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The Oil Sands Weekly

The Oil Sands Weekly

Oil & gas loss expected to reach $10 billion in 2016 . . . 

The Conference Board of Canada (CBOC) expects Canada’s oil extraction industry to lose $10 billion this year, down from a record loss of $11 billion in 2015. The CBOC cites low oil prices but also blames the energy sector for insufficient cost cutting. This will be the largest back-to-back yearly loss for the industry but the agency expects a return to balance next year.

The CBOC calculates energy investments will have been cut by $38 billion between 2014 and 2017, which it expects will translate into lower oil production. Canadian oil production will contract this year for the first time since 2008 due to outages caused by the Fort McMurray wildfires. The board is forecasting a West Texas price of US$67 by 2020.

Federal Liberals not so cooperative when it comes to carbon pricing . . . 

The federal government dropped a bombshell this week, announcing a minimum carbon price of $10 per tonne of CO₂e in 2018, rising $10 a year up to $50/tonne in 2022. Prime Minister Trudeau made the announcement in Ottawa while provincial and territorial environment ministers were in Montreal discussing carbon pricing with the federal environment minister.

Provinces and territories who do not already have something in place will have to choose between cap-and-trade and carbon pricing by 2018. Provinces would get to keep the revenues and decide how to spend the cash.

The $50/tonne carbon price, if implemented, would be the highest outside of select Scandinavian countries (namely Sweden, Switzerland and Finland). However, most of those countries have generous exemptions and loopholes for polluting industries or a hybrid carbon-trading system for big emitters. The US does not have a federally-mandated minimum carbon price, leaving it up to individual states. Even left-leaning candidate Hillary Clinton has refused to endorse a carbon-pricing strategy, which is politically very unpopular in the US.

A carbon price of $50/tonne works out to about 11¢/litre of gasoline. Note that GST/HST is levied on top of the carbon tax and all existing federal, provincial and municipal excise taxes. Natural gas prices will increase by about $2.5/GJ, effectively double the current spot price. Coal-fired power plants will be hit the hardest, making them economically unfeasible.

Federal Environment Minister Catherine McKenna insists Canadians are united in their view that "climate change is one of the defining issues of this century and they expect their governments to lead the way and take action." The provinces remain hopeful that the Trudeau Liberals are open to negotiations.

Saskatchewan’s Environment Minister Scott Moe called the new tax a repeat of Pierre Trudeau’s National Energy Program, which decimated energy producing provinces in the 1980s.

#BoycottTelus - why business and politics don't always mix . . . 

Telus got into hot water this week after it tweeted its support for the federal government's national carbon price. Several prominent Albertans, including Brett Wilson and MP Tom Kmiec called on fellow-Albertans to cancel their Telus subscriptions. Telus is of one of 22 Canadian companies that signed on to the Smart Property pledge, promising to boost Canadian competitiveness, innovation, and environmental performance through decarbonization. Smart Prosperity is the brainchild of Ottawa-based Sustainable Prosperity, also focused on investments for the green economy. Telus later apologized for the tweet, saying it had not intended to sound political or partisan.

Trump or Clinton - bad for Canada either way . . . 

Nomura economist and FX strategist Charles St-Arnaud predicts that Canada will be in trouble post-US election, regardless of who gets voted into the White House. Clinton would be less damaging than Trump, but would still be bad for Canada given her opposition to the Trans-Pacific Partnership. However, Trump has promised to abandon North American Free Trade Agreement (NAFTA) which has greatly benefited Canada . However, Wilbur Ross, one of Trump's economic advisor insists that Trump actually likes Canada and is more interested in stopping the flow of jobs to Mexico.

This week's Canadian energy news . . .

Calgary-based Pengrowth Energy announced a 63% increase in the value of its Lindbergh property located just south of Cold Lake, AB. The increase reflects the government's recent approval of the Lindbergh expansion to 30,000 bbl/day and better than expected operational performance at its exiting commercial pilot facility. P1 reserves were increased 43% to 147.9 billion barrels. P2 reserves were revised higher by 21% to 319.1 billion barrels. Q2 production at Lindbergh's commercial pilot averaged 15,500 bbl/day at an average steam-to-oil ratio of 2.35. The study was conducted by GLJ Petroleum Consultants.

