Canadian heavy crude is a cornerstone of global oil supply now and into next decade. But growth is likely to be increasingly affected by investor sentiment soured by environmental concerns and competition for capital from tight oil. Both factors have already begun to reshape the domestic corporate landscape.

How many oil producing countries can predict with some confidence that they can increase output over the next decade? Outside OPEC, we reckon the answer is just three, a fraction of the thirty or more non-OPEC countries that will contribute 53 million b/d to global oil supply this year. Those three power houses are: USA, driven by tight oil; Brazil, by the giant deep water pre-salt fields of the Santos basin; and Canada, by the extra-heavy crude of its Albertan oil sands.

Canada is already the third largest non-OPEC producer (behind the US and Russia) with 4.4 million b/d, and its oil sands growth should help it stay there for the foreseeable future.

This year, there’s an increase of nearly 0.4 million b/d, in part catch-up after the wild fires that disrupted production in H1 2016. The three big, independent oil sands producers, Suncor (+13%), Cenovus (+8%) and CNRL (+6%), each predict a meaningful rise in their output this year.

Beyond 2017, oil sands growth is incremental, but relentless and cumulatively material over time. We expect another 1 million b/d of additional production to come on stream by the end of next decade, a rate of just under 0.1 million b/d p.a.

Much of the new volumes come from brownfield development using Steam Assisted Gravity Drainage (SAGD), an extraction process in the ascendant over the mining operations of the past. SAGD has a shorter development time and relative investment flexibility, compared with longer-lead time mining projects with high upfront expenditure and higher break-evens.

A number of factors support ongoing growth in oil sands production.

First, the huge unexploited resource base close to significant existing infrastructure lends itself to incremental development. Secondly, break-evens of US$60/bbl (NPV,10) for the best brownfield oil sands developments compare reasonably well with some tight oil or deep water projects. Ongoing reduction of costs through technologies such as solvent injection will be critical to stay competitive. Thirdly, the cash flow profile - once on stream, project operating costs can be as low as C$8/bbl. The ultra long-life, stable production, with returns less vulnerable to a single year’s oil price than conventional projects, can provide steady support for a dividend policy.

Strong demand for heavy crude is a fourth driver. US refiners in the Midwest are set up for heavier feedstock rather than for lighter tight oil supplies. The TMX pipeline will unlock new export markets in Asia. Keystone XL will take more Canadian crude to the Gulf Coast where it’s needed, with traditional heavy oil imports from Mexico and Venezuela waning.

M&A activity in oil sands began early in this downturn with seven deals for a total of US$6bn completed over the past two years. Most have been about critical mass and improving operational and capital efficiency around advantaged assets, with Suncor’s US$4.6 bn take over of Canadian Oil Sands the flagship deal.

Heightened environmental regulation is emerging as a new catalyst for M&A deals, post the Paris Agreement.

It may be wrong to tar all projects with the same brush, but oil sands are among the most carbon-intensive of oil developments – emitting 6-7x more CO2 on average than conventional oil developments based on our analysis. Alberta is updating regulation for oil sands’ carbon emissions which includes an industry-wide cap of 100 Mt, around twice current emissions. We do not expect the cap to be breached during the next decade.

Growing public and investor antipathy towards high CO2 intensity is one factor that prompted Statoil to divest its oil sands assets late last year. Other inward investors may follow Statoil and exit over time, judging that the rationale for exposure to oil sands has irreversibly changed.

It’s easy to imagine a future where assets are highly concentrated among fewer players: either domestic consolidators for whom oil sands is core such as Suncor, CNRL, Cenovus, and Imperial (XOM); or a handful of ‘ remainers’, likely other North Americans with material, legacy cash generating positions like Devon and ConocoPhillips.