The Oil Sands Weekly
Imperial's future looks bright, but don't expect spending increases anytime soon . . .
Imperial Oil held their annual investor meeting presentation in Toronto this week.
CEO Rich Kruger gave a rather optimistic speech, reminding the audience that demand for fossil fuels is only going to rise over the next few decades as more of the world's poor move into the middle class. Kruger expects energy consumption to rise by 25% by 2040 and natural gas will the fastest growing energy source. Oil currently accounts for 95% of the world's transportation fuel. That number should come down to about 90% in 2040, but isn't going to zero anytime soon.
Despite the bullish forecast, Imperial will be reducing capital spending to about $1.5 billion/year for the next 4 years. That's down substantially from $5 billion/year over the past 5 years.
Imperial has 2 projects under review with the Alberta Energy Regulator (AER): Aspen and the Cold Lake Expansion.
Aspen would likely be the first project out of the gate, if approved. If everything goes according to plan, Aspen will be the first commercialized solvent-assisted steam-assisted gravity drainage (SA-SAGD) operation. The use of solvent to reduce bitumen viscosity has the potential to reduce steam-loads, burning less natural gas, which lowers greenhouse gas (GHG) emissions.
Kruger thinks both Aspen and the Cold Lake Expansion will get the green light from the government of Alberta. If approved, the company promises to limit spending to $600 million per year, but expects "double-digit returns in a $50 per barrel world".
Alberta government moves to air quality in Fort McMcKay . . .
The Government of Alberta has concluded a yearlong study on air quality in the First Nations community of Fort McKay, Alberta. Fort McKay is located 58 km north of Fort McMurray, right in the middle of 6 oil sands mining operations and several upgraders. Odours and air quality have been an ongoing concern for residents.
The study analyzed complaints logged over a 4-year period (from 2010 to 2014) and found that emissions do at times exceed odour and health thresholds. Since January 2010, residents have logged 172 complaints with the AER, mostly odour-related. The number of days per year where odours were reported varied from 13 (in 2012/13) to 39 (in 2014).
Out of 523 inspections carried out over the 4 years, 35 non-compliances were identified. The government has published a final report outlining 17 recommendations, including:
- taking steps to improve air quality monitoring
- assessing the long-term and cumulative health effects of emissions
- developing a better understanding of the link between emissions, air quality and odours
- improving response and communication protocols between the AER, Health Canada, Alberta Health Services, the oil sands operators and the community of Fort McKay.
The AER is not directly involved in health regulations, but does regulate monitoring and reporting of air quality and emissions. Public policy authority rests with the Government of Alberta and the Ministry of Health.
The province already publishes a real-time air quality map. Air quality in the city of Fort McMurray, located just south of the oil sands mining operations, consistently rate as "ideal" on the Air Quality Health Index, outperforming the air quality of larger cities such as Calgary and Edmonton. However, the authors concede it isn't clear exactly where odours detected in Fort McKay originate from.
The number of Albertans on EI blow past 2009 highs . . .
Statistics Canada reported a huge jump in the number of Employment Insurance beneficiaries for the month of July, up a 4.4% from the previous month. The reason? Recent changes to EI qualifications lowered the threshold for workers in parts of the country hurt by low oil prices.
There are over 99,000 EI recipients in the province of Alberta, up 87% from July of 2015 and even surpassing the 2009 highs. Over 33,000 of those recipients are in Calgary and about 30,000 in Edmonton.
The number of claimants in Saskatchewan has risen 40% in the past 12 months, now totalling close to 20,000. In contrast, BC has 56,000 recipients, relatively unchanged from the previous year.
The number of new EI claims across Canada is up a whopping 33% from the same time last year. However, StatsCan warns that the number of claims does not correlate to the number of unemployed since the application rules have changed substantially in Alberta, Saskatchewan and northern BC.
Premier Notley gets a warm reception in New York . . .
Alberta Premier Rachel Notley attended the New York Climate Week conference this week, pitching energy investments while outlining details of her province's efforts to combat climate change. Notely said her message was well received by the audience.
