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The Oil Sands Weekly

The Oil Sands Weekly

Restart timeline for bitumen upgraders still fuzzy . . . 

Imperial Oil announced that production at the Kearl mine is back to full capacity. Shell also noted that both Muskeg River and Jackpine are now operating normally. Little information has been telegraphed as to when the Suncor and Syncrude operations will be back to full production. However, both Suncor and Syncrude have integrated upgraders, which typically take much longer to restart. The combined output of both upgraders is approximately 700,000 bbl/day of light crude. The CNRL Horizon mine and upgrader was not affected by the wildfires. 

Fort McMurray tries to return to normal . . . 

Residents began moving back into the city of Fort McMurray this week. About 1,500 residents in the worst-hit neighbourhoods of Abasand, Waterways and Beacon Hill were told their neighbourhoods are too toxic to move back, delaying re-entry September after remediation has been completed. 

The Red Cross confirmed it has raised $125 million so far, $115 million of which has already been spent or earmarked. The agency announced it will allocate an additional $50 million towards the rebuilding effort. Federal and provincial levels of government have promised to match private donations with taxpayers funds, which have yet to be handed over.

Lindbergh Pilot expansion gets the green-light . . . 

Pengrowth Energy received regulatory approval for a 17,500 bbl/day expansion of its Lindbergh thermal in-situ project. The existing Lindbergh pilot produces 12,500 bbl/day of bitumen from the Cold Lake formation. Despite the green-light, the company won't be allocating capital or making a final investment decision until oil prices recover.

Husky warns wildfire shutdown will delay full production at Sunrise . . . 

During their investor day in Toronto, Husky Energy warned that the 60,000 bbl/day Sunrise SAGD facility may not reach nameplate capacity until 2017. Husky VP John Myer told investors that steam was shutdown for only a few days but quickly restarted to maintain the underground temperature. The thermal in-situ facility only began steaming last year and was producing close to 30,000 bbl/day when the plant was forced to shutdown due to the wildfires. New wells take much longer to heat up than more mature wells that have been steaming for several years.

Husky says it can survive at US$30 oil, balance the books at US$40 oil and generate tons of free cash flow at US$50 oil. The company also hinted it may even reinstate its dividend if all the stars align later this year.

Petro-Canada runs out of gas . . . 

A technical glitch at Suncor's Fort Saskatchewan refinery temporarily left several Petro-Canada stations in the Edmonton area without fuel this week. The refinery normally produces 142,000 bbl/day. Suncor called the outage "temporary" but did not provide guidance as to when the refinery would be back to normal operation. The "glitch" is rumoured to be a problem with the refinery's coker. 

Trans Mountain Line has room to spare . . . 

In a very rare event, Kinder Morgan is soliciting nominations for spare capacity on its Trans Mountain pipeline which runs from Edmonton to Burnaby, BC. Production outages from the wildfires have left the normally-full pipeline running below capacity for the month of June. A spokesperson for Kinder Morgan said the shortage was in refined products, not crude oil. The Trans Mountain line uses a batch process to transport both crude oil and refined products to the West Coast. Since BC has very little refining capacity of its own, it is unclear whether the shortage will lead to higher gas prices in the Lower Mainland. Vancouver area gas prices are more closely tied to Seattle prices since much of their fuel imports come from Washington State refineries.

MacKenzie Valley Gas Pipeline revisited . . .

The National Energy Board (NEB) says the MacKenzie Valley Pipeline is still in the best interest of Canadians and has approved extension of the sunset clause until 2022. The project is being led by Imperial Oil and was intended to bring gas from the Beaufort Sea through a 1,842 km pipeline which ties into existing natural gas networks in Alberta.

MacKenzie was mired in controversy and opposition for 37 years. Imperial Oil filed for regulatory approvals with the NEB in 2004 while gas prices were hovering near $15/MMBtu. The project was finally approved by the federal government in 2011, giving Imperial until 2015 to build the pipeline. However, the consortium gave up on MacKenzie when gas prices collapsed and the price tag ballooned to $16.2 billion (2010 dollars). Last August, Imperial Oil asked for an extension for undisclosed reasons. The Canadian Gas Association recently released a report outlining the benefits of delivering natural gas to Canada's northern communities, who still rely heavily on diesel for power and heat. The MacKenzie consortium includes Imperial Oil, Exxon Mobil, ConocoPhillips, Shell and the Aboriginal Pipeline Group.

Elsewhere in Canada . . .