Trilogy Energy discovered a leak in one of its crude oil pipelines within its Kaybob Montney Oil Development, about 15 km from Fox Creek, AB. The damaged section of pipe has been isolated and the company has commenced clean up. Production from the pipeline has been redirected. The cause and volume of oil spilled is still under investigation.

An Alberta court has ordered Apache Canada to pay $350,000 in penalties for spills that occurred in 2013 and 2014. The company pleaded guilty to two counts of failing to properly operate its pipelines. About 1.8 million litres of salty water was spilled near Zama City, AB after a bison allegedly crushed a section of pipe. Another 2 million litres of water were spilled near Whitecourt, AB which the company blamed on a poorly-sized pressure valve. Most of the funds will go to Alberta Innovates Technology Futures for research into soil remediation. Apache Canada is a subsidiary of Houston-based Apache Corporation.

Alliance Pipeline announced it will be shutting down its Alliance natural gas pipeline for 7 days starting October 12, while new sections of pipe are installed around Regina, SK. Alliance Pipeline is a joint venture between Enbridge and Veresen and normally transports approximately 1.7 billion cubic feet per day of natural gas from Alberta and BC into the Chicago area. 

The National Energy Board has recommended approval of the Towerbirch Expansion Project, an 88km section of natural gas pipe in northwestern Alberta and northeastern BC. The line is operated by NOVA Gas Transmission, a subsidiary of TransCanada. The federal government has commenced public consultations to determine greenhouse gas emissions and ensure all stakeholders were properly consulted.

This week's notable economic data . . . 

In their latest Business Outlook Survey, the Bank of Canada (BoC) sees signs of a bottom in the country's resource sector and improvement in non-energy pockets of the economy. The BoC expects foreign exports to pick up but warns of a weaker-than-expected US economy.

A sharp drop in foreign oil imports and rise in energy exports helped narrow Canada's trade deficit in August. According to Statistics Canada, overall exports increased 0.6% to $43.4 billion, reducing the national trade deficit from $2.2 billion in July to $1.9 billion in August. Among the key highlights:

  • Non-US exports rose 7.7%, the largest monthly increase since May 2014. 
  • Exports to the United States decreased 1.6% to $32.4 billion. 
  • Exports of energy products rose 4.4% to $6.0 billion, the sixth consecutive monthly increase. Volumes rose 3.4% and prices were up 1.0%. 
  • Exports excluding energy products were unchanged from the previous month. 
  • After 5 consecutive monthly increases, imports of energy products fell 16.6% to $2.2 billion due to lower volumes (-13.5%) and lower prices (-3.6%).
  • Imports of crude oil decreased 16.3% to $1.3 billion on lower volumes (-8.7%) and prices (-8.3%). 
  •  Imports of refined products declined 23.4% to $573 million, mostly on lower volumes. 

Statistics Canada reported that 67,000 jobs were added during the month of September, much more than expected. However, most of those jobs (44,000) were part-time. Canada's unemployment rate held stead at 7%. Wage growth is just 1.4% y/y, far below the rate of inflation. Employment in Alberta rose by 13,000 in September. The province's unemployment rate was unchanged at 8.5%, as more people re-enter the labour force. Saskatchewan's unemployment rate rose 0.5% hitting a new high of 6.8%.

In its October World Economic Outlook, the International Monetary Fund (IMF) delivered another gloomy forecast, warning that "persistent stagnation in advanced economies could further fuel anti-trade sentiment, stifling growth." Among the key highlights:

  • The IMF projects global growth will average 3.1% in 2016 (unchanged from it July forecast), rising to 3.4% next year.
  • US growth was downgraded from 2.2% to just 1.6% this year.
  • Canada's growth rate was cut to 1.2% in 2016 and 1.9% in 2017, down 0.2% from its July forecast, dragged lower by a feeble US economy.
  • A hard Brexit and Trump victory would further deteriorate the global economy.