Federal government steps on provincial toes . . .
Environment Minister Catherine McKenna ruffled a lot of feathers this week by announcing the federal government will force a minimum carbon price across the provinces.
McKenna was very short on details, only noting that every province must put a price on carbon and work towards reducing GHG emissions. The minister also pointed out that there are large differences between the way provinces have chosen to tackle climate change, which need to be reconciled.
For example, Quebec and Ontario have an emissions cap-and-trade program, which is technically different than a carbon price. Quebec also exempts all of its carbon-emitting industries from having to purchase carbon offset credits, providing them with free credits under the "carbon leakage" rule. The exemptions are intended to help maintain economic competitiveness and prevent job losses. In contrast, BC and Alberta offer no such exemptions for any industry.
The federal government has chosen to stick with the targets set by the Harper government, pledging to cut GHG emissions to 30% below 2005 levels by 2030. The Liberals called the targets "unambitious" during the last federal election, but have left the door open to stricter targets, if warranted.
The federal environment minister meets with her provincial and territorial counterparts on October 3 in Montreal to begin final negotiations on a Canadian-wide policy. McKenna will take her new plan to the next UN climate change summit in Morocco in November. Prime Minister Trudeau will finalize details of the new plan with the provinces sometime before Christmas.
. . . and change their definition of a "social license"
The Liberals have also modified their definition of a "social license".
While campaigning for election in 2015, the Liberal platform stated "While governments grant permits for resource development, only communities can grant permission.” Trudeau had virtually guaranteed local stakeholders and aboriginal communities veto power over infrastructure projects.
The new definition: “‘social licence’ is about ensuring public confidence in the decision-making for major resource projects.” Not quite the same.
When asked if he has changed his mind on pipeline approvals, Trudeau responded “the fact is Canadians expect us to make the difficult decisions on how to grow the economy and protect the environment at the same time.”
Apparently, the federal government has suddenly realized you can't please everyone all the time.
Enviro-lawyers choose to beat a dead horse . . .
Both Enbridge and the federal government have confirmed they will not appeal a ruling by the Federal Court of Appeal that overturned Northern Gateway's federal approval. Northern Gateway President John Carruthers said in a statement that meaningful consultation and collaboration is better path forward than litigation, and he looks forward to working with the government.
In an unexpected twist, lawyers for Ecojustice have filed papers to appeal the Federal Court of Appeal's decision. While the group is pleased federal approval was cancelled, they were disappointed the courts did not accept arguments from environmental intervenors. Ecojustice (formerly known as the Sierra Legal Defence Fund) is a registered Canadian charity that provides funding to lawyers for use in environmental litigation.
The project now sits with the federal government for reconsideration, but is unlikely to get the green light given heavy opposition from PM Trudeau.
Other Canadian energy news . . .
Suncor Energy confirmed its first exploration well at the Shelburne Basin came up dry. Shelburne is a deepwater basin located 250 km offshore of Halifax, Nova Scotia. The exploration project is operated by Shell and jointly-owned by Shell, Suncor and ConocoPhillips. Suncor will take a $105 million write-down on the venture.
Calgary-based Seven Generations (7G) Energy has purchased a minority interest in Vancouver-based Steelhead LNG and has entered into a agreement with the company to explore opportunities to export natural gas and LPGs to Asia. Steelhead is currently in partnership with two First Nations groups to develop the Malahat and Sarita LNG projects, both located on Vancouver Island. Malahat is still in the conceptual design stage but has received a 25-year export license from the National Energy Board (NEB). The $30 billion Sarita plant is currently under review by the NEB. 7G's CEO Pat Carlson has joined the board of directors for Steelhead LNG. The company says its deal with Steelhead is non-exclusive and it is in discussion with other firms.
Paramount Resources has sold 24.7 million of its 7G shares for a total of $735 million. Proceeds will be used to fund future acquisitions and day-to-day operation.
