The Oil Sands Weekly
Suncor divests another chunk of the East Tank Farm . . .
Mikisew Cree First Nation (MCFN) has agreed to pay $147 million for a 14.7% interest in Suncor Energy's East Tank Farm, currently under construction near the company's Base Plant operations just north of Fort McMurray. The East Tank Farm will provide bitumen blending and storage for the soon-to-be completed Fort Hills Oil Sands Mine.
Under the terms of the deal, MCFN will pay the capital once the tank farm becomes operational, which is expected by mid-2017. This is the second First Nations partnership announced by the Suncor in the past few months. Fort McKay First Nation purchased a 34.3% interest for $350 million for the same tank farm in September.
Suncor retains a 51% interest in the East Tank Farm and will operate the facility once construction is completed.
. . . and may have a buyer for Petro-Can's lubricants business
Reuters is reporting that US refiner HollyFrontier submitted the highest bid for Suncor's Petro-Canada lubricants division, which was put up for sale early this year. The divestiture is estimated to be worth at least $1 billion. The Petro-Canada division is based out of Mississauga, Ontario, producing about 350 different lubricants used in food, cosmetics and heavy machinery. Dallas-based HollyFrontier operates 5 refineries with a total throughput capacity of 443,000 bbl/day.
. . . and submits a bid for Houston refinery
Reuters is also reporting that Suncor is among bidders interested in LyondellBasell's Houston refinery. Other bidders include Saudi Aramco and Valero. Unnamed sources say Saudi Aramco put in the highest bid (US$1.5 billion), followed by Suncor (US$1.2 billion) and Valero (US$900 million).
The Houston refinery has the capacity to process 268,000 bbl/day of heavy, sour crude, imported mostly from Mexico and South America. Reuters pegs the facility to be worth about US$1.3 billion, based on recent US refinery sales.
Shell divests $1.4 billion worth of assets in Western Canada . . .
Royal Dutch Shell has agreed to sell 206,000 acres of non-core oil and gas properties in Western Canada to Tourmaline Oil for $1.369 billion, split approximately 75% in cash and the remainder in Tourmaline stock.
The assets includes 61,000 acres in the Gundy area of Northeast BC, 145,000 acres in the Deep Basin area of Alberta, three gas plants and 719 kms of pipelines. The properties produce about 24,850 boe/day of dry gas and liquids. Tourmaline says the acquisition will help it boost its 2017 production to 250-260,000 boe/day, rising to 310-320,000 boe/day in 2018.
Shell says the divestiture will allow them to focus on their core assets in the Montney and Duvernay regions.
At this year's Oil & Money Conference in London, Shell confirmed it currently has 16 assets up for sale, each worth an estimated US$500 million as it works towards US$30 billion of divestitures to pay for its recent acquisition of BG Group.
NRCan cuts pipeline spill fund in half . . .
Natural Resources Canada (NRCan) has reduced the funds required in case of a pipeline spill from 10% of the company's liability to 5%.
The Pipeline Safety Act originally had no minimum "cash on hand" requirement for spills. However, the federal government amended the act earlier this year, requiring a 10% emergency fund. After a series of consultations, the government announced that number will be cut in half to 5%.
Large companies have a clean-up liability limit of $1 billion, which translates into a $50 million emergency fund. Although the cash requirements are not a big deal for large companies such as TransCanada or Enbridge, smaller operators are now required to keep an estimated $200-$300 million of cash on hand, which might be a challenge.
Anti-pipeline groups have denounced the new plan, calling 5% insufficient. NRCan maintains the 5% clean-up fund is in addition to a number of other new safeguards and regulations recently put in place.
CP Rail crude-by-rail volumes continue to fall . . .
CP Rail reported lower than expected third quarter results this week on a delayed grain harvest and plummeting crude oil transport volumes. Q3 crude transport revenues fell 88% from the same time last year to just $13 million. The company transported only 5,000 oil tankers this past quarter, down from 7,000 in the last quarter and down from 25,000 in Q3/2015.
