As US shale booms, Canada may stumble 

(MENAFN - Arab News) Amid the excitement surrounding the shale oil phenomenon in the US, other important sources of non-OPEC oil supply growth cannot be overlooked.

Canada and Brazil, for instance, together represent more than half of the net 890,0000 barrels per day increase in non-OPEC oil output expected for next year.

Yet in both countries things are not so rosy. Western Canadian oil prices have slumped amid tight pipeline capacity. In Brazil, Petrobras' transformation from one of the world's most respected oil companies to an indebted plaything of politicians continues apace.

Both of these situations bear close monitoring. Canadian oil producers can hardly bear to sustain capital expenditures in the enormously expensive oil sands if wellhead prices continue to hover around 50 a barrel.

Similarly Petrobras' increasingly stretched balance sheet may well struggle to support the company's grand vision of becoming a global oil titan and the vanguard of Brazil's conquest of developed country status.

Moody's Investors Service warned recently that it might downgrade Petrobras' debt and the company is struggling to carry out the asset sales needed to fund its five-year, 237 billion capital spending plan.

Already analysts are predicting Brazil will struggle to meet its oil output goals due to financial constraints and the government's decision to focus development of its massive subsalt offshore oil reserves through Petrobras.
With Brazil's oil output set to snap a seven-year growth streak in 2012, the risk that Petrobras falls short of its growth plan in 2013 is not insignificant.
Nevertheless the International Energy Agency is forecasting a 190,000 bpd increase in Brazilian oil output in 2013 as new fields start output and Chevron's 70,000 bpd Frade development resumes pumping in the second half of the year.

Similarly, the IEA has left much of its growth forecast for Canadian oil output in 2013 largely unchanged, penciling in 350,000 bpd in growth next year.
The oil sands, however, are probably the most vulnerable oil developments in the world right now. Facing high costs and locked into buyers' markets, many companies must be considering contingency plans if prices for their crude stay stubbornly low.

With no major heavy oil pipelines due to enter service in 2013, additional production growth will weigh on pricing if refineries do not increase runs of Canadian crude.

Delays to BP Plc's Whiting, Indiana refinery upgrade could prove critical here. Although BP has said problems with fireproofing on new equipment will not delay the overall upgrade project, traders believe the oil major will not be able to start running incremental volumes of heavy crude until the second half of 2013.

It is hard to understate the risks arising from delays at Whiting to Canadian oil pricing. Canadian oil producers are counting on the project to help drive a narrowing of the Brent-WTI spread and a reduction in heavy crude discounts.
Although exposure to WTI can be hedged easily with futures contracts, cash flows are still highly exposed to heavy oil discounts.

So while the biggest and best capitalized firms ought to be able to ride out the current downturn in pricing, smaller companies may well struggle.
Even big firms could decide to push forward planned maintenance: ie, cut production temporarily, in response to weak pricing. Others could choose to slow the pace of future developments.

Shortfalls in Brazil and Canada next year could well provide a boost to oil prices, particularly if oil demand growth comes in stronger than currently expected.

The more important question, perhaps, is whether or not the factors that could inhibit production growth in Brazil and Canada next year are transient or more permanent.

In the case of Brazil, the major stumbling block is money and the government's desire to exert significant control over the country's oil resources.

The current government has not shown any willingness to revise the model adopted for developing Brazil's oil but does seem to be coming up against the limits of its policy of forcing Petrobras to subsidize fuel costs.

However it is not clear that increasing fuel prices will solve Petrobras' problems. Even with more money, the company will continue to struggle with efficiency issues, especially given its stated policy of deliberately sourcing as much of its services and supplies as it can from the Brazilian market. Thus, the cash crunch could well be a recurring problem.

The same may go for Canada. A critical problem for Canadian oil producers is the growing saturation of the market. New pipelines in 2014 that will add capacity between the US Midwest and the Gulf Coast will be helpful in boosting demand for heavy crude. So too will be developments that allow more US light shale oil to move to markets outside of the heavy oil corridor.

Shale poses a growing risk for Canadian producers. While in the past US refineries felt they had little choice but to embark on multi-billion dollar upgrades to run heavy oil, the emergence of shale is making this a less obvious decision.

Shale has emerged as a competitor for market share in all of Western Canada's target markets. That suggests marketing, and perhaps even vertical integration, may become important factors in sustaining Canadian oil output growth.


- Robert Campbell is a Reuters market analyst. The views
expressed are his own.