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The Oil Sands Weekly

The Oil Sands Weekly

Enbridge commences garage sale . . . 

Enbridge announced the sale of its Saskatchewan pipeline gathering system for $1.075 billion to private midstream firm Tundra Energy Marketing. The deal will help the company finance its recent $2 billion acquisition of Houston-based Spectra Energy.

The divested assets include over 1,600 km of crude oil/liquids pipelines and related transport facilities in Southeast Saskatchewan and Southwest Manitoba. The system connects to Enbridge's Bakken Expansion Pipeline, which was not included in the sale. The transaction is expected to close by the end of the year.

Enbridge is reportedly mulling the sale of up to $6 billion in non-core assets to pay down debt and grow its dividend, as promised to shareholders.

US Oil Sands back in business . . . 

Calgary-based US Oil Sands has issued $12.8 million in new shares and restarted construction at its PR Spring Project in Utah’s Uinta Basin. Construction is 93% complete with start-up expected by the end of the year. The pilot plant should produce 2,000 bbl/day of bitumen. A second phase of expansion will bring production to 10,000 bbl/day once completed.

The company has a proprietary extraction process which uses a citrus bio-solvent to extract bitumen from oil sands without the need for tailings ponds. If successful, the technology has the potential to dramatically reduce greenhouse gas (GHG) emissions and lower capital requirements.

Oil sands deposits in Utah area have different chemical properties than oil sands from Alberta's Athabasca region. Alberta oil sands is water-wet, making extraction possible using just hot water. Utah oil sands doesn't respond as well to hot water, and requires the addition of a chemical solvent to separate the bitumen from the solids. Utah bitumen is slightly lighter than Athabasca bitumen, with a lower sulphur content.

The company also hopes to commercialize the process of dry tailings, where tailings are filtered and transported back to the mine for faster reclamation. Although dry tailings and direct solvent extraction of bitumen are not a new concepts, feasibility on a large scale is challenging at best.

US Oil Sands will also be changing its name since it will no longer be focusing exclusively on US assets and has begun looking at opportunities in Alberta's Athabasca region.

TransCanada faces a tough sell in locking in natural gas contracts . . .

Natural gas shippers, including Canadian Natural Resources and Encana have rejected TransCanada's 42% discount for tolls from Alberta/BC to markets in Ontario. TransCanada currently charges about $1.41 per GJ but customers believe the 42% discount is too low to lock-in a 10 year contract. TransCanada's current contracts expire in 2020 but the company is eager to lock-in new contracts in order to compete with cheap US gas flooding into Ontario. TransCanada says it is continuing to work with its customers.

Pacific NW LNG gets the green light from Trudeau Liberals, but don't pop the champagne just yet . . .

The federal government finally approved the Pacific NorthWest LNG project with 190 legally binding conditions, mostly related to mitigating environmental impacts. The government cited the following in its decision:

  • total capital investment is expected to be in the range of $36 billion
  • over 5,000 direct and indirect jobs will be created during construction and on-going operation
  • 34,000 comments were received by individuals and organization and assessed by the review panel
  • Indigenous communities were provided $480,000 in funding to participate in the hearings and will be involved in on-going environment monitoring of the project
  • the facility will add nearly $2.4 billion per year to Canada's GDP.

Total GHG emissions from the project will be capped at 4.3 million tonnes of CO₂e/year, 900,000 tonnes lower than the ceiling set by the Harper government. That excludes upstream emissions from natural gas production and distribution, estimated at about 7 million tonnes CO₂e/year. The project will increase BC's carbon footprint by about 9%.

However, it is unclear if and when the project will ever get off the ground. Petronas CEO Wan Zulkiflee Wan Ariffin told reporters "We need time to look at the conditions and then we will have a review of the project." The Malaysian state-owned firm has cut jobs, slashed its dividend and promised to cut spending by US$12 billion over the next four years. Profits are down 85% this year and the company's outlook remains "gloomy" well into 2017 due to a slowing Malaysian economy. 