The government of Saskatchewan unveiled its 2016/17 budget, revealing a $434 million deficit, almost twice the original forecast. Lower oil, gas and potash prices left a $968 million hole in the province's $14.5 billion budget. The government decided against austerity or tax hikes, noting now is not the time to place extra burdens on the economy. Saskatchewan's economy is set to contract 0.6% in 2016 but expected to rebound back to 2.5% growth next year.

The province of New Brunswick passed a law to ban fracking - indefinitely. The Liberal government placed a moratorium on hydraulic fracturing in December of 2014. The province outlined 5 conditions for natural gas development, which include environment protection, revenue sharing for the province, approvals from aboriginal communities and the elusive "social license". The Liberal government blamed the previous PC government for the demise of the province's energy sector. Neighbouring Nova Scotia also has a fracking ban in place.

A independent report commissioned for the province of Newfoundland and Labrador recommends the province not bother with gas fracking. The study concludes low natural gas prices would mean government revenues would not be meaningfully impacted and the province is better off focusing its efforts on offshore oil production. The province has "paused" any gas development decisions but does not have a formal ban or moratorium in place.

A group of university professors got their 15 minutes of fame this week (at least in Canada) by publishing an open letter to the federal Liberals calling for a ban on all LNG development. The group laments the country's feeble climate policy and doesn't think LNG will stop China's coal consumption. The team of "climate scientists" consist primarily of Canadian and US professors, global warming celebrity James Hansen and (rather ironically) several professors from Australia. BC's Environment Minister Mary Polak dismissed the letter, calling the group's assumptions seriously flawed. The federal government was due to rule on Petronas' Pacific Northwest LNG earlier this year, but postponed the decision pending further environmental assessments.

Quebec-based Pétrolia announced the shipment of 530 barrels of crude to an unnamed Quebec refinery this week. Although the volume is not impressive, it marks a very rare production of oil from the Macasty Formation on Anticosti Island located at the outlet of the Gulf of St. Lawrence. Quebec has sizeable oil and gas reserves but fracking and drilling moratoriums prevent any meaningful development. The consortium working on the Anticosti development includes the Quebec Government but those agreements were signed with the previous Parti Québécois government, much to the dismay of the current ruling Liberals. 

Oil prices, bank earnings and mortgage defaults . . . 

Canada Mortgage and Housing Corporation (CMHC) warns that low oil prices are a much bigger threat to the housing market than wealthy foreign investors. Despite over-inflated home prices in Canada, default rates are quite low. The number of households in arrears across the country is 0.34%, unchanged from last year. However, arrears in Alberta has increased from 0.25% in 2015 to 0.35% this year. Saskatchewan has seen the biggest increase in homeowners struggling to make mortgage payments, rising from 0.48% to 0.70%. In their second quarter housing report, the CMHC also raised a red flag for Calgary, citing income deterioration, job losses, lower interprovincial migration and overbuilding. CMHC insures about $550 billion worth of mortgages in Canada. The total size of Canada's mortgage market is estimated at $1.2 trillion.

Scotiabank took a $752 million charge on sour oil and gas loans, up from $448 million for the same time last year. CEO Brian Porter thinks the worst is over for Canada's energy sector and expects loan losses to decline in the next quarter. The bank reported a 12% decline in second quarter earnings and will be closing about 50 branches across Canada over the next 2 years.

National Bank's net income fell to $210 million, thanks to a $274 million charge for faulty energy loans, up from only $17 million in the previous quarter. Echoing the sentiment of several other Canadian banks, National thinks the worst is over for the energy patch.

Edmonton-based Canadian Western Bank reported a 37% decline in second quarter profits on a $40 million charge in bad energy loans. The company is working on expanding its base outside of Western Canada.

Canadian Association of Insolvency and Restructuring Professionals (CAIRP) reported that insolvencies in Alberta were up 44% in March (yr/yr) while Saskatchewan saw an increase of 22% yr/yr. Newfoundland & Labrador remains the hardest hit by the downturn in oil prices, as insolvencies in that province rose 47% yr/yr.

This week's global energy news . . . 

A Union Pacific train carrying light crude oil from the Bakkens derailed and caught fire just outside of Portland this week. West Coast refineries rely heavily on crude-by-rail due to declining production from Alaska and California. About 1 million bbl/day of crude is transported by rail in the US. Tesoro is hoping to build a 360,000 bbl/day rail loading terminal in Washington State to take advantage of cheap oil from the Bakkens. Pipelines to the West Coast are at full capacity and there are no plans to build new ones. Rail loading terminals are orders of magnitude cheaper to build and don't have to pass as many regulatory hurdles.

