Canada’s oil sands will face unprecedented opportunities and massive challenges in 2013 as billions of dollars hang in the balance.Limited access to foreign markets, infrastructure and labour constraints, and decreasing demand from the United Staates threaten revenues. the $4.93-trillion in revenues that the Canadian Energy Research Institute projects in a best-case scenario over the next 25 years, primarily by selling oil to Asian markets.”It’s going to be a very interesting year. I think 2013 is going to be even more volatile, if that can be imagined,” said Andrew Potter, an oil and gas analyst at Canadian Imperial Bank of Commerce.

The 16 new oil sands projects slated to break ground over the next four years will exacerbate a market already starved of labour. The Petroleum Human Resources Council of Canada says the industry will need to fill 9,500 jobs in the next three years, but anticipates that up to 36% of those positions will not be filled.Western Canadian oil producers, unable to reach Pacific Rim or eastern seaboard markets, are slowing down a number of projects as the industry battles with regulators north and south of the border over infrastructure development.”There are a lot of investors and companies in Canada that have decided to put oil sands development on hold because they are not able to get it to markets, but more importantly they are not getting a good enough price,” said Pierre Fournier, a geopolitical analyst at National Bank Financial.

While new plays in the oil sands are profitable with oil between US$80 and US$90 a barrel, U.S. shale oil producers generate profit at US$60 or US$70, according to a recent report by National Bank.Both Suncor Energy Inc. and Canadian Natural Resources Ltd. pulled back on growth in 2012. Suncor will reduce spending by nearly $1-billion in 2013, according to a budget released earlier this month.”Canada exports out of Western Canada and imports into Eastern Canada because the north-south pipeline system is virtually full. Canadian producers are suffering big discounts off of West Texas Intermediate (WTI) prices while eastern Canada is busy buying imported oil at higher Brent Oil prices,” said Barry Munro, Ernst and Young’s Canadian oil and gas leader.Eastern Canada imported roughly 680,000 barrels per day in 2011.

While the U.S. remains the No. 1 customer for Canadian energy exports, the so-called “unconventional hydrocarbon revolution” has unlocked U.S. reserves once thought to be uneconomical or unattainable through improved technology. At the same time, higher fuel-efficiency standards and a changing energy mix that includes more natural gas are putting a significant dent in the demand for Canadian oil.Remaining dependent on a single market leaves Canada’s oil sands vulnerable to the consequences of the U.S. turning to a new supply, alternative energies or suffering economic challenges that would limit demand growth.”We have historically taken for granted that there would always be a market for our oil and natural gas.

Canadian natural gas producers have had to live through the very harsh lessons of the shale gas boom in the U.S. The same thing is going to happen with oil,” Mr. Munro said.Analysts agree exporting Western Canadian oil to the Pacific Rim via the west coast of British Columbia would be most economic based on distance and the rapidly growing Asian markets.

Enbridge Inc.’s Northern Gateway pipeline and Kinder Morgan Inc.’s Trans Mountain Expansion (TMX) would see more oil shipped out of B.C.TransCanada Corp.’s Keystone XL pipeline, which was earlier denied the permit it needed to cross the U.S. border earlier this year, would provide access to U.S. Gulf Coast refineries if the U.S. State Department approves it next year. Proposals are also underway to address Eastern Canada. Reversing Enbridge’s Line 9 pipeline from Sarnia, Ont., to Montreal would adequately fuel refineries in Montreal and Quebec City. A new pipeline that continues from Montreal to Saint John, N.B., could serve the Irving refinery and allow export by supertanker, although nothing has been proposed.”The industry is well aware of the pipeline bottlenecks. I think everyone is working from the same playbook in terms of urging governments to move on pipelines.

As we get closer to higher capacity, investors start to notice how tight the system is,” Mr. Potter said.As the oil sands continue to appear on the radar of international interests, particularly in Asia, an influx of foreign capital promises to bankroll new projects and infrastructure.In the wake of the CNOOC Ltd.’s (China National Offshore Oil Corp.) $15-billion takeover of Calgary-based Nexen Inc., Prime Minister Stephen Harper promised similar deals would be “extremely unlikely” to be approved in the future, causing widespread speculation over the role of state-owned enterprise in the Canadian resource sector.”We will still see the state-owned enterprises being the major source of financing. The big change with the rules is obviously the elimination of the possibility of an outright M&A related to oil, but we still left the door open to joint ventures,” Mr. Potter said. While the deal does nothing to diversify Canadian oil exports, “it does send a message that Canada is looking beyond the U.S., at least financially,” Mr. Fournier said.Given the climate of uncertainty, many oil sands developers are breaking up large projects into smaller, more manageable stages to control risk.

Steam-assisted gravity drainage (SAGD) projects are creating new opportunities for smaller players in the market and allowing larger firms to become leaner.”If you look at the evolution of the oil sands, in the early days everybody went and did their own thing, which led to severe cost inflation and severe labour shortages. There is an opportunity to achieve greater overall success through more thoughtful development,” Mr. Munro said.Efforts like the Canadian Oilsands Innovation Alliance and Petroleum Technology Alliance Canada are encouraging technological collaboration between competitors.”I’m not aware of any other industry in the world that has moved so aggressively to share amongst all of the participants to benefit the industry as a whole,” Mr. Munro said.In 2013, it could be technological collaboration, environmental initiatives and careful reputation management that will win the hearts and minds of Canadians in politically challenging locations like British Columbia. Working beyond regulatory standards of environmental stewardship may prove to be critical in garnering a social and political licence to develop new pipeline infrastructure and secure Canada’s position among the world’s oil-producing elite.