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The Oil Sands Weekly

The Oil Sands Weekly

TransCanada formally files for arbitration . . . 

TransCanada is formally requesting arbitration over President Obama's rejection of the Keystone XL pipeline under NAFTA provisions. TransCanada applied for arbitration in January in an attempt to "reach an amicable settlement" with the US government. The talks fell apart in April.

Obama rejected the cross-border pipeline last November after 7 years of review, concluding it would not make a meaningful long-term contribution to the US economy and harm the country's position as leaders in the fight against climate change. TransCanada accuses the US government of stalling for 7 years, turning Keystone XL into a political lightening rod. 

TransCanada maintains Keystone XL's rejection was politically motivated and not based on science or facts. Reports prepared for the US Department of Energy concluded that Keystone XL would not increase GHG emissions and reduce US dependancy on foreign oil.

TransCanada also points to Obama's 2009 approval of Enbridge's Alberta Clipper Pipeline which runs from Alberta to Wisconsin. The US government concluded the "shovel-ready project will provide construction jobs for workers in the United States" and that the "addition of crude oil pipeline capacity between Canada and the United States will advance a number of strategic interests of the United States". 

The NAFTA arbitration process allows companies to challenge governments before an international panel. The NAFTA claim is independent from TransCanada's legal challenge in US courts which seeks to reverse the government's decision. The company is seeking US$15 billion in damages, plus interest and legal fees.

Aboriginal groups pitted against each other as courts overturn Nothern Gateway's approval . . .

The Federal Court of Appeal has overturned Ottawa's approval of Enbridge's Northern Gateway Pipeline, ruling that the government failed in its duty to adequately consult with Aboriginal groups. The lawsuit was led by seven BC First Nations groups, several non-profits and Unifor, a Canadian labour union.

The courts noted Enbridge went above and beyond its duty to consult with First Nations people, engaging over 80 aboriginal groups throughout Alberta and BC. Ironically, Northern Gateway has 31 Aboriginal equity partners, representing 80% of the aboriginal population located along the project's right-of-way. The lawsuit highlights some of the deep divisions in BC's aboriginal communities over resource development.

The court case was one of the largest ever heard by the Federal Court of Appeal, with over 250,000 documents submitted during the proceedings. The matter now goes back to the federal government for review. Prime Minister Trudeau vowed to kill Northern Gateway during his election campaign stops in BC last year.

CNRL fined for failings to report H₂S release . . .

Canadian Natural Resources was fined $500,000 for failing to immediately report a hydrogen sulphide release from its Horizon Oil Sands upgrader.

In 2010, the upgrader's sulphur recovery unit (SRU) failed, allowing H₂S to escape through a flare stack. The company reported the incident to Occupational Health & Safety officials but did not notify Alberta Environment until 6 days later, resulting in a $350,000 fine.

A similar SRU malfunction in 2012 caused odour complaints from residents in nearby Fort MacKay, resulting in a $150,000 fine. 

CNRL has since revised its SRU operating procedures and updated its reporting practices. A majority of the funds collected will go to the University of Calgary.

Fort Mac's biggest trade show rescheduled . . . 

The 2016 Oil Sands Trade Show and Conference has been cancelled for this year due to logistical issues around the city's rebuilding efforts after the May wildfires ripped through the city. A charity golf tournament and community event will take place in lieu. The Oil Sands Trade Show is one of Fort McMurray's largest industry events.

Connacher gives prospective buyers another 2 weeks . . .

Connacher Oil and Gas is giving interested parties another 2 weeks to bid on its oil sands leases and thermal in-situ operations. Connacher is operating under creditor protection and is in the process of selling assets to raise cash. Prospective buyers now have until July 14 to submit a non-binding bid. The company's Great Divide SAGD facility has the capacity to produce 14,500 bbl/day. Connacher also owns 35,200 hectares of oil sands leases southwest of Fort McMurray, AB.

Petrochemical sector gets a boost - in Ontario . . .

Kinder Morgan had agreed to sell 50% of its Utopia Pipeline project to private equity firm Riverstone Investment Group.

The Utopia Pipeline transports ethane and propane from Harrison County to Fulton County, Ohio tying into existing infrastructure which delivers NGLs to petrochemical facilities in Ontario. Nova Chemicals has committed to a long term contract on the line.

The 330 km pipeline has a capacity of 50,000 bbl/day of NGLs (expandable to 75,000 bbl/day) and is expected to be in service by January of 2018.

This week's Canadian economic data . . . 

After falling in February and March, Canada's Gross Domestic Product (GDP) edged up 0.1% in April. Among the highlights:

  • oil sands economic activity fell 7.5% due to several upgrader shutdowns (note that April data precedes the Fort McMurray wildfires which occurred in May)
  • conventional oil & gas extraction rose 1.7%
  • a 3.9% decline in arts and entertainment was blamed on the lack of Canadian teams in this year's NHL payoffs.