The government of Argentina says Exxon Mobil could invest more than US$10 billion into shale projects across the country. Exxon has already spent US$200 million in exploratory drilling in the Vaca Muerta region. The government has vowed to resolve the country's persistent gas shortages and rolling power blackouts. Exxon CEO Rex Tillerson is optimistic on Argentina, noting that the country's investment climate is improving.

Norway's offshore oil workers are threatening strike action later this month if their demands aren't met. Norway is Europe's biggest producer of oil and gas. The last strike to hit the country was in 2012 and lasted 16 days. The downturn in energy prices has cost Norway 40,000 jobs over the past 3 years.

There is hope for some resolution to the nation-wide strike in France, with Total reporting some of its refineries might be restarting later this week. All 4 of Total's French refineries are completely offline. However, other European refineries are set to benefit from improved refining margins and declining stockpiles. The government has already released 1.5 million barrsls of fuel from its strategic petroleum reserves. The country is expecting 2.5 million visitors for its upcoming UEFA Euro 2016 soccer championship.

The situation in Nigeria is reportedly getting worse as militants blew up several pipelines, two belonging to Italian oil major ENI and one belonging to Shell. Nigeria's oil minister says the country's oil output has been reduced to 1.6 million bbl/day, down from the normal level of 2.2 million. The Niger Delta Avengers say they won't stop until oil output is reduced to zero.

BP has agreed to pay US$175 million to settle claims by US investors that it lied about the size of the 2010 Deepwater Horizon disaster. The investors were seeking $2.5 billion in compensation. The lawsuit was spearheaded by the public employee pension funds of New York and Ohio. BP has set aside $56.4 billion to cover economic and environmental damages by various levels of government. BP's market cap has been reduced to approximately $100 billion.

Proving that it's not just North Americans that love their gas-guzzling SUVs, SUV sales continue to hit record highs in Europe, surpassing passenger vehicles for the first time ever. The European surge in SUV and auto sales in general is being blame on lower gas prices.

Highlights from this week's OPEC meeting . . . 

All 13 OPEC members met in Vienna this week and concluded . . . well, not much. Saudi Arabia floated the idea of a production ceiling which Iran promptly rejected. Members expressed concern over high inventory levels around the world but seemed reassured by the recent rise in oil prices. The group appointed a new secretary-general - Nigeria’s Mohammed Barkindo, who will take over the helm in August. OPEC scrapped its production quotas earlier this year since none of the members were willing to cap or reduce production.




OIL PRICES • WEEKLY CLOSE
Friday close, $/bbl • data by CME Group
49.64
+0.32 ▲ 0.6%
BRENT USD/BBL
48.62
-0.71 ▼ 1.4%
WTI USD/BBL
36.92
-0.61 ▼ 1.6%
WCS USD/BBL
47.79
-1.15 ▼ 2.3%
WCS CAD/BBL
CHANGE WK/WK  

Oil prices dipped after Thursday's OPEC meeting, then rose on better than expected stockpile data, then declined again due to the increase in oil rig counts. Brent did manage to crack the $50/bbl mark on Thursday but failed to hold that level.

Natural gas prices appear to have turned a corner as production numbers appear to be declining and hopes are high for a long hot summer. NYMEX gas prices are up 45% from the January lows, ending the week at US$2.40/MMBtu. AECO gas prices have been hit hard by the oil sands outages, hovering near US$1.20/MMBtu but appear to have turned a corner.




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

94.03
-1.47 ▼ 1.5%
USD INDEX
77.26
+0.56 ▲ 0.7%
CDN DOLLAR
1.71%
-0.14 ▼ 7.6%
US 10Y Bond
1.18%
-0.17 ▼ 12.6%
CDN 10Y Bond
CHANGE WK/WK  

Statistics Canada reported a 0.2% contraction in GDP for the month of March, reducing Q1 GDP growth to 2.4%. This is the second consecutive month of GDP contraction. Economists were were expecting annualized growth to be closer to 2.8%. A decline in business spending failed to offset strong housing and consumer expenditures. Spending by mining and oil and gas extraction declined 2.8% yr/yr. The energy sector accounts for 40% of private investments in Canada, excluding housing.

Canada's exports increased 1.5% to $41.8 billion in April. Prices were up 1.1% while volumes rose 0.5%. Imports increased 0.9% to $44.7 billion, narrowing Canada's trade deficit from $3.2 billion in March to $2.9 billion in April. Exports of energy products rose 7.6% to $5 billion in April, the second consecutive monthly gain. Prices rose 9.7% but volumes decreased 1.9%. Exports of natural gas rose 43.2% while exports of crude oil and bitumen gained 3.5%.