Asian spot prices for LNG have dropped 70% since 2014. Over the next 5 years, LNG capacity will increase by almost 50% due to new projects coming on-stream, mostly in the US and Australia. Petronas' partners for the project include state-owned entities from China, India, Japan and Brunei. Reuters is reporting that the company has been trying to sell their stake in the project.

The federal government's approval was delayed by 3 years due to regulatory red-tape and severe opposition from BC's NDP party, various First Nations communities and anti-fossil fuel activists. Several groups are already preparing court challenges to the approval.

Ontario offers lessons learned for Alberta's power grids . . . 

After serious backlash from the media and consumers, the Ontario Government has shelved plans to spend more taxpayer dollars on wind and solar farms, finally admitting their renewable energy plan is partly to blame for soaring power prices in the province. The cancellation will save the average homeowner another increase of $2.45/month. Ontario recently removed the HST from power bills after widespread media reports of outrageous increases in electricity prices in rural areas, which are set to increase another 25% in January.

Solar and wind power plants lock-in lucrative long-term contracts, guaranteeing payouts regardless of consumption or the amount of power generated. The Ontario government has already signed 20 year contracts for 18,000 megawatts of power from wind, solar, bio-energy and energy-from-waste projects.

Ontario's power prices soared after the provincial Liberal government shutdown its coal-fired power plants and was forced to refurbish and restart old nuclear reactors, costing the province tens of billions. The government already deferred $15 billion in spending for 2 new nuclear reactors. Nuclear provides 59% of the province's power, hydroelectric power accounts for 28%, while renewables (wind, solar and biofuels) account for less than 6%.

The Green Party, David Suzuki Foundation, Environmental Defence and the Canadian Wind Energy Association called the move "short-sighted" and would rather see the old nuclear reactors shutdown and more renewable power installed.

Alberta Premier Rachel Notley says she remains committed to de-carbonizing Alberta's power grid but says her government will be looking closely at any lessons learned from Ontario's Large Renewable Procurement program. 

In other political news . . . 

Alberta Energy Minister Marg McCuaig-Boyd will be in Mexico City next week to sign a memorandum of understanding (MOU) allowing Alberta companies to be more actively involved in Mexico's energy sector. The deal will include collaborative research and setting up environmental and regulatory framework for the country's oil and gas sector. Mexico has extensive heavy oil reserves which it has yet to fully and efficiently develop.

Prime Minister Justin Trudeau has set a November 25 deadline to decide how to proceed on Enbridge's Northern Gateway pipeline. The federal Liberals must decide whether to re-do consultations for the project, now that the Federal Court of Appeal has overturned the previous government's approval.

The federal government's decision on Enbridge's Line 3 is also due on November 25. A decision on Kinder Morgan's TransMountain Expansion is due December 19.

This week's notable economic data . . . 

Statistics Canada reported that real gross domestic product (GDP) grew 0.5% in July, led by higher output from the energy sector. Mining, quarrying, and oil & gas extraction increased for the second month in a row, up 3.9% in July. The gains in June and July followed four consecutive monthly declines. Non-conventional oil extraction grew 19% as production returned to normal following maintenance shutdowns in April and the Fort McMurray wildfires in May. Conventional oil & gas extraction rose 0.6%. However, energy services declined for the sixth month in a row in July, falling 6.9% on reduced rigging and drilling services.

The Industrial Product Price Index (IPPI) declined 0.5% in August as prices fell in 11 out of 21 major commodity groups. Energy and petroleum products declined 1.3% for the month, heavy fuel oils fells 4.9%, light fuel oils declined 1.6%, diesel prices fell 1.6% and gasoline declined 0.5% for the month of August. Excluding energy and petroleum products, IPPI declined 0.3%, driven lower by falling food prices. Since August 2015, IPPI is down 1.3%, blamed mostly on steep declines in energy prices.

The Raw Materials Price Index (RMPI) also fell 0.7% in August, after declining 2.7% in July. Five out six major commodity groups declined for the month. The only gainer was crude products, up 1.4% for the month. From the same time last year, RMPI is up 0.6% in July, the first yearly gain since July 2014, thanks to a 5.1% increase in energy-related commodities. Excluding petroleum products, RMPI is down 2.2% yr/yr.