The full impact of the Fort McMurray wildfires will be revealed in next month's May GDP forecast, due to be released at the end of July. 

Wages in Alberta continued to fall in April, now down 2.4% over the past 12 months:

  • high paying sectors, such as professional and scientific, remain the hardest hit
  • the number of people employed in oil & gas and mining is down by 25,500 workers for the year (-11.7% y/y)
  • across Canada, wages declined 0.3% in April, bringing year/year wage growth to just 0.2%, far below the national inflation rate which is running close to 2%.

Alberta wages began falling in the summer of 2015 and have yet to bottom. However, Albertans remain the best paid workers in Canada, with average oil and gas salaries ($2,070/week) still more than double the national average ($956/week).

The Fort McMurray wildfires boosted prices of energy products and raw materials in May:

  • Industrial Product Price Index (IPPI) rose 1.1% in May (m/m), led by higher prices for oil and gas products, including gasoline (+6.4%), diesel (+7.8%) and light fuels (+8.2%)
  • prices for petrochemicals also rose 6.9%
  • excluding petroleum products, IPPI rose 0.5% m/m
  • despite the May gains, IPPI is still down 1.1% y/y due a 12.7% drop in petroleum product prices
  • the Raw Materials Price Index (RMPI) rose 6.7% m/m, led by a 15.7% gain in crude oil prices.
  • excluding crude, RMPI rose 1.4% m/m. 
  • RMPI is still down 10.6% y/y driven lower by a 18.8% decline in crude oil.

CBOC remains optimistic on Canada's economy . . .

The Conference Board of Canada (CBOC) remains optimistic on the Canadian economy, despite rising unemployment and slowing building and commercial building permits. The CBOC cites an improved oil price, recovering stock market and improving US economy as cause for enthusiasm.

President Obama pats Canada on the head . . .

President Obama got a very warm reception as he addressed the Canadian parliament this week. Obama praised Canada and specifically Alberta for leading the fight against global warming. 

Obama blocked construction of Keystone XL during his presidency as oil production expanded considerably in both Canada and the US. The move has forced millions of barrels per day of oil onto rail cars on both sides of the border.

The president is currently on a farewell tour and visited Canada as part the "Three Amigos" summit with Mexican President Enrique Peña Nieto.

This week's cancelled takeovers . . .

Superior Plus has backtracked on plans to buy Canexus. The move comes after the US Federal Trade Commission (FTC) ruled it would move to block the transaction due to lack of competition in the sodium chlorate market. Canexus receives a $25 million termination fee, which it will put towards debt reduction. The merger would have created one of Canada's largest chemicals supplier.

Energy Transfer has officially terminated its US$33 billion buyout of pipeline giant Williams Company after 18 months of negotiation. The cancellation comes one week after a Delaware judge ruled last week that it could back out of its bid to buy the rival pipeline giant. The deal was announced in late September 2015 but balance sheets at both companies have become very strained as oil prices collapsed through the end of 2015 and into the beginning of this year. Williams still maintains that Energy Transfer does not have the legal right to back out of the deal and has appealed the Delaware ruling.

This week's global energy news . . . 

The State of California has launched yet another probe into whether ExxonShellTesoro and Phillips 66 colluded to undergo maintenance at their California refineries all at the same time, causing gas prices to spike to almost US$3 per gallon (roughly $1/L), 25% higher than the national average. The state conducted a similar probe in 2006 under Governor Arnold Schwarzenegger, which found no evidence of market manipulation.

Exxon Mobil announced a significant oil discovery in the Stabroek block, 120 miles off the coast of Guyana. The 17,900 ft (5.5 km) deep deposit is estimated to hold 800 million to 1.4 billion barrels of oil equivalent. The Starbroek block is a joint venture between Exxon, Hess, CNOOC and the government of Guyana.

Nigeria's output continues to rise as the country repairs damage made to energy infrastructure in the Niger Delta region. Output was cut from 2.2 million to 1.6 million bbl/day after a domestic terrorist group blew up several pipelines and tank farms in the region. Output has now risen to 1.9 million bbl/day and government officials expect to be back to full output by the end of July. Nigeria is seeking to raise US$40 to US$50 billion in foreign investment for support of its energy sector.

Saudi Aramco and Sabic (Saudi Basic Industries Corp) are reportedly mulling a joint venture in the petro-chemicals business. The two state-owned companies are conducting a feasibility study to build a plastics plant in Yanbu on the Red Sea coast. The move will help the Saudi government diversify its economy away from crude oil exports.

Beginning July 1st, the city of Paris has banned the use of autos older than 20 years old. Cars built before 1997 cannot be driven in the city centre from 8am to 8pm during weekdays. The move is being labelled "anti-socialist" as it adversley impacts the poorer Parisians who do not live near transit and can't afford a new car. The law also lowers the resale value of older vehicles. Many European lawmakers are going one step further, vowing to ban gasoline and deisel powered vehicles altogether by 2025.




