The Oil Sands Weekly
Line 3 replacement expected to be approved next week . . .
Reuters is reporting that the federal government will announce the approval of Enbridge's Line 3 Replacement project next week, likely on Tuesday November 29. Line 3 currently runs 1,660 km from Alberta to Wisconsin, but is operating at reduced rates due to pressure restrictions related to the age of the pipeline. Line 3 was originally installed in the 1960s and put into service in 1968, making it almost 50 years old. The new pipe diameter will also be expanded, boosting capacity from the current 390,000 bbl/day to 760,000 bbl/day.
The federal government's approval only applies to the segment on Canadian soil, which runs from Hardisty, Alberta to Gretna, Manitoba. The remaining 300 km, which runs from North Dakota through Minnesota to its final destination in Superior, Wisconsin still requires state-level permits. Despite being a cross-border project, Line 3 does not require presidential approval since the line is already in existence and Enbridge is restoring the system to its original capacity.
Line 3 is a “mixed-service” line, carrying a variety of crude streams, including light/sweet blends, heavy/sour crude and upgraded synthetic crude. The company thinks the new line could be in service by early 2019 if all approvals are received on time. Cost estimates for the complete replacement are $7.5 billion, making the project the largest in Enbridge's history.
As a concession to anti-pipeline groups, the federal Liberals are also expected to release details of their moratorium on crude oil tankers on BC's northern coast, which effectively kills any prospects for Northern Gateway, at least for now.
Smart-Prosperity expands corporate support for national carbon pricing . . .
Ottawa-based think-tank Smart Prosperity has sent yet another open letter to federal and provincial ministers, calling for a national price on carbon. The group says carbon pricing is the only way "to reflect the real environmental costs" and "is the most cost-effective way to reduce emissions, stimulate innovation and drive energy efficiency." The group wants to see heavy investment in "clean infrastructure".
The non-profit made a similar plea in early October with only 22 signatories, which did not include any major carbon emitters. This latest press release now includes representatives from over 60 companies, including Shell, Cenovus, Suncor, Teck Resources and Northwest Refining.
The federal government has already moved to implement a minimum carbon price across the provinces, starting at $10/tonne, rising to $50/tonne by 2022. Provinces are free to decide how the funds will be distributed. The carbon tax will increase the cost of coal and gas-fired electricity and raise the price of transportation fuels, all of which will be passed on to the consumer.
Critics of carbon-pricing argue that the added tax will stifle private-sector investment, particularly in the energy sector. Energy majors have recently made sizeable investments in LNG and petrochemical plants in jurisdictions such as the US, Asia and the Middle-East, which have so far indicated no intentions to put a price on carbon.
Costs of Alberta's coal-phase out begin to trickle in . . .
The Alberta government announced it will pay $1.36 billion to close 6 power plants across the province. The funds will come from the new provincial carbon tax, which takes effect in January. The three power companies included in the deal (AltaGas, TransAlta and Capital Power Corp.) have agreed to drop their lawsuits as well.
Alberta has the most coal-dependant power grid, representing over 50% of the province's electricity. The NDP government has promised to phase-out coal by 2030, but the total cost to taxpayers has been estimated to be anywhere in the $2 billion to $8 billion range. There are 18 coal-fired power plants in total that need to be shutdown or converted to natural gas.
Alberta's power grid gets "modernized" . . .
Alberta also announced they will be moving from free-market pricing (where power producers get paid for the power they produce) to a fixed pricing "capacity market", where power plants are guaranteed revenue regardless of power generated or market demand.
Renewable energy (such as wind and solar) is intermittent power and not economical under free-market pricing. The government has set a target to increase the province's renewable power from the current 9% to 20% by 2030.
Alberta needs to build an extra 8,000 megawatts of power by 2030 to displace coal power. The government estimates $25 billion will be required in new investments over the next 14 years.
Alberta and Texas are currently the only jurisdictions in North America with free-market electricity pricing. However, all other electricity producers in Canada are crown corporations.
Coal-power ban moves from provincial to federal . . .
The federal government also moved to ban "traditional" coal-fired power by 2030. The government says the decision will reduce GHG emissions by 5 megatonnes (Mt), excluding Alberta, equivalent to taking 1.3 million cars off the road. The ban makes allowances for carbon capture and cap-and-trade.
Coal-fired power plants account for 10% of the country's electricity but over 70% of emissions from power generation (keeping in mind that carbon-free hydroelectric and nuclear power make up 75% of the country's power grid). The Pembina Institute estimates taxpayers will save $800 million per year through improvements to air quality. Coal power presently accounts for about 8% of Canada's total GHG emissions.