Weekly payrolls in Alberta continued to decline in July, now down 1.6% yr/yr. The declines were blamed on continued jobs losses in professional, scientific, and technical services, as well as wholesale trade. The loss of high-paying jobs in the energy patch also contributed to the overall decrease in average weekly earnings for the province.

Over the past 12 months, there are 2,100 fewer oil & gas extraction jobs and 23,500 fewer manufacturing jobs across the country. The average weekly earnings in July was $955 for Canadian non-farm employees, down 0.2% from the previous month.

State-side, US GDP was better than expected in the second quarter, revised higher from 1.1% to 1.4% yr/yr. Business investment grew by 1%, the first gain since Q3/2015, suggesting that cuts in the US energy patch might be over. After-tax corporate profits fell 1.9% in Q2/2016, a smaller decline than expected.

The World Trade Organization (WTO) cut its forecast for global trade from 2.8% to 1.7% on slowing demand from China and falling imports into the US. The WTO sounded the alarm on protectionist policies and anti-globalization rhetoric, disputing claims that global trade only benefits big businesses.

North Dakota considering Canada-style partnerships with First Nations businesses . . .

Whiting Petroleum CEO Jim Volker has suggested the US should consider partnering with Native American groups, providing them with business opportunities for supply and delivery contracts. 

Whiting Petroleum is North Dakota's largest oil producer, caught in the crossfire between North Dakota's Standing Rock Sioux and the Energy Transfer Partner's Dakota Access Pipeline. Construction of the 1,770 km line from North Dakota to the US Gulf Coast has been temporarily halted due to violent protests over land rights and environmental concerns. Volker thinks providing Native American firms with business opportunities will give the energy sector a "social license" to build pipelines. 

The Dakota Access Pipeline will reduce transportation costs from US$8.50 to about US$5/bbl for North Dakota oil.

This week's climate change news . . . 

The EU's 28 members have agreed to fast-track ratification of the Paris accord for combating climate change. The EU accounts for 12% of the world's GHG eissions. So far, 61 nations representing 48% of the world's emissions have signed on, short of the 55% required to ratify the deal. However, if the EU deal is approved by parliament next week, the accord with formally enter into force. The EU bloc as a whole have committed to reducing GHG emissions by 2030 to at 40% below 1990 levels. Individual countries within the EU will have to work through their own targets. The next round of climate talks is in November in Marrakech, Morocco.

The Organisation for Economic Cooperation & Development (OECD) says carbon prices are 80% lower than where they need to be in order to meet climate change goals. The OECD would like to see a carbon price of US$34/tonne (or $45). To put that number in perspective, EU carbon allowances are about €4.50/tonne (or $6.60). Alberta's new carbon tax is $20/tonne, rising to $30/tonne in 2018, matching BC's carbon tax rate.

OPEC gooses oil prices by agreeing to cut production . . . 

For the first time in 8 years, OPEC members have agreed its oil output should be somewhere between 32.5 and 33.0 million bbl/day, down from the current level of 33.5 million bbl/day.

That translates into a production cut of about up to 700,000 bbl/day. The cartel thinks that would be enough to reduce the current oversupply and put a floor under oil prices. 

The move came as a surprise since OPEC recently abandoned its usual practice of imposing production ceilings, conceding that members tend to ignore those targets and consistently produce more than planned.

The unexpected decision comes the same week as Saudi Arabia made drastic cuts to social services and reduced pay for civil servants. The country has burned through US$182 billion in cash reserves since 2014 and the kingdom will be running a budget deficit of US$98 billion this year, the highest among the world's 20 largest economies.

Saudi Energy Minister Khalid al-Falih said that Iran, Nigeria and Libya would be allowed to produce "at maximum levels that make sense" as part of any output limits. Unofficially, OPEC sources have said Saudi Arabia offered to reduce its output from 10.7 million to 10.2 million bbl/day if Iran agreed to freeze production at the current level of 3.7 million bbl/day. However, Iran has repeatedly expressed desires to return to pre-sanction levels of 4 million bbl/day. Iraq is also unhappy with the reinstatement of a production ceiling, noting that OPEC has consistently under-reported its production. The country has been working with multi-nationals to expand oil output from 4.7 to 5.0 million bbl/day.