Lower crude-by-rail transport revenues were blamed on low oil prices, increased pipeline capacity and lower surcharges. CP also reported a significant reduction in traffic from Alberta to the northeastern US. Year to date, crude-by-rail revenues are down 63%.
Overall, third quarter revenues at CP fell 9% to $1.55 billion over the same time last year. Despite the decline in revenues, profits rose to $347 million (versus $323 million in Q3/2015) thanks to a 6.2% cut in operating costs.
Enbridge cuts 5% of its workforce, again . . .
Enbridge announced it will be eliminating another 530 positions as part of its organizational review which commenced earlier this year. The cuts amount to 370 in Canada and 160 in the US. A spokesperson for the company says the layoffs are not related to its recent $37 billion acquisition of Spectra Energy. Enbridge had previously chopped its workforce by 5% (or 600 positions) late last year.
Tesoro might be interested in Chevron's BC operations, for the right price . . .
Reuters is reporting that Chevron has completed its initial round of bidding for the potential sale of its Vancouver refinery and retail gas stations in BC. Independent refiner Tesoro is apparently interested in the assets. The BC refinery is the only refinery operating in the Vancouver area and is not designed to process heavy crude from Alberta. Chevron recently sold its Hawaii refinery to a private equity firm.
Premier Notley sets a "new and better course" for Alberta . . .
In this week's State of the Province address, Premier Rachel Notley called on every Albertan to help the province diversify its economy away from crude oil exports. The premier reiterated a number of previously announced initiatives to help grow the petrochemicals industry, small businesses and other non-energy parts of the economy.
The premier is hopeful that the worst of the oil price shock is largely over, but remains cautiously optimistic going forward. However, Notley reminded Albertans that government revenues are down 15% and the province will be looking to bring the budget into balance as the economy improves. That means no room for new spending and much smaller increases in public sector salaries. However, the government will follow through on its promise to fund $34 billion in infrastructure projects over the next 5 years.
Notley blamed the previous government's inaction over climate change as the key reason for pipeline opposition, insisting Alberta now has the social licence in place to build pipelines to tidewater. Later this year, the government will confirm the cost to taxpayers for shutting down coal plants across the province and building new renewable energy power.
Kinder Morgan provides update on Canadian operations . . .
Houston-based Kinder Morgan reported a 10% drop in quarterly revenues today on lower transport volumes throughout its North American pipeline network. Revenues declined to US$3.33 billion, resulting in a net loss of US$227 million, including a US$405 million write-down on the Midcontinent Express Pipeline.
In contrast, Kinder Morgan Canada reported a 2% increase in revenues for the third quarter, rising to US$43 million. Volumes on the Trans Mountain line rose to 30.7 million barrels in Q3, up 4% from the same quarter last year. A decision is expected from the federal government on the Trans Mountain Expansion by December 20, 2016.
The company also announced it is progressing construction of its Base Line Terminal, a new crude oil storage facility being developed in Sherwood Park, Alberta. The terminal is a 50/50 joint venture with Keyera. The project includes 12 crude oil storage tanks with a total capacity of 4.8 million barrels. Commissioning is expected to begin in the first quarter of 2018.
Planning and permitting is also progressing on its Utopia Pipeline Project, which will initially carry 50,000 bbl/day of ethane and propane from Ohio to Windsor, Ontario. The US$500 million project should be in service by January 2018, if everything goes according to plan.
Kinder Morgan has reduced its debt by US$2 billion since the last quarter and plans to boost capital spending over the next few years.
Western execs not thrilled about Liberal government . . .
A survey of 157 Canadian executives are about evenly split on the Trudeau government's handling of the Canadian economy. Among the key highlights:
- 45% of executives say the government has fallen short of expectations, while 53% believe the government has met or exceeded expectations. Those numbers are slightly improved from the survey taken right after the Liberals were elected in late 2015.
- Not surprisingly, CEO's in Western Canada had a lower government approval rating.
