(Bloomberg) – Canada’s oil sands are experiencing a comeback after years of living in the shadow of U.S. shale.
Crude output is climbing to new highs, the nation’s top producers are seeing their shares soar and interest in the industry is rising among U.S. institutional investors. The catalyst for the brighter outlook is simple: The newly expanded Trans Mountain oil pipeline is bringing Canadian oil to the critical Asian market after years of capacity constraints capped output and pressured crude prices.
With the pipeline in place, production hit a record-high in June and is set to grow another 300,000 to 400,000 bpd to 6 million daily barrels by 2030, according to the Bank of Montreal. At the same time, the average stock price of the biggest oil sands producers — Imperial Oil Ltd., Suncor Energy Inc., Cenovus Energy Inc. and MEG Energy Corp., which was bought by Cenovus in November — have outpaced the S&P Global Oil Index by as much as three-fold over the past year.
See also: Cenovus completes MEG acquisition, adding 110,000 bopd of oil sands output
And while a global supply glut is weighing on crude prices, the Trans Mountain expansion has juiced local prices for heavy oil, which are trading at a $10-$12 a barrel discount to the U.S. benchmark, compared with discounts as wide as $30 or more before. Against that backdrop, U.S. institutional investors’ stake in oil sands companies has risen as high as 65% from 40% a decade ago, according to BMO.
The brighter outlook illustrates a seismic shift in oil markets. As oil production from massive U.S. shale basins such as the Permian peak, investors are shifting their focus north of the border where steady crude supplies are poised to continue flowing for decades more, and where the cost of production is low enough to withstand even steep drops in the global benchmark.
It’s a stark turnaround from a decade ago, when booming shale production and a deluge of oil from OPEC tanked crude prices. Oil majors including Shell Plc., ConocoPhillips, TotalEnergies SE and Chevron Corp. began selling their stakes in Canadian operations, allowing production to concentrate within the hands of a handful of local producers. That helped the industry become more efficient, according to Enverus Senior Analyst Michael Berger.
Unlike U.S. shale oil producers, who must continuously drill new wells just to sustain their level of output, oil sands production declines at a much slower rate. As a result, four of the five lowest-cost, large-cap oil companies in North America are oil sands producers, said BMO analyst Randy Ollenberger.
“They don’t have to continually invest capital to offset decline,” he said. “They only have to invest capital to maintain their facilities and, so, that gives them a cost advantage.”