Details of production targets for each member will be hammered out at the official OPEC meeting on November 30 in Vienna, Austria. Non-OPEC member Russia will also be invited to the table.

OPEC pledged to cut production by 4.2 million bbl/day by the end of 2008 when oil prices plummeted from a high of US$140/bbl in the summer to just US$40/bbl by the end of the year. OPEC production peaked at 33.3 bbl/day in July 2008 and bottomed at 30.5 million bbl/day by March 2009.

Elsewhere in the world . . .

TransCanada subsidiary Columbia Pipeline Group has offered to buy all outstanding shares of Columbia Pipeline Partners for US$848 million in cash, or US$15.75 per share. Columbia Pipeline Partners is based in Delaware and holds interests in three natural gas pipelines, spaning from New York to Mexico, as well as storage and other midstream assets. The company's board of directors are currently reviewing the offer.

Pipeline operator Sunoco Logistics and its partner Vitol Group have agreed to buy Vitol's assets in the Permian Basin for US$760 million. The assets will add a 2 million barrel crude oil terminal in Midland, Texas, a gathering and mainline pipeline system in the Midland Basin, and various inventories related to Vitol’s crude oil purchasing and marketing business in West Texas.

Italian energy giant ENI is seeking billions in loans to help finance a huge offshore gas development in Mozambique's Rovuma Basin. The deposit holds an estimated 85 trillion cubic feet of gas and is one of the largest gas discoveries in the past decade. The government has been in negotiation with ENI and Anadarko for several years over development of the assets. Mozambique is one the world's poorest countries, but could position itself as a major LNG exporter. ENI hopes to make a final investment decision by the end of this year. Mozambique's Energy Minister Pedro Couto was fired last week for reasons undisclosed.

The head of Russia's regional government in the Sakhalin region reported that offshore production will rise an estimated 8% next year to an average of 362,000 bbl/day. Sakhalin is home to some of Russia's large oil and gas projects, operated by Exxon Mobil and state-owned GazProm. Despite western sanctions and low oil prices, Russian oil production is expected to reach a record 11 million bbl/day by year end. Russia's cost of production is one of the lowest in the world, thanks partly to a a low currency. Excluding condensates and NGLs, Russia is the world's largest crude oil producer.




US IMPORTS OF CANADIAN CRUDE
million bbl/day • preliminary data by EIA
US OIL INVENTORIES
million bbls • data by EIA

US OIL PROD'N & RIG COUNT
million bbl/day • data by EIA & Baker Hughes

3,194k
-266 ▼ 7.7%
BBL/D CDN EXPORTS TO US
8,497k
-15 ▼ 0.2%
BBL/D US PROD'N
502.72M
-1.88 ▼ 0.4%
BBL US INVENTORY
425
+7 ▲ 1.7%
US RIG COUNT
CHANGE WK/WK  

The US reported a small decline in production (down 15,000 bbl/day) and a sharp decline in commercial oil inventories (down 1.9 million barrels). Most of the those declines occurred on the East Coast, which fell 3.3 million barrels, offsetting rising inventories in other parts of the country.

Refinery utilization also fell sharply last week, from 92% to 90%, as many refineries come down for routine maintenance as they switch from gasoline production to heating oil. Both gasoline and distillates inventories fell last week. Foreign oil imports declined 465,000 barrels.

Rig counts climbed again this week on both sides of the border. According to Baker Hughes, 109 oil rigs have been added in the US since May, now totalling 425. That's down substantially from a record high of 1,609 in October 2014 but up 34% from a low of 316 reached this past May. In Canada, the number of oil rigs rose by 7 to 84.