- A majority of executives see a further deterioration of the EU but only 10% think Europe is important to their business. 42% see the business environment deteriorating in Europe while 38% think things will get worse for relations with the US.
- A majority of executives support trade with China and think trade relations are on the right path.
The survey was conducted during the month of September.
This week's other Canadian energy news . . .
Laurentian Bank is taking advantage of the the downturn in the oil and gas sector and announced it will be setting up an energy investment banking team in Calgary. The company has historically had a "near-zero" exposure to Alberta or the energy sector in general, but thinks now is a good time to get involved in mergers and acquisitions. The Montreal-based company is Canada's seventh largest bank.
Alliance Pipeline has completed its bypass line in Regina, SK and was put back into service earlier this week. The line was taken out of service on October 12 to facilitate construction of the new Regina Bypass. Alliance delivers about 1.6 billion cubic feet per day of natural gas from BC and Alberta to the Chicago area. The pipeline is a 50/50 joint venture between Enbridge and Veresen.
Minister of Natural Resources Jim Carr appointed four temporary members to the National Energy Board (NEB), who will be responsible for community and First Nations consultations along the Energy East right-of-way. Three additional members are expected to be confirmed in the coming weeks.
A former Green Party candidate tossed pumpkin seeds at the Prime Minister in Hamilton this week, calling on Trudeau to "keep his promises". Ute Schmid-Jones was reportedly upset over Enbridge's proposed replacement of Line 10, which passes through the Hamilton area. The woman was promptly tackled by Trudeau's security and has since been banned from Hamilton City Hall. The Green Party issued a statement strongly condemning "that sort of behaviour."
Other notable Canadian economic news . . .
For the first time ever in its history, Canada Mortgage and Housing Corporation (CMHC) issued a red-flag for the country's housing market, noting that high debt loads coupled with elevated housing prices often lead to an economic contraction. The "red zones" flagged were Vancouver, Calgary, Saskatoon, Regina and Toronto. The CMHC praised the government's tighter mortgage lending rules, saying that a "delay in when people can purchase their first home, or their decision to buy a smaller home, rent or stay put is rather a small price to pay."
The new mortgage rules caused the Bank of Canada (BoC) to reduce GDP growth expectations to 1.1% in 2016 and 2.0% in 2017. Governor Poloz says exports are improving but not nearly fast enough. The BoC is assuming a West Texas oil price of US$48/bbl this year with a US$16 discount for Western Canadian Select. By the end of this year, investments in the energy patch will still be 60% below 2014 levels. Despite some internal debate, the BoC opted to keep interest rates unchanged at 0.5%.
Advisors to Finance Minister Bill Morneau has called on the federal government to increase immigration to Canada by 50% to 450,000 people a year. The Advisory Council on Economic Growth thinks the increase would stimulate economic growth, create jobs, fill skilled labour shortages and solve the problem of Canada's aging population.
After a very ugly July, the number of Canadians collecting Employment Insurance (EI) benefits fell 3% in August. Alberta saw a 17% drop in EI recipients, falling from 104,730 in July to 86,570 in August. The decline is likely due in part to the expiry of EI benefits. Saskatchewan saw a similar decline in August.
The number of new EI claims in Alberta also dropped substantially, from 66,760 in July to 34,300 in August (down 49%). Newfoundland and Labrador also reported a 54% decline, while Saskatchewan reported a 41% drop. Across Canada, new EI claims in August declined 18.4% from the previous month.
Manufacturing sales posted 0.9% gain in August to $51.1 billion thanks to higher food, metals and energy sales. Sales of petroleum products and coal rose 2.5% to $4.4 billion in August, the second consecutive monthly gain. The increase was helped by higher refinery throughput volumes. After a 2.0% decline in July, sales in Alberta were up 2.2% to $5.2 billion in August.
Canada's inflation rate was 1.3% in September (y/y), up slightly from August's numbers. Gasoline prices were down 3.2% y/y. Excluding gasoline, the Consumer Price Index (CPI) rose 1.5% y/y. Retail sales edged down 0.1% in August to $44 billion, led by weaker auto sales.