The agency calls on all nations to maintain "easy monetary policies" and advises against any attempts to increase interest rates. The IMF also expressed concerns over the US$152 trillion in outstanding global debt, which represents 225% of GDP. About 85% of that debt is owned by governments.

This week's US energy news . . .

North Carolina-based Nucor has purchased 49% of Encana's leasehold interest covering approximately 54,000 acres in Colorado's South Piceance Basin. In exchange, Nucor has sold its 50% equity interest in Hunter Ridge Energy Services to Encana. Hunter Ridge is a gas gathering and water service provider formed by Nucor and Encana in 2012 to support the well development in the North Piceance Basin. Nucor is North America's largest recycler, primarily focused in the manufacturing of steel products.

Marathon Oil has divested various conventional assets in Texas and New Mexico for US$235 million. The properties produce an average of 4,000 boe/day. Since August of last year, divestitures at the company have totalled over US$1.5 billion.

Shell has abandoned plans to build a crude-by-rail terminal near Anacortes in Washington State. The terminal would have brought light oil from the Bakken field in North Dakota, displacing dwindling supply from Alaska's North Slope. Shell's Puget Sound refinery receives a significant volume of Alberta crude via the Trans Mountain line.

Privately-held Caelus Energy claims to have made a huge oil discovery in Alaska's Smith Bay, about 300 miles north of the Arctic Circle. The company estimates the deposit contains between 1.8 billion and 4 billion barrels of recoverable light oil, making it one of the biggest discoveries in recent years. Alaska's declining production from the North Slope is putting the Trans Alaska Pipeline at risk of shutdown. Production from Smith Bay could extend the life of the pipeline. Caelus estimates the there could be as much as 6 billion barrels of oil under Smith Bay, almost doubling Alaska's current reserves. Shell recently abandoned plans for Alaskan deep water exploration after spending US$7 billion and coming up dry.

Hurricane Matthew disrupted oil shipments into the US Atlantic Coast, resulted in gas shortages in certain parts of the region. Two million people in Florida, Georgia, South Carolina and North Carolina were put under evacuation order late in the week. Several major southern ports were closed, preventing oil and gas imports from overseas. The lower Atlantic region of the US does not have any operating refineries. Gasoline stockpiles declined sharply at the end of September due to a temporary shutdown of the Colonial Pipeline, which supplies more than half of the area's gasoline demand. Matthew is expected to make landfall in Florida as a Category 3 storm, which would make it the most powerful since 2005. The US Energy Information Administration (EIA) has released a real-time energy disruption map for the area.

Elsewhere in the world . . .

BP spilled an estimated 600 barrels of oil into the North Sea from the Clair platform, 75 km west of the Shetland Islands. Production was stopped within an hour of the incident. The platform remains offline pending investigation. 

BP also announced plans to set up 3,500 gas stations in India. The country already has a similar agreement with Royal Dutch Shell.

State-owned National Iranian Oil Co. signed a US$2.2 billion deal with Persia Oil & Gas Industry Development Co. to develop four oil fields and reservoirs in southwest Iran, increasing output from 185,000 bbl/day now to at least 260,000 bbl/day. Persia Oil & Gas Industry Development Co. is controlled by Iranian Supreme Leader Ali Khamenei.

A consortium led by Exxon Mobil was fined US$75 billion in a Chad court over unpaid royalties. The court ruled that the group owes the government about US$800 million and demanded an immediate payment of US$670 million pending appeal. No reason was given for the US$74.2 billion penalty. A spokesperson for Exxon says the company disagrees with the ruling and is evaluating next steps. Chad produces about 120,000 bbl/day of oil it exports via pipeline through neighbouring Cameroon.

BP and its partners also formalized an agreement to purchase 100% of the LNG produced by the Coral South Floating LNG facility to be construction off the coast of Mozambique. A final investment decision is expected by the end of the year. The 3.3 million tonnes/year facility will be operated by a subsidiary of Eni. Terms of the deal were not disclosed. 