CURRENCIES • WEEKLY CLOSE
Friday close • data by Bank of Canada & ICE

95.39
-0.00 ▼ 0.0%
USD INDEX
76.24
+0.31 ▲ 0.4%
CDN DOLLAR
1.60%
-0.02 ▼ 1.2%
US 10Y Bond
1.00%
-0.04 ▼ 3.8%
CDN 10Y Bond
CHANGE WK/WK  



OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group
49.06
+3.17 ▲ 6.9%
BRENT USD/BBL
48.24
+3.76 ▲ 8.5%
WTI USD/BBL
45.19
+3.66 ▲ 8.8%
CDN LT USD/BBL
34.24
+4.11 ▲ 13.6%
WCS USD/BBL
CHANGE WK/WK  

The September monthly average oil prices are as follows: 

  • WTI = US$45.23 (versus US$44.80 in August)
  • Brent = US$47.30 (versus US$47.16 in August)
  • WCS = US$31.05 (versus US$30.28 in August)
  • Canadian Light = US$42.55 (versus $41.23 in August)

The heavy oil discount for the month averaged 31% or US$14.18, down US$0.34 from the previous month.




ENERGY SECTOR PERFORMANCE
Friday close • data by TSX & NYSE

CANADIAN & US EQUITIES
Friday close • data by TSX & NYSE

SECTOR SUMMARY
Friday close • data by TSX & NYSE
TSX ENERGY STOCKS • WEEKLY CHANGE
NYSE ENERGY STOCKS • WEEKLY CHANGE

The Alberta Government announced close to $100 million in investments this week through its investment management corporation known as AIMCo. $46 million went to Calfrac Well Services (CFW +5.0%) for environmental innovation and another $46 million to TransAlta Renewables (RNW -1.0%) to expand developments in clean energy. The remainder ($6 million) was invested in Pine Cliff Energy (PNE -1.9%) for consolidation of its natural gas assets. AIMCo is allowed to invest up to 3% of the Heritage Fund (equivalent to $540 million) into Alberta companies with growth potential.

Midstream-player Veresen (VSN +4.0%) has reportedly hired TD to sell its power unit, estimated to be worth about $1 billion. Proceeds from the sale would be used to reduce debt and fund growth.

This week's 52-week highs on the TSX include Canadian Natural Resources (CNQ +7.5%), Teck Resources (TCK.B -1.3%), Veresen (VSN +4.0%), Trilogy Energy (TET +3%), Penn West Petroleum (PWT +0.9%), Parkland Fuel (PKI +1.4%) and Vermillion Energy (VET +7.6%).

UPGRADES

  • Encana (TSX:ECA): Upgraded from Underperform to Sector Perform at CIBC and from Neutral to Buy at Citigroup.
  • Phillips 66 (NYSE:PSX): Upgraded from Sell to Neutral at Goldman Sachs.

DOWNGRADES

  • Spectra Energy (NYSE:SE): Downgraded from Buy to Hold at Argus.

PRICE TARGET CHANGES

  • Paramount Resources (TSX:POU): Price target decreased from $16 to $15.50 at TD Securities.
  • Pengrowth Energy (TSX:PGF): Price target increased from $1.25 to $1.50 at RBC.
  • Royal Dutch Shell (LSX:RDSA): Price target decreased from GBX2180 to GBX2050 at HSBC.
  • Teck Resources (TSX:TCK/B): Price target increased from $16 to $22.50 at BMO Capital Markets.

NEXT WEEK'S EVENTS

Monday:

  • RBC Manufacturing PMI for September released @ 9:30am ET

Tuesday:

Wednesday:

  • EIA Petroleum Status Report released @ 8:30am ET
  • Encana 2016 Investor Day in New York City, NY

Thursday:

  • Speech by Bank of Canada Senior Deputy Governor Carolyn Wilkins in Trois-Rivières, QC 
  • EIA Natural Gas Report released @ 10:30am ET

Friday:

  • September Labour Force Survey released by StatsCan @ 8:30am ET
  • Bank of Canada Business Outlook Survey
  • Baker-Hughes Rig Count released @ 1:00pm ET.

Next edition of the Oil Sands Weekly: Friday October 7, 2016 @ 8pm MT.

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