From Peak Oil to Peak Demand . . .
In its recent World Energy Scenarios 2016, the World Energy Council says energy demand per capita will peak by 2030 and then decline due to "unprecedented efficiencies created by new technologies and more stringent energy policies." The study predicts a "phenomenal rise" in solar and wind energy while coal and oil reserves will become "stranded" due to falling demand. Fossil fuels account for over 80% of the world's primary energy supply, down from 86% in 1970. The agency thinks oil consumption will peak at just over 100 million bbl/day, not much higher than the current 96 million bbl/day.
Clinton tells anti-frackers to "get a life" . . .
Recently leaked e-mails reveals Hillary Clinton's inner conflict over energy independence and voters that oppose all fossil fuels.
As Secretary of State in 2010, Clinton argued in favour of natural gas as "the cleanest fossil fuel available for power generation today," and heavily promoted the use of fracking in developing nations. Clinton was also very critical of Russia for funding anti-fracking propaganda, particularly in Europe.
While running against Bernie Sanders in 2015, supporters of the "Keep it in the Ground Movement" asked Clinton if she would "promise never to take any fossil fuels out of the earth ever again," to which Clinton responded "No. I won’t promise that. Get a life . . .” However, Clinton also acknowledged that Sanders was getting lots of support from the most radical environmentalists, and his anti-Keystone XL stance was wildly popular among certain groups of voters.
While Sanders was a clear anti-fracking candidate, Clinton's official platform makes no mention of fracking directly, except to say she would strengthen regulations.
During her campaign, Clinton says she's against fracking "when any locality or any state is against it," adding that "we've got to regulate everything that is currently underway, and we have to have a system in place that prevents further fracking . . . by the time we get through all of my conditions, I do not think there will be many places in America where fracking will continue to take place."
Other US energy news . . .
Exxon Mobil has asked a federal court to throw out a subpoena from the state of New York that would require the company to hand over decades of documents. Prosecutors initially launched an inquiry into whether or not the company mislead investors on the risks of climate change and later shifted focus into Exxon's accounting practices related to booking reserves. The company is facing a similar court case in the state of Massachusetts.
Mining giant Freeport-McMoRan has sold its onshore California oil and gas properties to Sentinel Peak Resources for US$742 million, including a contingency of US$50 million per year for 2018/19/20 if Brent prices average US$70/bbl or higher. The assets produce about 29,000 bbl/day. The company has divested several of its energy assets in the past year as it works towards paying down its debt. Freeport is the world's largest publicly traded copper producer.
The American Petroleum Institute (API) continues its crusade against the Environmental Protection Agency (EPA), warning that jobs, economic prosperity and energy security are at risk from unwarranted increases in regulations. API says "the United States leads the world in both production of oil and natural gas and in the reduction of carbon emissions," pointing out that both EPA and EIA data shows the country's carbon emissions are already at a 25 year low due to the increased use of natural gas. API called on the EPA to use science as their guide in shaping public policy.
The US Justice Department is investigating whether Leonardo DiCaprio's environmental non-profit foundation received funds stolen from a Malaysian wealth fund. An estimated US$3.5 billion was laundered from top-level Malaysian officials, some of which went towards financing DiCaprio's "Wolf of Wall Street" movie. A Swiss rainforest charity has demanded DiCaprio resign his post as the UN's "Messenger of Peace" if he doesn't disclose his financial ties to the Malaysian fund. However, a UN spokesperson says they "continue to welcome his public work on behalf of climate change". DiCaprio and his foundation have committed to repaying any donations connected to the Malaysian wealth fund.
Elsewhere in the world . . .
The widow of a Nigerian activist is considering suing Royal Dutch Shell in a Dutch court, alleging the company was complicit in the execution of her husband by the Nigerian military in 1995. The suit was thrown out of US courts in 2013 since the alleged activities took place in Nigeria.
