NO RESPECT, by John Myers (on Canada's oil, incl oil sands)
America is rapidly running out of oil and gas reserves. But
Canada is loaded with the stuff. So why do Canadian oil and
gas stocks "get no respect" in the stock market?
Why do they, in general, sell for lower valuations than
their U.S. counterparts? Maybe it's just a bad habit. But
we think this is a habit that is about to be broken, as
Canada's oil and gas companies step in to supply an ever-
growing share of America's energy needs.
A rapidly expanding pipeline network will facilitate oil
and gas deliveries from Canada's distant fields to an
energy-thirsty U.S.. This pipeline network is just part of
the reason why we expect Canadian stocks to "re-price" in
line with American energy stocks over the next couple of
years. First, a few important facts:
* The United States imports more crude oil and petroleum
products from Canada than from any other country.
* Canada has proven conventional oil reserves of 4.9
billion barrels, as of January 2002. Oil production
averaged 2.9 million barrels per day (bbl/d) during 2002.
* And here's the sexiest part of the Canadian oil story -
Canada holds between 1.7 and 2.5 trillion barrels of oil
sands!
Unlike conventional crude oil, oil sands contain a mixture
of bitumen, sand, water and clay. Bitumen, which is a thick
and tar-like hydrocarbon, surrounds the sand and water.
To develop oil sands, bitumen is separated from the sand,
water and clay. Once separated, bitumen can be upgraded
into a high-quality oil called "synthetic crude." The
Athabasca Oil Sands deposit, in northern Alberta, is one of
the two largest oil sands deposits in the world (the other
is in the Orinoco Belt, Venezuela). There are also oil
sands deposits on Melville Island, in the Canadian Arctic,
and there are three smaller deposits in northern Alberta.
Current output of synthetic crude and bitumen is estimated
at 600,000 bbl/d. A new oil sands project, the Muskeg River
Mine, located on the Athabasca oil sands and operated by
Shell Canada, Western Oil Sands and Chevron Canada, is
scheduled to begin production in early 2003. The Muskeg
River mine will produce an additional 155,000 bbl/d.
Construction is also nearing completion at Petro-Canada's
MacKay River oil sands project.
Petro-Canada expects production of 30,000 bbl/d in 2003.
According to the Canadian government, synthetic oil and
bitumen production is expected to reach 1.2 million bbl/d
by 2010.
But this is merely the beginning of the exciting Canadian
oil story. It "ends" at several pipeline hubs across North
America...and that's a great story all by itself.
Canada's growing pipeline network may well be a boon to the
country's oil and gas production, as well as an important
catalyst for revaluing Canadian energy stocks in line with
American energy stocks.
Although most Canadian oil is produced in western Canada
(mainly Alberta), oil is consumed primarily in central and
eastern Canada. As a result, Canada exports mostly crude
oil from Alberta and imports crude oil and petroleum
products on the east coast, explaining why Canada exports
approximately 1.89 million bbl/d (gross) to the United
States, but net exports are slightly lower (1.78 million
bbl/d).
An extensive pipeline system transports western oil to
eastern Canadian and U.S. markets. There are two major
pipeline networks. The first is Enbridge Pipelines Inc., an
8,700-mile network of piping and terminals, delivering oil
from Edmonton, Alberta, east to Montreal, Quebec and
eastern Canada as well as the U.S. Great Lakes region.
Enbridge is one of the largest crude oil and petroleum
liquids pipeline systems in the Western Hemisphere, and the
company is currently expanding its U.S. export capacity
through its three-phase Terrace Expansion program. The
other major pipeline system is the Trans Mountain Pipe Line
(TMPL) system, which delivers oil mainly from Alberta west
to refineries and terminals in the Vancouver, British
Columbia area, as well as to the Puget Sound area of
Washington State.
Development of Alberta's massive oil sands has necessitated
new pipelines to transport diluted bitumen from the mine to
downstream processors and eventually to market terminals.
Most recently, Canadian pipeline companies have focused on
taking the Athabasca oil sands southward to processing
facilities in the Edmonton area. This is one of the primary
operations of the Enbridge network.
Construction of another similar pipeline, the Corridor
Pipeline (TransMountain) connects the nearly completed
Muskeg River Mine (Shell Canada, Chevron Canada, Western
Oil Sands) to Shell's Scotford Refinery, located in the
Edmonton area, near market terminals. The company expects
oil to begin flowing through the Corridor Pipeline this
year.
In January 2002, BC Gas announced that it intends to build
a new pipeline in conjunction with TransMountain, called
the Bison Pipeline, to transport diluted bitumen from mines
and refineries near Fort McMurray to pipelines and
processing plants in the Edmonton area. The Bison Pipeline
would cover about 320 miles and cost about $625 million. BC
Gas predicts that if regulatory approval is granted in
early 2003, the pipeline could come on-stream by 2005.
There has been considerable progress in recent years on
natural gas interconnections between Canada and the United
States. The $2.5 billion Alliance Pipeline, at 1,875 miles,
is the longest pipeline ever built in North America.
Alliance is designed to carry about 1.3 billion cubic feet
per day (Bcf/d) of natural gas from western Canada (Fort
St. John, British Columbia) to the Chicago area. The
pipeline entered into commercial service on December 1,
2000.
The Maritimes and Northeast Pipeline (M&NE) came on-stream
in January 2000. M&NE is designed to deliver natural gas
from Canada's Sable Island area to New England. The
pipeline currently is in the midst of two expansion
projects. Construction is underway on Phase III expansion,
which will extend the pipeline further into Massachusetts,
connecting it with the U.S. Algonquin pipeline system in
2003.
In every area, from exploration to oil sands development
and pipeline expansion, Canada is a growing energy market
with a built in buyer - the United States. This is
especially true in light of the development of the Oil
Sands project and the expansion of oil and gas pipelines
reaching into America.
The country will certainly be - if, indeed, it is not yet
so - one of the most important global energy players in the
years to come.
Sincerely,
John Myers,
for The Daily Reckoning
P.S. Canada's oil and gas companies are still largely
under-priced compared to their U.S. counterparts. Yet the
Canadian companies have greater potential for bringing in
large oil and gas field than U.S. drilling the lower 48
states. It all adds up to one thing - buy Canada Dry. |
