Vladimir Putin's war in Ukraine has raised questions about Canada's capacity to ramp up oil exports amid bans on Russian supply. While tight conditions and crude near US$100 favour the country's oil sands producers, research firm S&P Global Commodity Insights says pressure to reward shareholders and emit less carbon will limit new production growth despite rising energy insecurity.
"The Russian invasion of Ukraine has heightened interest in the ability of Canada—and oil sands specifically—to contribute more crude supply to the global oil market," said Kevin Birn, Canadian oil markets chief analyst at S&P Global Commodity Insights, based in Calgary.
"While this has increased the incentive to raise oil sands production in the near term, a longer-term focus on strengthening returns to shareholders as well as decarbonizing the industry continue to weigh on growth for the longer term."
Russia's war in Ukraine has been raging for over five months with no end in sight. It's unclear how long sanctions from Western nations on Russian oil would last if the conflict were resolved.
Birn and his colleague Celina Hwang say their growth expectations for Canada's oil sands through 2032 are "still substantial" in their research titled Heightened energy security hasn't changed long-term oil sands outlook.
They expect an increase of about half a million barrels per day over 2021 levels. In 2030, they're calling for Canadian oil sands production of over 3.5 million barrels per day, 100,000 barrels per day fewer than last year's 2030 estimate.
S&P Global says nearly all of this reduction was from oil output expected from new projects that would have come online later in the forecast period.
"Bringing online new oil sands operations requires large upfront expenditures over multiple years. While investor interest in future large-scale investments has fallen, projects that are now online are in a position to realize oil sands free cash flow potential," Birn added.
S&P Global expects more than 80 per cent of production growth to come from ramping up, optimizing, and completing projects where some capital has already been invested.
In addition to shifting shareholder priorities and expectations for pricy decarbonization projects like carbon capture and storage, S&P Global's downward revision of the 10-year outlook also reflects "ambitious greenhouse gas reduction expectations announced by the Government of Canada."
Last week, Ottawa released preliminary plans for an emissions cap on the oil and gas sector, the latest step in Canada's bid to reach net-zero by 2050.
A discussion paper published by Environment Minister Steven Guilbeault outlines two regulatory options: a sector-specific cap-and-trade system, or a steeper carbon price for the industry. The paper says the cap on the sector will have to account for targets outlined in the government's Emissions Reduction Plan, which equate to a 42 per cent cut below 2019 levels.
The Pathways Alliance, a group representing companies responsible for about 95 per cent of Canada's oil sands production, has called this level of reduction "not realistic" and risks producers shutting in production rather than investing in emissions-cutting technologies.
"If it is going down a road of bludgeoning an industry with a hammer, I don't think that will be well received," Kevin Krausert, CEO of Calgary-based energy start-up accelerator Avatar Innovations, told Yahoo Finance Canada's Editor's Edition. "It won't result in emissions reduction, and probably just results in capital leaving the country."
The government says it intends to unveil full details of its plan in early 2023.
'Less about growth, and more about returns'
Meanwhile, Calgary-based Crescent Point Energy (CPG.TO)(CPG) continued the trend of oil and gas producers focused on padding the pockets of shareholders through dividends and stock buy-backs amid high energy prices.
The company reported on Tuesday that it returned $108 million, or about 30 per cent of its excess cash flow, to shareholders through its base dividend and share repurchases in its second quarter. Crescent Point said in July that it was aiming to return up to 50 per cent of its discretionary excess cash flow to shareholders.
"The story about the Canadian oil sands today is one that is looking to be increasingly less about growth, and more about returns, output optimization and maintenance, and accelerating technologies to lower emissions to put the industry in a position to compete on carbon," Birn and Hwang wrote in their research.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.