Brazil's state-owned Petrobras has agreed to sell its mothballed Okinawa refinery to Japan's Taiyo Oil for US$129 million. The 100,000 bbl/day operation was shutdown last year. Petrobras is working towards US$15 billion of divestitures by the end of this year. The company has an estimated debt-load of US$125 billion.
Kuwait's ruling emir has dissolved parliament and triggered early elections in part over a dispute over oil prices and alleged financial improprieties. Faced with declining revenues, the government has cut fuel subsidies, hiking the price of gas at the pump by as much as 80%.
Qatar has delayed the start-up of its Barzan Gas project due to a leak discovered in a gas pipeline. The US$10 billion project is a joint-venture between Qatar Petroleum and Exxon Mobil. The field is expected to produce 2 billion cubic ft/day, which will be put towards domestic power and water supply. Qatar is the world's largest LNG exporter and desperately needs cash to pay for its US$200 billion in infrastructure upgrades required for the 2022 FIFA World Cup.
US commercial oil inventories fell 5.25 million barrels last week as imports into the East Coast declined sharply, likely due in part to disruptions caused by Hurricane Matthew.
Russia's Energy Mining Alexander Novak says his country plans to produce about 11 million bbl/day of oil next year, not far from its current level of 11.1 million bbl/day. Russian officials will be discussing an output freeze with OPEC next week, but have scoffed at the idea of a production cut. State-owned Rosneft, Gazprom and Lukoil are all launching new fields in 2016. Rosneft CEO Igor Sechin says Russia has the capacity to increase output by another 4 million bbl/day.
US Fed Vice Chair Stanley Fischer says the US is very close to meeting its employment and inflation targets, acknowledging that "having very low interest rates makes monetary policy more difficult", increasing the risk of "longer and deeper recessions".
The Euro tumbled to a four month low against the US dollar on speculation the ECB might provide more stimulus in December. The lower Euro boosted the US dollar to a 9 month high. The Chinese yuan has hit a 6-year low against the greenback. The Canadian dollar also hit a 7 month low.
Money managers are quite bullish on oil prices, as net long positions have risen to the highest level since the July of 2014 when oil prices were trading above US$100/bbl. Net short positions have been cut from a high of 249 million barrels in August to just 102 million barrels in mid-October, while net long positions have creeped up from 329 to 394 million barrels for the same period. Traders appear to be covering their shorts just in case OPEC members manage to hammer out a deal at the end of November.
BP CEO Bob Dudley says his company can now live with oil prices at about US$50/bbl, revised lower from his previous threshold of US$60. The CEO thinks demand will remain strong but oversupply will remain a headwind for the industry. Dudley made the comments at this year's Oil & Money Conference in London.
Saudi Arabia's Energy Minister said "fundamentals are improving and the market is clearly balancing". In contrast, Exxon Mobil CEO Rex Tillerson told the same conference he expects US shale oil output to rebound, which will only add to the current oversupply and keep a lid on any upside in oil prices. Tillerson is set to retire from his position next March.
Logistics and service provider Mullen Group (TSX:MLT) reported a 15% decline in third quarter revenues, falling to $258.6 million. The company says growth remains tepid in the oil and gas sector, but cost cutting and improved operational efficiencies have helped it preserve its bottom line. Net income for Q3 was 17.6 million, up from 7.3 million in Q3/2015.
Precision Drilling (TSX:PD) posted a smaller than expected third quarter loss, helped by lower operating costs. Revenues declined 45% to $201.8 million for the quarter. Net losses narrowed to $47.4 million, down from $86.7 million for the same period last year. Drilling activity is down 37% in Canada, 42% in the US and 36% internationally when compared to Q3/2015. The company raised its capital budget to $222 million thanks to "recent contract bookings and improving pricing environment."
Power and gas provider AltaGas (TSX:ALA) reported third quarter revenues of $176 million, up 41% from the same time last year. Net income rose to $38 million, up from $19 million in Q3/2015. The company's Board of Directors also approved construction of the $130 million North Pine Facility, a liquids separation plant located 40 km northwest of Fort St. John, BC.
