Price forecast December 31, 2018 Resource Evaluation & Advisory This page has been intentionally left blank. 2 Forecast commentary 4 Alberta upstream oil and gas investment and royalties 8 Canadian economic outlook 10 Canadian domestic price forecast 12 International price forecast 14 Global trends 15 Canadian domestic price tables 19 International price tables 22 Price philosophy 24 Glossary 25 3 Price Forecast December 31, 2018 | Forecast commentary Forecast commentary “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” — Jimmy Dean Volatility continues to be the theme of the reached highs of US$35/bbl. Storage oil and gas sector, with prices fluctuating stockpile volumes in Alberta rose to substantially throughout 2018. International approximately 35 MMbbl due to increased prices started to soften in October as the production from oil sands projects and industry expressed concern about increased temporarily decreased demand due to supply and minimal demand growth. WTI refinery maintenance. Major disruptions prices fell as domestic production volumes to Canadian crude oil exports occurred reached record levels and transport issues in Q4 2018 because of lower-than-usual persisted, primarily in the Permian basin. refinery utilization rates in the US Midwest, Overseas, Brent crude pricing continued where almost 70 percent of Canadian crude to outpace North American pricing, exported to the United States is processed. averaging approximately US$9/bbl higher Refinery utilization rates decreased to than WTI prices in the last quarter of 2018. 73 percent at the end of October from Brent prices decreased substantially in traditional rates of over 90 percent, leaving November, however, as a result of increased Canadian crude oil with nowhere to go. international supply and exemptions from As these refineries returned online in late Iran sanctions granted to several countries, 2018 and reached a more typical utilization including India and China. rate, the price differentials began to narrow, but the Canadian supply glut remains In December, OPEC and non-OPEC countries an issue. agreed to decrease production output by 1.2 MMbbl/d. If member nations meet these To reinstate the balance between oil supply production-cut quotas, global inventory and takeaway capacity with near-term volumes should decrease and Brent prices effectiveness, the Alberta government should increase. That said, persistent is implementing mandatory production supply growth in the United States means cuts that will take effect in January 2019. WTI prices are expected to remain at a These curtailments are intended to larger-than-historical discount to Brent reduce production by 325,000 bbl/d until until additional transportation and export excess storage volumes dissipate, which infrastructure comes online. the government estimates will occur in Q1 2019. (Some operators have already Canada experienced a severe imbalance announced company-imposed production between production and export capacity in decreases in Q4 2018, which will be included the last quarter of 2018, causing Canadian in the province-wide volume restrictions oil price benchmarks to collapse. Heavy scheduled for 2019). Once storage volumes oil differentials widened to US$45/bbl in reduce, production cuts will be amended to mid-November while light oil differentials 95,000 bbl/d until December 31, 2019. 4 Price Forecast December 31, 2018 | Forecast commentary This announcement has been met with to decrease differentials for Canadian oil mixed reaction in the industry since only a price benchmarks and increase provincial small percentage of producers are expected royalty revenue for Alberta. The cuts are to be significantly affected. Operations also likely to reduce drilling activity for the producing less than 10,000 bbl/d are winter season, as companies try to meet exempt from production cuts, so it is the curtailment quotas. bigger players that will bear the brunt of the measure: namely, the five producers With the production-cut announcement that account for approximately 85 percent and Midwestern refineries back online, of Alberta oil production. Meanwhile, Canadian oil differentials for both light smaller Albertan producers and producers and heavy made major strides in early in Saskatchewan, where there are no December, injecting some much-needed mandatory cuts, are expected to benefit hope into the market. Other measures from rising crude prices. The imposed to stabilize export capacity demand and production volume reductions are expected supply include the purchase of additional rail cars by the Alberta government, with the goal to increase rail export capacity Canadian Pipeline/Rail Export Capacity by 120,000 bbl/d by 2020. The expected timing of the new takeaway volumes and the process by which the additional volumes 000 will be designated to producers are not yet known. Nevertheless, with pipeline projects 000 in limbo, the investment in mid-term export capacity is good news for the industry. 