Vancouver, British Columbia (Platts)--17Aug2012/540 pm EDT/2140 GMT

Light oil production in North America could increase by 800,000 to 900,000 barrels per day per year through 2016, including an annual increase of 380,000 b/d in Canadian oil sands output that will continue through 2020, if the industry can resolve the lack of pipeline capacity, CIBC World Markets said Friday.

Andrew Potter, an analyst with the Canadian investment bank, said that "when plotted against pipeline capacity, it becomes increasingly clear that not all planned oil sands projects can proceed," although conventional oil production growth also would be affected.

He said that if all current pipeline proposals proceed, oil shipments form Western Canada could rise by 2.9 million b/d by 2020, adding that "overall Canada needs pipe and lots of it to avoid .... stranding over 1 million b/d of potential crude oil growth."

But Potter said that even if regulators approve Keystone XL, Kinder Morgan's Trans Mountain expansion, Enbridge's Northern Gateway, Alberta Clipper expansion and TransCanada's tentative plans to convert part of its natural gas Mainline in Canada to carry crude "there would still not be enough pipeline capacity to handle planned growth through 2020." He gave only even chances that all of the pipeline projects would proceed.

"In a market that is over-saturated, there will no doubt be rationalization and the first projects to get squeezed will be those with higher supply costs and riskier capital profile," Potter said in a note to clients. "Unfortunately, higher cost oil sands projects seem like the first to get rationalized."

He said "oil sands companies that are making big capital allocation decisions have to be that much more confident in the macro environment to hit the button."

The 270-page CIBC report described some oil sands company forecasts as "wildly optimistic" given the uncertainty surrounding pipeline plans.

But the report said estimates of conventional and oil sands crude growth in Canada, combined with burgeoning production growth of 530,000 b/d a year in US resource plays and 45,000 b/d a year in the Gulf of Mexico, fall short of what could be achieved.

It said horizontal drilling and multi-stage hydraulic fracturing technologies could see production from Canadian conventional oil plays grow by an average 10% a year from 2011 to 2016, or about 100,000 b/d per year, then increase by 8% a year from 2016 to 2020, raising output to 1.65 million b/d.

It said Canadian light oil production rose 35,000 b/d in 2011 from 2010 and made a year-over-year gain of 70,000 b/d in the first four months of 2012.

The Canadian Association of Petroleum Producers in June estimated that conventional growth in Canada would average 40,000 b/d a year to peak at 1.3 million b/d in 2020.

CIBC said oil sands producers have plans in the works to add 380,000 b/d a year and reach 5 million b/d, compared with CAPP's target of 180,000 b/d a year to total 3.2 million b/d.

CAPP, conceding it has set "conservative" goals, said a reasonable compromise for the oil sands is annual growth of 270,000 b/d through 2020.

CIBC said low-cost bitumen producers using steam-assisted gravity drainage technology can operate with WTI prices at $43/b, but those involved in upgraded mining operations need oil prices of $83.30/b to break even, assuming a 15% discount for Western Canada Select heavy crude blend to WTI.

If oil drops to $70/b, close to 1 million b/d of planned production would be unable to justify proceeding, CIBC said.

Potter suggested the one hope of improving the market outlook would be a wave of takeovers on the scale of the US$15.1 billion bid by China's CNOOC for Nexen and the C$5.16 billion (S5.22 billion) offer by Malaysia's Petronas for Progress Energy Resources by increasing the chances of opening new markets in Asia.

But he said "there has been a cooling off period in M&As and it will continue to cool, [although] with the record-low cost of capital and low valuations there is room for transactions."

--Gary Park, newsdesk@platts.com --Edited by Jeff Barber, jeff_barber@platts.com

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