More ethanol might be coming to a gas station near you . . .
The federal government has also vowed to work with "provinces and territories, Indigenous peoples, industries, and non-governmental organizations" on developing a nation-wide clean fuel standard. The standard would require reductions in the carbon footprint of the fuels consumed in Canada. The government promises carbon footprint calculations will be based on lifecycle analysis and will not discriminate against domestic fuels.
On average, Canadian gasoline contains about 7% ethanol, which exceeds the 5% minimum target. In contrast, the US government mandates at least 10% ethanol in their gasoline.
However, the jury is still out on whether ethanol actually has a lower carbon footprint than refined gasoline. Research done in the US concluded that biorefineries that burn natural gas to produce ethanol actually results in more GHG emissions than gasoline.
Aside from ethanol, the new clean fuel standard will also promote alternative forms of energy such as electricity, biogas, and hydrogen, and would also extend to home heating and industrial fuels.
The goal of the program would be to achieve annual reductions of 30 Mt of GHG emissions by 2030 as part of the country's commitments under the Paris Accord (30% reduction in GHGs from 2005 levels by 2030).
The government will release more details on the program and set up a working group in February.
This week's other notable Canadian energy news . . .
Calgary-based Baytex Energy has agreed to buy heavy oil production assets from Murphy Oil for $65 million. The assets are located in Peace River, adjacent to Baytex's existing lands. The acquisition and will add around 3,000 boe/day to the company's total production. The purchase will be funded through $100 million in bought-deal financing.
Connacher Oil and Gas announced a 45% in drop in third quarter revenues, declining to 31.7 million. Q3 net losses narrowed to $34.3 million, down from a loss of almost $290 million for the prior year quarter. Third quarter production at its Great Divide SAGD operations dropped 30% to 9,947 bbl/day, bringing year-to-date average production to just over 8,000 bbl/day, down 45% from the previous year. Earlier this year, Connacher decided to curtail production in order to preserve cash. The company remains under creditor protection while it seeks a buyer for its assets.
Calgary-based Total Energy Services has made an all-stock offer for Savanna Energy. Savanna shareholders are being offered 0.1132 Total Energy shares for every share they own. Total Energy says they were approached by a significant shareholder of Savanna back in September, who floated the idea of combining the two companies. Total claims they already tried the "friendly merger" route, but so far has had no luck. Savanna says no formal offer was officially received. The combined company would have Canada's second largest drilling fleet. Total Energy thinks the merger could save $10 million a year in operating costs.
The National Energy Board (NEB) has rejected a request from TransCanada to amend its tariffs for the Storage Transportation Service offered on its Mainline Gas Transportation network. TransCanada has asked for the ability to vary its charges, increasing rates by as much as 30% depending on daily or seasonal demand. Many were opposed to the plan, noting that the whole system is up for rebidding in 2020.
This week's Canadian economic data . . .
According to Statistics Canada, the number of Canadians collecting Employment Insurance (EI) in September rose 0.6% versus August, to a total of 571,800. That number is 5.1% higher than the same time last year, reflecting recent changes to qualification rules that made it easier for unemployed workers in the energy patch to collect benefits. Among this month's key highlights:
- Month-over-month, the number of recipients rose 10% in Saskatchewan (up 1,770 recipients), 2.9% in Newfoundland and Labrador (up 1,060) and 1.2% in Ontario (up 1,690). Alberta was relatively unchanged for the month, up only 220 (or 0.2%).
- The hardest hit cities include Edmonton (up 3% for the month, or 840 recipients) and Saskatoon (up 16.4% or 650 recipients). There were 220 fewer EI recipients in Calgary in September versus August.
- Outside of the Calgary and Edmonton metropolitan areas, the number of people receiving EI benefits in Alberta rose by 1.9% (or 330 people).
On a more positive note, the number of initial and renewal EI claims declined in all provinces (except PEI), suggesting the number of EI beneficiaries should begin to level-off through the end of this year.
Statistics Canada also reported no improvement in Alberta's payroll numbers for the month of September. Average weekly earnings in the province are now down 1.7% to $1,118 versus September of 2015. The largest earnings decreases are in professional and technical services, which has been hit especially hard during this latest downturn. Across Canada, weekly earnings averaged $957 in September, approximately unchanged from the previous month.
Canadian wholesale trade unexpectedly fell 1.2% m/m in September, the first decline in six months. Sales fell in all provinces with Alberta posting the second largest decline in dollar terms, down 3.0% to just $6.1 billion. This is the second worst performance on record since September 2011.