Halliburton (NYSE:HAL) posted a surprise quarterly profit, thanks to higher oil prices, deep cost cuts and a rise in rig counts. The company eked out a $6 million profit on revenues of $3.8 billion, down 31% from the previous year. Halliburton stock hit a fresh new 52 week high on the NYSE this week.
Schlumberger (NYSE:SLB) reported an 82% decline in third quarter revenues, blamed in part on costs related to its recent acquisition of Cameron International. Revenues declined to US$7 billion in Q3, down 25% in North America and 13% outside of North America. CEO Paal Kibsgaard says business has "stabilized" but he does not expect a "V-shaped recovery" for the energy sector. Q3 profits came in at US$176 million versus US$989 million for the same time last year.
Phillips 66 Partners (NYSE:PSXP) raised their quarterly dividend by 5%, or US$0.531 per share.
This week's 52 week highs on the TSX include: Altagas (ALA), Birchcliff Energy (BIR), Bonavista Energy (BNP), Canadian Natural Resources (CNQ), Encana (ECA), Enerplus (ERF), Paramount Resources (POU), Pembina Pipeline (PPL), Seven Generations (VII), Teck Resources (TCK/B), Trilogy Energy (TET) and Vermillion Energy (VET).
- Ensign Energy Services (TSX:ESI): Upgraded from Hold to Buy at GMP Securities.
- Kinder Morgan (NYSE:KMI): Upgraded from Market Perform to Outperform at Wolfe Research, from Neutral to Outperform at Credit Suisse and from Hold to Buy at Stifel Nicolaus.
- Marathon Oil (NYSE:MRO): Downgraded from Overweight to Equal Weight at Barclays. The company decreased its price target from US$18 to US$17.
- Trican Well Service (TSX:TCW): Downgraded from Buy to Hold at GMP Securities.
PRICE TARGET CHANGES
- Enerplus (TSX:ERF): Price target increased from $11 to $12 at RBC.
- Halliburton (NYSE:HAL): Price target increased from US$58 to US$62 at Imperial Capital, from US$40 to US$45 at Cowen & Company, from US$60 to US$63 at Morgan Stanley, from US$49.50 to US$53 at Goldman Sachs Group, from US$54 to US$61 at Nomura, from US$50 to US$57 at Howard Weil, from US$55 to US$60 at iberia Capital and from US$52 to US$54 at Barclays.
- Mullen Group (TSX:MTL): Price target increased from $20 to $21 at TD Securities and from $19.50 to $20 at CIBC.
- Tesoro (NYSE:TSO): Price target increased from US$92 to US$102 at Citigroup.
- Valero Energy (NYSE:VLO): Price target increased from US$58 to US$61 at Citigroup.
NEXT WEEK'S EVENTS
- August wholesale trade data released by StatsCan @ 8:30am ET
- Parliamentary Budget Office (PBO) releases report on Canada’s fiscal outlook
- Speeches by Bank of Canada Gov. Poloz and Deputy Gov. Wilkins @ 3:30pm ET
- API Weekly Statistics Bulletin released @ 4:30pm ET
- Q3 earnings release: PrairieSky Royalties, Baker Hughes and Valero Energy
- EIA Petroleum Status Report released @ 10:30am ET
- EIA October Monthly Energy Review
- Suncor Energy Q3 earnings release
- August payroll data released by StatsCan @ 8:30am ET
- EIA Natural Gas Report released @ 10:30am ET
- Q3 earnings release: Calfrac Well Services, Cenovus Energy, Husky Energy, MEG Energy, ConocoPhillips, Teck Resources and Marathon Petroleum
- August Federal Budget Balance
- US Q3 GDP
- Baker-Hughes Rig Count released @ 1:00pm ET
- Russia and OPEC meet in Vienna for informal "technical exchange"
- Q3 earnings release: Imperial Oil, Exxon Mobil, Chevron, Total SA and Phillips 66.