5000 While the proposed purchase may not buoy near-term prices, it is expected to improve options for Canadian oil producers and 4000 decrease differentials to WTI pricing. 3000 In addition to extra rail capacity, relief on pipelines should also be coming in late Export Capacity Mbbl/d 2000 2019. Enbridge’s Line 3–a mixed-service route that transports a variety of crude oil, including light and heavy, from Alberta 1000 to the United States–is expected to come back online in the second half of 2019, 0 after the replacement of the existing pipeline route is completed. Line 3 will add Jan-18Apr-18 Jul-18 Oct-18 Jan-19Apr-19 Jul-19 Oct-19 Jan-20Apr-20 Jul-20 Oct-20 Jan-21Apr-21 Jul-21 Oct-21 Jan-22Apr-22 Jul-22 Oct-22 approximately 370,000 bbl/d of export capacity, increasing current capacities by an Keystone L M AB Govt Rail Line 3 Cenovus Rail estimated 9 percent. This is expected to play Base Rail|Export Capacity Base Pipeline Export Capacity a key role in relieving the Western Canadian oversupply and boosting Canadian prices Source: CAPP, NEB heading into late 2019. 5 Price Forecast December 31, 2018 | Forecast commentary On the downstream side of the industry, the much more as multiple projects come Sturgeon refinery in Alberta was scheduled onstream throughout 2019. By the end of to begin processing 80,000 bbl/d of diluted the year, it is forecast that the country’s LNG bitumen by the end of 2018. If the refinery export capacity will reach 9.6 Bcf/d, almost continues processing in Q1 2019 as planned, tripling average 2018 volumes. We predict the need for additional heavy crude prices will slip from the current high early in pipeline capacity and rail shipments should 2019 as concerns over storage levels ease. be alleviated since more crude can be processed domestically. In addition, US Gulf Canadian natural gas prices, meanwhile, Coast refineries have received less heavy oil have gained slightly in recent months but from Mexico and Venezuela as production continue to trail behind the Henry Hub volumes in those countries continue to benchmark. AECO prices have fluctuated decline; Canadian heavy crude is expected significantly, ranging from $3.20/GJ to to increase its market share in 2019 and $0.10/GJ throughout November alone, fill the discrepancy in feed volumes to the while natural gas production remained Gulf Coast. We expect Canadian oil prices in relatively flat in 2018. Producers have had 2019 will see a differential to WTI subject to good results, particularly in unconventional rail costs, with that differential narrowing in plays, from extended-reach horizontal 2020 as pipeline capacity increases. drilling—a method that enables them to drill fewer wells (thus spending less capital) while Natural gas prices in the United States have still extracting significant volumes. Seen climbed since November, primarily due to across the industry in 2018, this trend is low storage volumes and increased demand. expected to continue as gas prices stay low Storage levels there are approximately and companies strive to replace developed 17 percent lower this year than the volumes with low-capital budgets. previous year, with large discrepancies in the south-central (Texas) and mountain Approximately 40 percent of Alberta natural areas (Colorado). Dry-gas production rates gas consumption in 2017 was attributed reached a record 86.3 Bcf/d in September to extraction efforts within the oil sands. 2018. In addition, domestic consumption Oil sands producers purchased 1.25 Bcf/d of natural gas reached levels not seen for in-situ production methods and a since 2001, rising approximately 12 percent further 0.5 Bcf/d for mining and upgrading from 2017, while natural gas exports operations. As oil production cuts come reached 10.1 Bcf/d in 2018, an increase of into effect and large-scale oil sands projects approximately 21 percent. scale back operations, short-term natural gas demand may slow in the province. This increase in export volumes continues Growth in condensate demand will likely to be driven by liquefied natural gas. shallow out as shipping bitumen by rail The United States exported 2.7 Bcf/d of LNG becomes more commonplace, since diluent to 13 countries in 2018 and expect to export isn’t needed in rail cars as it is in pipelines. 6 Price Forecast December 31, 2018 | Forecast commentary Natural Gas Consumption - Alberta 4 12 Industrial oil sands 41 Other industrial 15 Residential Industrial petrochemical Reprocessing plant shrinkage ransportation 1 11