The Conference Board of Canada says consumer confidence in Alberta has improved considerably in November after a very bleak October. Alberta's confidence index jumped from a record low of 21.7 to 60.2. That's still much lower than the national average of 102.7, which is up by 6 points over the previous month.
The federal government ran a deficit of $2.4 billion in September. Revenues declined to $21.7 billion on lower corporate taxes while spending grew to $22.2 billion on higher government transfers.
TPP dead, Paris Accord on life support and coal gets a life-line . . .
Donald Trump provided a YouTube update on his transition to power and first 100 days in office. Trump vowed to withdraw from Trans-Pacific Partnership (TPP) on day 1, effectively killing the trade deal. The President-elect will also lift "job-killing restrictions" on shale and clean coal through executive order.
However, in an interview with the New York Times, Trump says he'll keep an open mind on the Paris Accord (and on climate change in general) and is currently "looking at it very closely," noting he thinks that clean air and “crystal clear water” are vitally important to all Americans.
This week's other US energy news . . .
Four people were critically injured after a fire broke out at Exxon Mobil's Baton Rouge refinery earlier this week. The fire broke out at an alyklation unit as it was getting ready to be restarted after a maintenance shutdown. A compressor blew out during the restart, setting off the blaze. The Baton Rouge refinery is the fourth-largest in the US with a throughput capacity of just over 500,000 bbl/day. At least four incidents have occurred in the Gulf Coast this past week, causing gasoline prices to move higher.
Tesoro Logistics announced the purchase of US$1.1 billion in various midstream assets, including oil and gas and gathering systems in North Dakota from Whiting Petroleum for US$700 million and various terminal and storage assets from parent company Tesoro Corp for US$400 million. Tesoro Corp. owns about 34% of Tesoro Logistics.
The US government has boosted 2017 ethanol requirement to a record high this week. The Environmental Protection Agency (EPA) has set a renewable fuel target of 19.28 billion gallons for 2017, a 6% increase from 2016 and higher than the volumes initially proposed in May. A minimum of 15 billion gallons is specifically reserved for corn-based ethanol. The EPA raised its target in response to higher gasoline demand forecast. The move is a big win for US corn producers and a big pain for independent oil refiners who have called the biofuel standards "unworkable". The Renewable Fuel Standard program was enacted by President Bush in 2005 as a way to promote energy independence and boost rural farming communities.
Saudi Arabia issues ultimatum ahead of big OPEC meeting . . .
Saudi Arabia has asked Iraq, Iran and Russia for concessions, lamenting it cannot cut output by 1 million bbl/day on it own. Iraq's Prime Minister says his country is open to sharing some of the production cuts while Russia has already said the best they can offer is a production freeze. Iran is sticking to its plans to return to pre-sanction levels of 4 million bbl/day.
OPEC has also asked asked non-OPEC members to cut about 500,000 bbl/day. Russia is the world's largest crude oil producer (and the largest non-OPEC member) and is expected to increase output by another 300,000 bbl/day next year, bringing their total output to over 11.5 million bbl/day.
OPEC and Russia meet on Wednesday (November 30) to confirm details of a previously announced plan to reduce output to 32.5 to 33 million bbl/day, down from the current 34 million bbl/day (excluding Russia). Saudi Arabia has declined to attend a meeting with non-OPEC members on Monday.
Around the world this week . . .
The UK Sunday times is reporting that Royal Dutch Shell will sell its North Sea assets to UK-based Chrysaor. The deal is estimated to be worth US$2 billion. Shell is apparently also in discussions to sell its onshore operations in Gabon, estimated to be worth about US$700 million.
Paris-based Total has been awarded the rights to build an LNG terminal in the Ivory Coast with a capacity to import 3 million tons per year. The project will be located in the city of Abidjan. The plant is expected to become operational by mid-2018, making it the the first regional LNG import terminal in West Africa. Total has a 34% stake in the project. Partners include Shell (13%), Golar (6%), Endeavor Energy Resources (5%) and three other national energy companies from the Ivory Coast (16%) and Azerbaijan (26%).
The Melbourne airport was forced to implement fuel rations this week, forcing airline carriers to "gas up" in neighbouring Sydney. Fuel supplies at the airport are managed by Exxon Mobil. Exxon was rather vague about the cause except to say the supply issue arose after “disruptions in recent weeks to jet fuel deliveries from multiple fuel terminals across Melbourne.”
Eni has sold a 10% interest in the Shorouk concession offshore Egypt to BP for US$375 million and reimbursement of past expenditures. The block includes the "super-giant" Zohr gas field, located in the Mediterranean Sea, approximately 190 km north of Port Said. The field was discovered by Eni in 2015 and is thought to be the largest gas discovery made in the Mediterranean, containing as estimated 30 trillion cubic feet of gas. The first phase of development is being fast-tracked, with first gas expected in late 2017.