The Irving family has donated $80 million to Dartmouth College to help launch the Arthur L. Irving Institute for Energy and Society. The institute will help “prepare future generations of energy leaders” and advance understanding of the field. Additional gifts of $33 million have been committed to the project, and Dartmouth has plans to raise more funds. Dartmouth says the institute will “work at the intersection of energy and society” from four perspectives: technology and science, society and the environment, business and economics, and geopolitics. The institute is set to open in 2020.
Bellatrix Exploration has entered into an agreement with privately-held InPlay Oil to sell certain non-core assets in the greater Pembina area of Alberta for $47 million. The divested assets produce approximately 930 boe/day.
Lightstream Resources failed to reach agreement with its bondholders, forcing it into a second forbearance agreement. The company is currently under creditor protection but says its facilities are continuing to operate normally. Company advisors are currently soliciting bids for pending asset sales. Lightstream has cancelled its annual meeting, originally scheduled for the end of September.
WestJet entered into a multi-year contract with Suncor Energy to fly employees and contractors in and out of its oil sands operations starting early November. Over 100 flights per week will shuttle between Suncor's airstrip and Edmonton, Calgary, Vancouver, Kelowna, Saskatoon, and Fort McMurray. Westjet is the primary provider of charter services for Suncor.
The City of Vancouver continue their crusade against fossil fuels, this time voting to ban natural gas from city limits by 2050. The plan calls for a complete ban of natural gas, meaning no new buildings can use it and old buildings must be retrofitted to use renewable energy. Natural gas accounts for 45% of the city's energy and 56% of GHG emissions. However, the city will allow for the use of "green gas" derived from the breakdown of organic materials and wastewater. Fortis BC estimates the move will cost the average resident $1,500 extra per year.
This week's notable Canadian economic data . . .
Bank of Canada (BoC) Governor Stephen Poloz gave a rather sombre speech this week entitled "Living with Lower for Longer". Poloz wants all Canadians to get used to slow growth due to an aging population and feeble productivity. The governor hinted that Canadian interest rates will remain low for the foreseeable future, warning seniors they may not be able to live off their savings. TD Economics expects the BoC to leave rates unchanged, even if the US Federal Reserve choses to tighten monetary policy.
The OECD downgraded Canada's expected GDP growth rate from 1.7% to just 1.2% in 2016. Although not explicitly stated, the big downward revision is likely due to production outages that were caused by the May wildfires in northern Alberta. Global 2016 growth was downgraded from 3.0 to 2.9%. The agency also noted US growth appears to be weakening, downgrading 2016 growth from 1.8% to 1.4%.
Alberta's wholesale sales declined for the third time in four months, down 2.5% in July to $6.1 billion. The decrease was led by lower sales of machinery, equipment and supplies. Total wholesale trade for the province is still down 7.3% yr/yr, and has been on a downward trend since early 2015. Across Canada, wholesale sales rose 0.3% to $56.5 billion in July, a fourth consecutive monthly gain. However, in volume terms, wholesale sales were unchanged for the month.
Statistics Canada also reported slowing inflation across the country. The Consumer Price Index (CPI) rose 1.1% yr/yr in August, down from a 1.3% gain in July. Excluding gasoline, the CPI was up 1.7% yr/yr. When adjusted for seasonality, the CPI actually decreased 0.1% in August blamed mostly on a 11.5% decline in gas prices.
Retail sales were also relatively unchanged for the third consecutive month in July, declining 0.1% to $44.1 billion. Excluding gasoline stations, retail sales increased 0.2%. Receipts at gas stations fell 3% in July, the first decline in 4 months. Receipts in Alberta declined 0.8%, the third consecutive decline, reaching their lowest level since June 2013.
Paris Accord on track for implementation by year end . . .
The United Nations (UN) secretary general Ban Ki-moon has confirmed he has secured enough commitments from world leaders to ensure that the 2015 Paris climate accord will enter into legal force this year, binding the next American president.
Donald Trump has vowed to pull the US out of the accord if he is elected. If the deal comes into legal force before the presidential inauguration, it will take four years under the accord’s rules for the US to legally withdraw. That would keep the country bound to the measure through the first term of the next administration. However, the targets are non-binding, so it unclear what the consequences would be of non-compliance.