Despite a narrow defeat overturning Columbia's peace plan with FARC rebels last week, Juan Carlos Echeverry, CEO of state-owned Ecopetrol, insists the future still looks bright for Columbia's energy sector. The country has a conservative forecast US$50 WTI for the next 4 years and expects its production to grow from 715,000 to as much as 800,000 bbl/day. Investments in the country's energy patch is expected to be somewhere in the range of US$3.0 to US$3.5 billion. Columbia has both onshore and offshore oil and gas reserves which it develops jointly with most of the world's largest oil companies, including several Canadian firms.

Members of the International Civil Aviation Organization (ICAO) committed to capping CO2 emissions from international flights at 2020 levels. Airlines that pollute more than the 2020 limit would have to purchase carbon-offset credits. The International Air Transport Association, which represents more than 200 airlines, called it a “momentous agreement.” Compliance will be voluntary beginning 2021 but become mandatory in 2027. ICAO estimates that the cost will be somewhere between US$5.3 to US$23.9 billion per year by 2035, depending on the price of carbon at the time. Global airlines spent US$181 billion on fuel last year. Aviation accounts for 2% of global GHG emissions. Federal Transport Minister Marc Garneau welcomed the deal but warned ticket prices could rise by up to 1.5%. 

The European Parliament has approved ratification of the Paris climate deal, allowing the accord to formally take-effect by early November. The EU’s 28 nations account for 12% of the world's GHG emissions.




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

3,305k
+111 ▲ 3.5%
BBL/D CDN EXPORTS TO US
8,467k
-30 ▼ 0.4%
BBL/D US PROD'N
499.74M
-2.98 ▼ 0.6%
BBL US INVENTORY
428
+3 ▲ 0.7%
US RIG COUNT
CHANGE WK/WK  

Fitch warned this week that a substantial amount of shale oil could come back online if WTI prices remain solidly above US$55 a barrel. The ratings agency pointed that oil rig counts have jumped by 109 over the past 14 weeks and there remains a healthy supply of drilled-but-uncompleted-wells (DUCs) in the US. Fitch believes US shale is among the most price-sensitive and fast-responding oil producing region in the world, which would limit any future gains in oil prices.

Reuters is reporting that OPEC production likely hit a record high on September, thanks to higher output from Libya, Nigeria, Iraq and Iran. A survey based on shipping data suggests that production from the cartel rose to 33.60 million bbl/day last month, up from 33.53 million bbl/day in August. S&P Global Platts is reporting that production dipped slightly in Saudi Arabia, Angola, Qatar and Venezuela

OPEC committed to a production ceiling of 32.5 to 33.0 million bbl/day at their meeting in Algeria last week. Russian Energy Minister Alexander Novak says his country expects an output freeze deal could be reached before the November OPEC meeting in Vienna, but no deal is expected at next week's World Energy Congress in Istanbul.




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

96.65
+1.26 ▲ 1.3%
USD INDEX
75.27
-0.96 ▼ 1.3%
CDN DOLLAR
1.73%
+0.13 ▲ 8.1%
US 10Y Bond
1.17%
+0.17 ▲ 17.0%
CDN 10Y Bond
CHANGE WK/WK  

Fears of a hard Brexit sent the pound Sterling to a 30 year low and the FTSE to new highs. A mini-flash crash overnight Thursday took the pound to historic low of $1.18 before recovering slightly on Friday. 

Various fed chairs from the across the US have signalled strong desires to raise interest rates in December, sending bond prices lower and boosting the US dollar.

The Canadian dollar disconnected from oil prices this week, decisively breaking below 75.5¢ and reaching lows not seen since late March.




OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group
51.93
+2.87 ▲ 5.8%
BRENT USD/BBL
49.81
+1.57 ▲ 3.3%
WTI USD/BBL
46.86
+1.67 ▲ 3.7%
CDN LT USD/BBL
36.06
+1.82 ▲ 5.3%
WCS USD/BBL
CHANGE WK/WK  

Maintenance work at BP's Whiting Refinery in Indiana and Exxon Mobil's Joliet Refinery in Illinois caused gas prices to spike in the US Midwest. Some parts of the Canadian prairies saw overnight price increases of up to 0.14¢/L.

