Dinara MillingtonVP Research

Canadian Energy Research InstituteMay 29, 2019

Canadian Oil and Gas Production and Costs Outlook

Relevant • Independent • Objectivewww.ceri.ca

Canadian Energy Research Institute

Overview

Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent,

registered charitable organization specializing in the analysis of energy economics and

related environmental policy issues in the energy production, transportation, and

consumption sectors.

Our mission is to provide relevant, independent, and objective economic research of

energy and environmental issues to benefit business, government, academia and the

public.

CERI publications include:

•Market specific studies

•Geopolitical analyses

•Commodity reports (crude oil, electricity and natural gas)

In addition, CERI hosts an annual Petrochemical Conference and supports the Argus

Media Canada Week.

Core Funders:

Donors:

In-kind:

Ivey Foundation

Presentation Outline

▪ Background

▪ Supply Costs

▪ Crude Oil and Natural Gas Production Outlooks

▪ Conclusions

Background

Crude Oil Markets

Source: Bloomberg

• World demand growth was 1.3 Mmbpd in 2018, future growth is driven by rising petrochemicals, freight and aviation demand

• Global crude prices rebounded since the 2014 downturn as a result of OPEC and non-OPEC production cuts

• OPEC compliance cuts within 200,000 bbls of target January 2019. Exceeded compliance in 2018

• Geopolitical concerns over crude supply

• Economic sanctions in Venezuela

• Alberta-made curtailment was announced in December 2018 to be enforced for duration of 2019

Canadian Oil and Gas Resources

Source: CAPP

Canadian Crude Oil Production

Source: Statistics Canada CANSIM Table 126-0003

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

('0

00

bp

d)

Atlantic MB SK AB BC NWT AB-Bitumen and SCO

8.5%

US Crude Imports from Canada

Source: US EIA

55% 57%59%

59%59%

60%62% 61% 66%

68%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

('0

00

bp

d)

Light Sweet Light Sour Medium Heavy Sweet Heavy Sour

7.3%

Natural Gas Production and Disposition

Source: NEB

11.5 11.9 12.3

(8.05) (8.10) (8.25)

2.1 2.5 2.1

17.8 18.1 18.6

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

2016 2017 2018

Bcf

/d

Domestic demand Pipeline Exports Pipeline Imports Production

US Gas Industry Developments

Source: EIA

The Battle for the Central Canada Gas Market

Source: CERI, EIA

• Eastward throughput of TransCanada Mainline (at the Prairie point) fell from 5.97 bcf/d in 2006 to 2.17 bcf/d in 2017 (-3.8 bcf/d)

• Imports from the US increased for the same period (+1.6 bcf/d)

-63%

+170%

Dominion Hub minus Henry Hub

The Battle for the US Gas Market

Source: CERI, EIA

Supply Costs

Supply Costs

Supply Cost - is the constant dollar price needed to recover all capital expenditures, operating costs, royalties and taxes, and earn an acceptable return on investment.

• Assumptions:➢ 10% real rate of return➢ 2018 constant dollars➢ Oil and gas price forecasts – EIA AEO 2019➢ $0.80 US/CAD$ exchange rate

Source: CERI, Canoils

Bitumen Supply Costs

WTIeq. Costs:

SAGD –US$52.31

Expansion –US$46.69

SAGD 10% ROR (a) Expansion SAGD 10% ROR (a)

Fixed Capital (Initial & Sustaining) $18.59 $9.67

Operating Working Capital $0.39 $0.21

Fuel (Natural Gas) $4.63 $4.63

Other Operating Costs (incl. Elec.) $7.07 $7.07

Royalties $7.24 $4.30

Income Taxes $2.72 $1.44

Emissions Compliance Costs $0.67 $0.67

Abandonment Costs $0.03 $0.01

$0

$10

$20

$30

$40

$50

Rea

l 20

18

CD

N$

/bb

l

$41.33

$27.99

Note: (a) Return on Investment included

Conventional Oil Supply Costs ($/bbl)

$43

$41

Horn River

Montney

Spirit River

Duvernay

Cardium

Viking

Bakken$28$24

$28

$37-40

$59

(Horizontal wells)

Natural Gas Supply Costs ($/mmscf)

Horn River

Montney

Spirit River

Duvernay

Cardium

Viking

Bakken

Legend: $X (Vertical)-$Y (Horizontal)

$1.8

$1.2-3.3

$1.4-2.6

$1.9-2.5

$1.0-2.6

$2.7

Change -25%

DISCOUNT

12%

8%

Change +25%

Change -25%

GAS PRICE

25%

-25%

Change +25%

Change -25%

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

US, brownfield, LA US, greenfield, TX Eastern Canada,Marcellus, NS

Eastern Canada,AECO, NS

Eastern Canada,Horton Bluff Shale,

NS

Qatar Russian pipelinegas

Landed LNG cost at UK, $ per mmbtu

CAPEX Feed gas Transport OPEX Corporate taxes Carbon Tax Shipping

$60

$70

$50

HH*115% + 3.5 + 0.75 = $9.44

HH*115% + 2.5 + 0.75 = $8.44$80

$90

$100

Oil-

linked contract

Source: CERI, Rystad Energy, LNG Journal

Landed Costs in Europe

Crude Oil and Natural Gas Production

Outlooks

Canadian Oil Production Outlook – Ref Case

Source: CERI, BCOGC, AER, Government of SK, Government of MB, CNLOPB, PSAC, CAPP, CanOils

Source: CERI, BCOGC, AER, Government of SK, Government of MB, CNLOPB, PSAC, CAPP

0

1000

2000

3000

4000

5000

6000

7000

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

('0

00

bp

d)

Total Conventional Crude AB - total bitumen

• Curtailment in 2019 – projected 3% decline (1.9% conv./4.1% oil sands)• Future growth is dominated by oil sands in-situ projects• Oil sands production growth – 3.5%/yr post-2019• Conventional production supported by condensate and pentanes plus – 0.6% post-2019

Canadian Gas Production and Disposition Outlook – Ref Case

Source: CERI, BCOGC, AER, Government of SK, Government of MB, CNLOPB, PSAC, CAPP

Source: CERI, BCOGC, AER, Government of SK, Government of MB, CNLOPB, PSAC, CAPP

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Bcf/

d

Pipeline Imports Production LNG Domestic demand Pipeline Exports

• Gas production growth – 2%/yr from 18.6 Bcf/d in 2019 to 25 Bcf/d in 2035• Drilling predominantly in liquids-rich reservoirs• Incremental growth is dependent on future LNG projects. Growth of 2.5 Bcf/d in 2025 to

6.9 Bcf/d in 2035.

Conclusions

• Crude and oil sands producers continue to be challenged by market access

• Natural gas producers need to secure new markets

• Natural gas market will affect NGLs production and petrochemical investment

• Concerns of lower competitiveness compared to the US

• Concerns of regulatory processes

Conclusions

• Growth in oil and gas production is predicated on growth in exports that could support global demand growth

• Crude oil production growth will be driven by condensates and in-situ oil sands projects

• Natural gas production growth is greatly dependent on the LNG projects

• Costs of producing crude oil, bitumen, natural gas and LNG remain competitive

UPCOMING STUDIES:

ECONOMIC IMPACTS AND EMISSIONS PROFILES OF THE PETROCHEMICAL INDUSTRY IN CANADA

ELECTRICITY STORAGE SYSTEMS: APPLICATIONS AND BUSINESS CASES

OIL SANDS AND CONVENTIONAL OIL AND GAS PRODUCTION FORECASTS AND ECONOMIC IMPACTS