The accord requires the formal approval of 55 countries representing 55% of global emissions. Officially, 60 member countries have ratified the deal so far, representing almost 48% of the world's emissions. The EU is expected to join on October 9, adding another 10% of global emissions. UK Prime Minister Theresa May has also pledged to join later this year. Canada is also expected to join, adding another 2% to the total.
The most notable holdouts include India, which accounts for 7% of global emissions, Russia, which produces 5%, and Japan, which accounts for 3%.
Ban Ki-moon is retiring as head of the UN at the end of 2016 and sees the climate deal as a centrepiece of his legacy. The UN was founded in 1945 and has an annual operating budget of US$13 billion.
This week's notable US energy news . . .
A leak in Shelby County, Alabama forced the partial closure of the Colonial Pipeline earlier this week, causing gasoline prices to spike in the southeastern corner of the US. Colonial delivers diesel and other fuel from refineries in the US Gulf Coast to consumers along the Atlantic, accounting for about 40% of the gas consumed on the East Coast. The company has constructed a bypass and restart of the line was approved by the US government on Wednesday. The size of the spill is estimated at about 6,000 to 8,000 barrels.
Valero Energy has shut the large crude distillation unit and a coking unit this week at their 335,000 bbl/day Port Arthur, TX refinery as part of an on-going plant-wide overhaul. The plant will be operating at reduced rates until late October.
The Wall Street Journal reported that Exxon Mobil is now under investigation by the US Securities and Exchange Commission (SEC) on the company's asset valuation practices. The news comes one week after NY's Attorney General launched a similar probe into Exxon's longstanding practice of not writing down the value of its oil and gas reserves when prices fall. The company has repeatedly stated that it uses very low price assumptions when evaluating its assets, thus not requiring a write-down when prices decline.
Exxon also agreed to pay the federal government and the state of Montana US$12 million to settle claims related to a 2011 crude oil spill in the state of Montana. The company's 40,000 bbl/day Silvertip pipeline ruptured, releasing about 1,500 barrels of crude underneath the Yellowstone River near Billings, Montana. The company has already paid out $135 million in clean up cost, including compensation to affected property owners. The latest settlement will be used for restoration of fish and wildlife habitat.
TransCanada's US subsidiary has reached agreement with its customers to raise rates on its natural gas transmission lines by 34.8%. The increase still needs to be approved by the Federal Energy Regulatory Commission. Under the terms of the deal, TransCanada has agreed to spend US$837 million over three years to upgrade its 9,400 miles pipeline network, which runs from Texas, Oklahoma and the Gulf of Mexico to markets in Wisconsin, Michigan, Illinois and Ohio. The last rate hike on this particular network was 20 years ago.
The state of Alaska and ConocoPhillips announced intentions to form a joint venture (JV) to acquire North Slope gas and facilitate the sale of LNG from the Alaska LNG project to global markets. Alaska LNG is jointly owned by BP, ConocoPhillips, ExxonMobil and the state of Alaska. The project would bring gas from Prudhoe Bay and Point Thomson (in the northern tip of the state) to an LNG plant near Anchorage via a 806 mile pipeline. The US$45-55 billion price tag and falling demand for LNG have led the partners to question the viability of the project and defer spending. TransCanada sold its 25% stake to the state of Alaska last year. Exxon also backed out of the "state project" in August, refusing to put in more funds. It is unclear whether Exxon and BP will eventually joint the JV or put their stake up for sale.
The US Federal Reserve is proposing new legislation to increase capital requirements required by investment firms when trading physical commodities, including energy products. In a statement, the Fed noted “The proposal would help reduce the catastrophic, legal, reputational, and financial risks that physical commodity activities pose to financial holding companies.” Those capital requirements would vary from 100% to 300% for every dollar invested in physical commodities. Fed officials estimated that translates into an addition US$4 billion required in capital reserves.
Republican presidential nominee Donald Trump has vowed to speed up government approval of energy infrastructure projects, if elected. During a speech delivered at the Shale Insight conference in Pittsburg, Trump took the opportunity to blast Hillary Clinton's anti-energy platform, calling her policies much worse than President Obama. Trump told the audience billions of dollars in infrastructure projects are tied up in "regulatory limbo" costing the US economy trillions per year in lost revenues.