West Texas prices peaked above US$50/bbl on Thursday for the first time since late June.

Henry Hub natural gas prices ended the week firmly above US$3/MMbtu. Canadian and US gas prices have reached fresh new highs on strong power demand in the US and hopes of a colder-than-normal winter.




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

Inter Pipeline announced the reinstatement of their Premium Dividend under the Dividend Reinvestment Plan (DRIP). Additional common shares will be at a 3% discount to the average market price. DRIP was scaled back in September of 2014.

Penn West Petroleum announced it will be using $448 million acquired from recent divestitures to pay back some of its debt holders. The move reduces their debt-load from $2 billion at the end of 2015 to $470 million.

Bellatrix Exploration announced the sale of $10 million worth of flow-through shares through a bought deal. Proceeds will be used to fund the company's expenditures through the end of 2016.

Former Canadian energy mogul Murray Edwards purchased a 9.5% stake in Canexus this week, allegedly for investment purposes. Canexus is in the process of evaluating a hostile takeover from chemicals giant Chemtrade.

In its investor day presentation to shareholders, Encana claims to have saved an extra $50 million so far this year, mostly in operating, transport and processing costs. Total capital investment in 2016 is expected to be $1.1 to $1.2 billion. The company also updated its 2016 guidance forecast

Calgary-based Enerplus has put its Marcellus shale natural gas assets up for sale. The properties are worth an estimated US$500 million. The divestiture will help Enerplus pay down debt and better focus on its liquids production in the Canadian Waterfloods and North Dakota's Williston Basin.

This week's 52 week highs in the TSX energy sector include Canadian Natural Resources (CNQ), Encana (ECA), Penn West Petroleum (PWT), Enerflex (EFX), Vermillion Energy (VET), Paramount Resources (POU), Trilogy Energy (TET), Trican Well Service (TCW), Birchcliff Energy (BIR), ARC Resources (ARX), PHX Energy Services (PHX) and Advantage Oil & Gas (AAV).

UPGRADES

  • Encana (TSX:ECA): Upgraded from Hold to Buy at GMP Securities and from Underperform to Neutral at Macquarie.
  • Halliburton (NYSE:HAL): Upgraded from Hold to Buy at Societe Genrale.
  • Teck Resources (NYSE:TCK): Upgraded from Sell to Hold at Deutsche Bank. The company increased its price target from US$11.50 to US$20.

DOWNGRADES

  • Encana (TSX:ECA): Downgraded from Hold to Sell at Societe Generale.
  • Enerflex (TSX:EFX): Downgraded from Outperform to Market Perform at Raymond James.
  • Kinder Morgan (NYSE:KMI): Downgraded from Buy to Hold at Stifel Nicolaus.
  • Mullen Group (TSX:MTL): Downgraded from Outperform to Market Perform at Raymond James.
  • Secure Energy Services (TSX:SES): Downgraded from Strong Buy to Outperform at Raymond James.
  • Trican Well Service (TSX:TCW): Downgraded from Strong Buy to Market Perform at Raymond James Financial and from Buy to Neutral at PI Financial.

NEXT WEEK'S EVENTS

Monday:

  • Markets closed in Canada for Thanksgiving

Tuesday:

  • Third quarter earnings season kicks-off in the US
  • International Energy Agency Monthly Market Report
  • API Weekly Statistics Bulletin released @ 4:30pm ET

Wednesday:

Thursday:

  • EIA Short Term Energy Outlook
  • EIA Petroleum Status Report released @ 11:00am ET (delayed due to Monday holiday)
  • EIA Natural Gas Report released @ 10:30am ET

Friday:

  • US Federal Reserve Chair Janet Yellen speaks in Boston @ 1:30pm ET
  • Baker-Hughes Rig Count released @ 1:00pm ET.

Next edition of the Oil Sands Weekly: Friday October 14, 2016 @ 8pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly