Alberta spill heaps pain on Canada's oil sector

An oil spill in the heart of Canada's oil sand region has sparked renewed criticism of the country's industry, and raised concerns about the already-limping resource sector.

The 31,449 barrel leak prompted emergency response near Northern Alberta's Fort McMurray last Wednesday, and a subsequent apology by the company responsible for the accident, Nexen Energy.

Ben Nelms | Bloomberg | Getty Images

While it pales in comparison to spills like BP's Deepwater Horizon oil disaster, which saw approximately 4.3 million barrels leak into the ocean in 2010, bad publicity around the leak could impact a sector already feeling the heat from low oil prices, environmental groups, local wildfires, and delayed and cancelled projects.

WTI, a North American benchmark for crude, has plunged over 50 percent over the past 12 months to $50.74 per barrel. The oil cartel, the Organization of Petroleum Exporting Countries, is in a game of chicken with North America's oil and gas industry, keeping output high in the hope of squeezing the U.S. and Canada into cutting their production.

The oil slump has hit the Canadian economy hard enough to prompt two surprise interest rate cuts by the Bank of Canada since January. An unexpected cut last week brought the key rate down by 25 basis points to 0.5 percent.

Costly business

Albertan oil is more expensive to extract than traditional drilling as it is caught in a mixture of sand and clay: It either involves mining the sands and then separating the oil in a processing plant or getting to the oil by pumping steam or solvents into the sand.

Alberta produces 1.9 million barrels per day, according to the Canadian Energy Research Institute's latest figures. Alberta's government website says the province is home to 168 billion barrels worth of crude oil reserves.

The cost of these process is beginning to take its toll. A June note from Barclays Commodities Research estimates that projects that would have produced 1 million barrels of oil per day by 2030, have now been delayed.

Meanwhile Shell earlier this year withdrew an application for their Pierre River Mine project that would have produced over 200,000 barrels per day, while pipeline building TransCanada last month confirmed with national media that it had laid off nearly 200 workers from its major projects department.

Oil companies Husky, Suncor and CNRL have also deferred projects that would have been online by 2020.

Albertan wildfires also shut down over 200 thousand barrels per day worth of oil sands projects last month, Barclays Commodities Research estimated.

"In the short term they're going to have a slow recovery, and it's going to be a challenging environment," Warren Russell of Barclays Commodities Research told CNBC by phone

Alberta spill: fuel to the fire?

Amrita Sen, chief oil analyst at EnergyAspects told CNBC that one of the biggest problems for landlocked Alberta has been a lack of pipelines. Pipeline development has met fierce opposition from environmental activists, and a spill like Nexen's just provides ammunition, Sen explained.

"It just makes it even harder to gain regulatory approval," she said.

"This leak is...a good reminder that Alberta has a long way to go to address its pipeline problems and that communities have good reasons to fear having more built. ," Mike Hudema, a representative of Greenpeace's Climate and Energy team said in a press release.

While Albertan Premier Rachel Notley said the leak was "very troubling," she added that it didn't shake the conclusion that pipelines are the safest way to move oil, according to Reuters.

Sen said she was optimistic about the outlook for the oil sands into 2016, when seven projects will be coming online. Canada's will be one of the few countries with an oil sector will see year-on-year growth in 2016, Sen said.

The real pain from project deferrals , she explained, will start to be felt in 2017.

Clarification: This article has been updated to clarify the production processes used in Alberta's oil industry.