Elsewhere around the world . . .
Copenhagen-based Maersk announced it will be splitting its bulk transport division from its energy operations. Maersk Oil is also in talks to purchase various North Sea Assets from Royal Dutch Shell. Maersk's energy operations will likely be spun out into a separate company or form new joint-ventures. Maersk is the world's largest shipping company.
ConocoPhillips announced the sale of its subsidiaries in Indonesia and Singapore to Indonesia's Medco Energi International. The deal includes a 40% stake in the Natuna oil fields offshore of Indonesia and Conoco's receiving facility in Singapore. Terms of the transaction were not disclosed.
Brazil's state-owned Petrobras plans to cut investments by 25% over the next 4 years, to US$74.1 billion. Capital spending will be the lowest since 2006. The company wants to sell US$15 billion worth of assets by the end of this year and plans to raise an additional US$19.5 billion through divestments and partnerships over the next 2 years. Total assets sales over the next decade is expected to reach US$40 billion as the company tries to shrink its US$125 billion debt-load. The company also announced it will be divesting its biofuels division. Brazil is the world's second largest producer of ethanol (after the US) produced from the country's ample sugar cane crop. Petrobras accounts for about 10% of Brazil's economic output.
A consortium led by Brookfield Infrastructure has agreed to buy South American Natural Gas Transmission Utility from Petrobras for US$5.2 billion. The consortium includes China’s CIC Capital Corp and Singapore’s GIC Private Ltd, which are both clients of Brookfield Asset Management. The 2,048 km pipeline system supplies natural gas to Brazil's most populated cities, including Rio de Janeiro and São Paulo. The pipelines will continue to be operated by a subsidiary of Petrobras.
Russian President Vladimir Putin officially launched production at a new oil field on Wednesday, despite making noise about a possible production freeze at the upcoming OPEC meeting. Russian oil output touched an all-time high of 11.75 million bbl/day last week but analysts think that level cannot be sustained for long. Russia should close out 2016 at about 11 million bbl/day, up from the 2015 record of 10.7 million bbl/day.
Venezuela is also getting ready to start-up “one of the world’s largest drilling projects” in the Orinoco heavy crude belt. The US$3.2 billion project will drill 480 wells and add 250,000 bbl/day of new output over the next 30 months. PDVSA President Eulogio Del Pino thinks oil prices should be closer to US$70 a barrel and global output needs to decline about 10% in order to get there. The country hopes other OPEC members will cut output or agree on a production freeze.
Libya's crude oil exports are on the rise, despite fighting at some of its major export terminals. The country's state-owned Arabian Gulf Oil Company has ramped up production now that force majeure has been lifted. The output has risen 50% since August to 390,000 bbl/day.
The government of Nigeria has reached a cease-fire deal with militants in the Niger Delta region. Nigeria's output has risen to 1.75 million bbl/day, up from 1.44 million bbl/day last month.
OPEC says next's weeks informal talks may turn into a formal session. Venezuelan President Nicolas Maduro insists members are close to a deal. Iran thinks "this is the right time" for an agreement, noting that crude is unlikely to rise above $50/bbl unless OPEC reduces production. Iraq has also promised it won't flood oil markets. Saudi Arabia allegedly offered to cut production if Iran agrees to a production freeze, but later issued a statement denying the claims. The next OPEC meeting is on September 28 in Algeria. OPEC estimates oil markets are currently oversupplied by 800,000 bbl/day.
The US Energy Information Administration (EIA) reported a huge jump in Canadian crude oil imports, reaching a record 3.46 million bbl/day. The increase completely reverses the previous week's declines. However, weekly numbers are preliminary and can be quite volatile. The EIA reports final imports numbers two months in arrears.
The FOMC left US interest rates unchanged this week, noting the economy looks okay despite low inflation but slow growth remains a challenge. Federal Reserve Chair Janet Yellen says she is struggling to understand what's going on in the economy. Wage growth is tepid at best and labour productivity remains weak despite strong household spending. Yellen also expressed concerns that the recent spurt in job growth in the US is not sustainable over the long haul. The FOMC promised to raise rates sometime this year, barring any black swan event.
After decades of experimental quantitative easing, the Bank of Japan (BoJ) is no longer pushing interest rates lower and instead has pledged to increase rates on the long-end of the yield curve. The bank believes a steeper yield curve will stimulate lending by the country's banks. However, BoJ Governor Haruhiko Kuroda left the door open for more stimulus at the next meeting on Nov. 1, should the yen strengthen further. The BoJ now owns one-third of all outstanding government bonds. Ironically, the yield curve flattened and the yen gained another 1.3% this week.
Despite OPEC chatter on a possible production cap, West Texas Intermediate failed to hold above US$45/bbl this week after Saudi Arabia squashed any hopes for a deal on Friday afternoon. The heavy oil discount is holding steady at US$14.35/bbl.
Bank of America Merrill Lynch is very bullish on energy stocks, upgrading the entire S&P 500 energy sector from Market Weight to Overweight. The firm thinks oil prices will soon reach a bottom and rise through June of next year. Higher oil prices will be spurred by lower production, and rising demand, which it expects will help energy stocks outperform the broader S&P.
Encana issued 107 million common shares this week. About half will be use to fund its 2017 capital spending program with remaining funds used to pay down debt. Encana stock (TSX:ECA -6.9%) was the worst performer on the TSX energy sector this week.
Carl Icahn dumped more than half of his shares in Chesapeake Energy for tax planning purposes, reducing his stake to 4.6%. Icahn remains Chesapeake's largest shareholder. Chesapeake stock (NYSE:CHK -9.8%) was the worst performer in the US energy sector this week.
This week's 52-week highs on the TSX include: Teck Resources (TCK/B), Penn West Petroleum (PWT), TransCanada (TRP) and Seven Generations (VII).
- Enbridge Energy Partners (NYSE:EEP): Upgraded from Sell to Neutral at Goldman Sachs Group. The company increased its price target from US$20 to US$24.
- Imperial Oil (TSX:IMO): Upgraded from Market Perform to Outperform at Raymond James Financial.
- Encana (TSX:ECA): Downgraded from Sector Perform to Underperform at Scotiabank.
PRICE TARGET CHANGES
- Crescent Point Energy (TSX:CPG): Price target decreased from $25 to $22 at RBC, from $26 to $22 at CIBC, from $29 to $25 at FirstEnergy Capital and from $30 to $28 at TD Securities.
- Baytex Energy (TSX:BTE): Price target decreased from $8.50 to $6 at CIBC.
- Encana (TSX:ECA): Price target increased from $13 to $14 at RBC.
- Teck Resources (TSX:TCK/B): Price target increased from $23.75 to $29 at Paradigm Capital.
- TransCanada (TSX:TRP): Price target increased from $68 to $69 at Scotiabank.
NEXT WEEK'S EVENTS
- International Energy Forum kicks off in Algiers, Algeria
- Bank of Canada Governor Stephen Poloz delivers lecture at Western Washington University
- US Presidential Debate in Hempstead, NY @ 9:00pm ET
- EIA Monthly Energy Market Review (September 2016)
- Veresen Investor Day
- API Weekly Statistics Bulletin released @ 4:30pm ET
- EIA Petroleum Status Report released @ 8:30am ET
- OPEC meeting in Algiers, Algeria
- Canadian payroll data released by StatsCan @ 8:30am ET
- EIA Natural Gas Report released @ 10:30am ET
- US GDP revision for Q2/2016
- Canadian GDP for July released by StatsCan @ 8:30am ET
- August Industrial Product and Raw Materials Price Index released by StatsCan @ 8:30am ET
- Canadian Budget Balance (July) released @ 11:00am ET
- Baker-Hughes Rig Count released @ 1:00pm ET
- EIA Petroleum Supply Monthly (July data)
- November contract expiry for Brent crude.