Only 38,000 jobs were created in the US in April, the lowest since 2010 and much worse than anyone expected. March's job numbers were also revised lower. However, the US unemployment rate fell to 4.7% as almost 500,000 Americans exited the labour force. The news greatly reduces the chances of a rate hike in the summer and dropped the US dollar.

The OECD warned of anemic growth in 2016 with minor improvements expected next year. Global growth was revised to 3% this year, rising to 3.3% next year. The agency lowered US GDP forecasts from 2% to 1.8% for 2016 but remains optimistic about the Canadian economy.




US IMPORTS OF CANADIAN CRUDE
million bbl/day • 4-week average • data by EIA (preliminary)
US OIL INVENTORIES
million bbls • data by EIA
US OIL PROD'N & RIG COUNT
million bbl/day • data by EIA & Baker Hughes
2,717k
-371 ▼ 12.0%
BBL/D CDN IMPORTS TO US
8,735k
-32 ▼ 0.4%
BBL/D US PROD'N
535.7M
-1.4 ▼ 0.3%
BBL US INVENTORY
325
+9 ▲ 2.8%
US RIG COUNT
CHANGE WK/WK  

Weekly data released by the US Energy Information Administration (EIA) showed that imports of Canadian crude into the US fell again last week, declining to about 2.7 million bbl/day. Imports are down about 500,000 bbl/day from the highs of January.

The National Energy Board (NEB) reported that exports to the US hit a record high of 3.2 million bbl/day in Q1. Most of Canada's oil is destined for the US Midwest, which also hit a record 2.1 million bbl/day in the first quarter. The NEB also reported a slight dip in Canadian oil production, falling below 4 million bbl/day in March.

Baker Hughes reported that oil rig counts in the US increased for the first time since December. Energy traders are worried that banks might be pushing small shale producers to hit the restart button in order to make their loan payments. 




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 TSX is officially in bull market territory, rising 20% from the lows of January, thanks in part to an 85% increase in oil prices. For the same period, the S&P500 benchmark is up about 15%.

Energy service providers on the TSX had a good week, including Trinidad Drilling (TDG +13%), Calfrac (CFW +1%) and Precision Drilling (PD +8%). Other big gainers include Enerplus (ERF +15.%), Painted Pony (PPY +12%) and Crew Energy (CR +11%).

Several small-cap producers had a rough week, including Paramount Resources (POU -9%), Athabasca Oil Sands (ATH -8%) and Bonterra Energy (BNE -4%). TransCanada hit another 52 week high this week (TRP +2%).




UPGRADES

  • Precision Drilling (TSX:PDS): Upgraded from UnderPerform to Market Perform at Raymond James.
  • Marathon Oil (NYSE:MRO): Upgraded from Neutral to Overweight with price target increase from US14 to US$16 at Piper Jaffray.

DOWNGRADES

  • Exxon Mobil (NYSE:XOM): Downgraded from Buy to Neutral at Bank of America.
  • Statoil (NYSE:STO): Downgraded from Sector Perform to Underperform at RBC Capital.
  • Precision Drilling (TSX:PD): Downgraded from Neutral to Underperform at Credit Suisse.

PRICE TARGET CHANGES

  • Encana (TSX:ECA): Price target decreased from $10.50 to $7.85 at Barclays.
  • Gibson Energy (TSX:GEI): Price target decreased from $16.50 to $16 at TD Securities and from $17 to $16 from CIBC.
  • Husky Energy (TSX:HSE): Price target increased from $15 to $16 at Raymond James.
  • Trican Well Service (TSX:TCW): Price target increased from $1.75 to $2.25 at TD Securities.
  • Halliburton (NYSE:HAL): Price target increased from US$42 to US$50 at RBC Capital.



NEXT WEEK'S EVENTS

Monday:

  • Federal Reserve Chair Janet Yellen speaks in Philadelphia at 12:30pm ET
  • BP Statistical Review of World Energy 2016 webcast

Tuesday:

  • Kick-off of the Global Petroleum Show in Calgary, AB
  • API Weekly Statistics Bulletin released @ 4:30pm ET
  • Canada's Ivey Purchasing Manager's Index (PMI) released at 10:00am ET

Wednesday

  • PM Trudeau & Finance Minister Bill Morneau deliver keynote speeches at the Canada Summit in Toronto, ON
  • EIA Petroleum Status Report released @ 10:30am ET

Thursday:

  • EIA Natural Gas Report released @ 10:30am ET
  • Bank of Canada Financial Systems Review @ 2:30pm ET followed by speech from Governor Poloz and Deputy Governor Wilkins

Friday:

  • Canadian unemployment data for May released @ 8:30am ET
  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday June 10, 2016 @ 7pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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