Will nervous investors back away from infrastructure projects in western Canada, spooked by volatile global crude oil prices?

In a recent report, IHS Markit acknowledged the headwinds of insufficient pipeline capacity that challenge producers in the region, but the firm remains confident that crude production in western Canada will continue to grow. It pointed to recent growth, even as crude prices slumped, as a number of important infrastructure projects came online in the past few years.

“Constrained pipelines have driven deep discounts for western Canadian heavy oil beyond what would normally be expected based on quality and pipeline transportation costs,” IHS Markit said.

“The timing of future pipeline capacity and the physical act of construction have become critical signposts for the industry and investors alike,” the report said. The need for additional pipeline capacity has become so critical that the Canadian government acquired Kinder Morgan Inc.’s (NYSE: KMI) Trans Mountain expansion project for C$4.5 billion (US$3.44 billion) in May.

The Canadian government agreed to acquire and fund the construction of this project to maximize the benefits of oil sands production for its citizens.

“The outcome we have reached represents the best opportunity to complete [the project] and thereby realize the great national economic benefits promised by that project,” Steve Kean, Kinder Morgan Canada’s chairman and CEO, said in a release.

The good news for global markets is that western Canadian production can begin to increase again as new infrastructure, specifically pipeline systems, is brought online. At the moment, however, there are few infrastructure projects scheduled to be completed after 2019, with many final investment decisions having yet to be made.

Production out of the western Canadian oil sands has helped to sustain global heavy crude oil levels as OPEC nations, particularly Venezuela, have seen this type of production drop off. Canada is now the fifth-largest crude oil producer in the world and the largest source of imported crude into the U.S.

“Although the global oil market has been a story of abundance over the past few years, the heavy market has borne the brunt of the tightening global oil market. Much of the constraint shown by OPEC has come from the heavier side of their production portfolio while output from large heavy oil producers in the Western Hemisphere…has declined,” IHS Markit said.

The firm highlighted production declines out of Venezuela as being the largest of the cartel’s membership. Production from this South American country peaked at more than 2.5 million barrels per day (bbl/d) a few years ago, but is currently 1.4 million bbl/d and production may fall to less than 1 million bbl/d in the coming years, according to IHS Markit.

While OPEC production declines, IHS Markit forecasts that Canadian crude production will grow by another 500,000 bbl/d between 2018 and 2019. However, the company anticipates that Canadian heavy crude production will slow in 2020.

Though pipeline constraints are likely, IHS Markit is optimistic regarding the outlook for Canadian oil sands as the company anticipates that railroads will help provide transportation capacity for increased production. Rail transportation will also help to place a price cap on these volumes until more pipeline capacity is brought online.

One of the fortunate effects of oil sands production is that it has a long-flat production profile with limited declines. Producers have also been able to reduce costs while achieving higher utilization rates from existing facilities.

The company anticipates much of this new capacity coming through the less-risky expansion of existing facilities since they require less capital and are quicker to produce. The report anticipates that many producers and operators will also be able to increase output from existing facilities without expansion by minimizing downtime and increasing utilization rates.

“Innovation should not be ruled out. It unlocked the oil sands. It unlocked U.S. tight oil. And it yet could transform oil sands production, cost and its carbon intensity,” the report said.

The resolute nature of production out of western Canada during the current price downturn also means that any new transportation capacity added in the region should lead to rapid production growth.

“Over the next decade, from 2018 to 2027, IHS Markit expects 1 million bbl/d more output. Growth will be driven upwards by the ramp-up of recently completed projects, the resumption of construction of several projects that were deferred during the worst of lower prices, and new investments being made into capital efficiency projects that can deliver not only more oil but lower costs,” the report said. “This accounts for about half of the growth to 2027, the remainder will come from projects yet-to-be sanctioned.”