+12k ▲ 0.4%
BBL/D CDN EXPORTS TO US
+9k ▲ 0.1%
BBL/D US PROD'N
-1.26M ▼ 0.3%
BBL US INVENTORIES
+3 ▲ 0.6%
US RIG COUNT
US oil rig counts continue to tick higher, adding another 3 this week. US rig counts have risen for 23 out of the past 25 weeks. The total number of oil and gas rigs in service in Canada fell by 10 to 174.
Macquarie says US oil production from the lower 48 states will show "meaningful" recovery through the next 3 years as DUCs (drilled but uncompleted wells) come back to life, potentially increasing US output by up to 350,000 bbl/day next year.
The chances of a US rate hike in December has now hit 100% (actually 100.2%), sending the US dollar to 13 year highs. If the federal reserve does pull the trigger on December 14, this would be the second rate hike since the 2008 financial crisis. The last increase (in December 2015) sparked a global market sell-off on concerns of tightening credit. Rising US interest rates would be particularly bad for emerging markets which hold plenty of US-denominated debt.
Bond markets continue to sell off this week as yield curves steepen. The Euro and Canadian dollar held relatively steady this week. The Japanese yen continues to be the biggest loser in currency markets, declining another 2% as money moves into riskier assets.
UK GDP forecast for 2017 was revised lower from 2.2% (pre-Brexit vote) to just 1.4%. The government says it will need to borrow a lot more money as a result of leaving the EU. The pound gained almost 1% for the week.
RBC estimates that oil prices could reach US$55 a barrel if OPEC reaches a deal next week. The bank pegs the chances of an agreement are about 50%.
Goldman Sachs recommends investors go overweight on commodities, particularly oil and industrial metals. Goldman believes a deal will be reached by OPEC members, limiting output to 33 million bbl/day in the first half of 2017 while it expects Russia to freeze output to 11.6 million bbl/day. Goldman also boosted its 2017 price forecast to US$55/barrel for the first half of the year.
Calfrac Well Services (CFW) announced $60 million in private placement through the sale of over 21 million shares at $2.85 per share. Proceeds from the sale will go towards paying down debt and general working capital.
Savanna Energy Services (SVY) has also raised $18.85 million through the private placement of 13 million shares at $1.45 per share. The company was also extended a $200 million loan by AIMCo (Alberta Investment Management Corp) due in 2021 at an annualized interest rate of 7.15%.
This week's 52 week highs on the TSX include: Suncor (SU), Canadian Energy Services (CEU), Canadian Natural Resources (CNQ), Enerflex (EFX), Enerplus (ERF), Encana (ECA), PrairieSky Royalty (PSK), Painted Pony Petroleum (PPY) and Teck Resources (TCK.B).
52 week highs on the US exchange include Anadarko Petroleum (APC), Halliburton (HAL) and Chevron (CVX).
The big 6 Canadian banks release fourth quarter earnings next week. It remains to be seen if write-downs will continue on bad energy loans. Canadian banking stocks have climbed to new highs since the US election.
US markets powered higher this week, with the Dow, S&P500, NASDAQ and Russell 2000 hitting all-time highs. The NYSE is lagging due to its significant holdings in international stocks, all dragged lower by the stronger US dollar.
UPGRADES & DOWNGRADES
- Savanna Energy Services (TSX:SVY): Upgraded from Hold to Buy at GMP Securities.
- TransCanada (TSX:TRP): Upgraded from Hold to Buy at GMP Securities.
NEXT WEEK'S EVENTS
- OECD Global Economic Outlook released @ 10:00am GMT
- US GDP estimates for Q3/2016
- API Weekly Statistics Bulletin released @ 4:30pm ET
- September and Q3 GDP data, and Industrial Product and Raw Materials Price Indexes released by Statistics Canada @ 8:30am ET
- EIA Petroleum Status Report released @ 10:30am ET
- EIA Petroleum Supply Monthly (September data)
- EIA Working and Net Available Shell Storage Capacity update
- 171st (Ordinary) OPEC Meeting in Vienna, Austria
- January contract expiry for Brent crude
- EIA Natural Gas Report released @ 10:30am ET
- CAPP CEO Tim McMillan delivers speech "Canadian Oil and Natural Gas: Fuel for a Better Future" at Ottawa's Economic Club of Canada @ 12:00 pm ET
- November Labour Force Survey released by Statistics Canada @ 8:30am
- Baker-Hughes Rig Count released @ 1:00pm ET.