada's assets. Booming U.S. production has certainly had a negative impact on the company's business, but the infrastructure problems don't stop there. Before long, Canadian companies may see the same issue with crude oil.
Pipelines running through the middle of the U.S. down to the Gulf Coast used to be a sweet trip for Canadian oil. Now that they're full of oil from North Dakota's Bakken Shale, Canadian producers are forced to sell their oil at a $10 per barrel discount to get a ticket to ride. Keep in mind that the WTI benchmark price for U.S. oil is already trading at about a $20 per barrel discount to the Brent world price.
Discounted oil is a big problem when it comes to developing expensive unconventional oil projects like the Canadian oil sands. Costs in the oil sands have risen 250% in the last 10 years; if the price of North American oil continues to decline, there are absolutely some oil sands projects that will be shut down. It is likely that they will be mining projects much like the Suncor Energy (NYSE: SU ) Fort Hills mine expansion that is now on hold, rather than in situ extractions, which are cheaper to operate. Regardless, the price of oil is a real threat to Canada's bottom line.
Desperate times, desperate measures?
It is easy to figure that because of Canada's declining exports and paltry economic growth -- real GDP rose 0.1% in the third quarter -- the country's leadership will be more likely to give the green light to controversial energy projects like CNOOC's (NYSE: CEO ) proposed buyout of Nexen, and Enbridge's (NYSE: ENB ) Northern Gateway pipeline. But Canada has already proven that it isn't willing to take the easy way out.
In October, Prime Minister Stephen Harper's government blocked Malaysia's state-owned Petronas from going forward with its $5.2 billion acquisition of Progress Energy. The deal didn't bring enough to the table for Canadians, supposedly, and Petronas has gone back to the drawing board in hopes of ultimately getting the buyout approved.
Last week, the Canadian government also vetoed a Cenovus Energy (NYSE: CVE ) gas project that would have drilled up to 1,275 shallow wells in southeastern Alberta, citing environmental risks. This particular project has been under review since 2006, and despite many critics cynical of the government's true leanings, a commitment to environmental protection eventually won out.
Obviously, as much as it seems Canada "needs" pipeline projects like the Northern Gateway, or the expansion of Kinder Morgan Energy Partners (UNKNOWN: KMP.DL ) Trans Mountain line, its government has clearly shown it is not willing to sacrifice the environment in favor of hydrocarbon development.
The foreign investment story remains a tad bit unclear. Ottawa is supposed to announce Monday whether or not it will approve the Nexen buyout, though there is a possibility the decision will be delayed once more. Ultimately, the outcome will set the tone for foreign investment in Canada going forward.
Canadian Energy Minister Joe Oliver expects $660 billion to be injected into more than 600 Canadian energy projects over the course of the next 10 years. Oliver expects that number to continue to grow, which means the industry also will continue to grow, despite being unsure of itself right now. In fact, unemployment is so low in energy producing regions that Canadian companies have taken to poaching American workers to meet staffing needs. Indeed, despite the decline of production, all signs still point to future growth. Canada is committed to going forward, but how it will get there remains to be seen.
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