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
3,037k
-62 ▼ 2.0%
BBL/D CDN IMPORTS TO US
8,622k
-55 ▼ 0.6%
BBL/D US PROD'N
526.6M
-4.1 ▼ 0.8%
BBL US INVENTORY
341
+11 ▲ 3.3%
US RIG COUNT
CHANGE WK/WK  

The Energy Information Administration (EIA) reported a larger than expected decline in US oil inventories last week, falling 4.1 million barrels, inline with API estimates. This week marks the 5th consecutive week of declines in oil inventories. However, gasoline inventories remain stubbornly high despite strong demand for gasoline in the US.

Baker Hughes reported an increase in oil rigs in the US, rising by 11 this week. This is the fourth gain in the past 5 weeks. Despite the increase, US oil production ticked down again this week for the fourth week in a row.

Average oil imports of Canadian crude into the US held steady at about 3 million bbl/day. The Alberta Energy Regulator (AER) reported a sharp drop in upgraded bitumen for the month of April (down 370,000 bbl/day from March levels), which is reflected in April's weak GDP number. The April decline was due to several maintenance outages in Fort McMurray. Impact of Alberta wildfires will be reflected in next month's data.




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

95.72
+0.15 ▲ 0.2%
USD INDEX
77.42
+0.49 ▲ 0.6%
CDN DOLLAR
1.46%
-0.11 ▼ 7.0%
US 10Y Bond
1.06%
-0.11 ▼ 9.4%
CDN 10Y Bond
CHANGE WK/WK  

US Q1 GDP was revised higher to 1.1% (from an original estimate of 1.0%). Better than expected economic data released this week has raised the GDP Now forecast to 2.6% for the second quarter. In contrast, Canadian Q2 GDP is estimated to contract by almost 1% due to the Alberta wildfires.

Bank of England Governor Mark Carney signalled intentions to "provide more stimulus" this summer due to Brexit, which will likely translate into lower capital requirements for the banks, lower interest rates and/or more quantitative easing. The sombre speech lowered the  British pound once again this week (-3.0% w/w), taking the London FTSE to post-Brexit highs (+7.2% w/w). 

Despite the better than expected economic data, global bond yields declined again this week to yet another historical low. The US 10-year has now fallen below 1.5%.




OIL PRICES • WEEKLY CLOSE
Friday close, $/bbl • data by CME Group
50.35
+1.94 ▲ 4.0%
BRENT USD/BBL
48.99
+1.35 ▲ 2.8%
WTI USD/BBL
35.29
+1.05 ▲ 3.1%
WCS USD/BBL
45.58
+1.08 ▲ 2.4%
WCS CAD/BBL
CHANGE WK/WK  

Natural gas prices rallied after stockpiles rose less than expected. Strong demand for air conditioning on the East Coast and Midwest are edging Henry Hub gas prices by close to US$3 per MMBtu.

For the month of June, oil prices averaged about 4.5% higher than the April average. The heavy oil discount averaged US$12.67/bbl in June, up from the May average of US$12.18.




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

A number of energy companies managed to seal-the-deal this week:

This week's notable winners and losers:

  • Exxon Mobil, Chevron and TransCanada hits fresh 52 week highs again this week.
  • Valero Energy (NYSE:VLO) touched a new 52 week low, falling another 2.2% w/w.
  • Calgary-based Bellatrix Exploration (TSX:BXE) declined 8.6% this week as the company works through its credit issues.
  • Williams Cos (NYSE:WMB) shares sank 5% on Friday (-3.5% w/w) on news that 6 out of 13 directors have resigned after a failed attempt to oust the CEO.

UPGRADES

  • Baytex Energy (TSX:BTE): Upgraded from Underperform to Market Perform at BMO Capital Markets.
  • Crescent Point Energy (TSX:CPG): Upgraded from Buy to Action List Buy at TD Securities.
  • Penn West Petroleum (TSX:PWT): Upgraded from Underperform to Sector Perform at RBC Capital.
  • Marathon Oil (NYSE:MRO): Upgraded from Underperform to Peer Perform at Wolfe Research.
  • Tesoro (NYSE:TSO): Upgraded from Neutral to Buy at Goldman Sachs.
  • BP (NYSE:BP): Upgraded from Equal Weight to Overweight at Morgan Stanley.

DOWNGRADES

  • Royal Dutch Shell (NYSE:RDS/A): Downgraded from Overweight to Equal Weight at Morgan Stanley.
  • Total (NYSE:TOT): Downgraded from Overweight to Equal Weight at Morgan Stanley.

PRICE TARGET CHANGES

  • Bonavista Energy (TSX:BNP): Increased from $3.75 to $4.25 at BMO Capital Markets.
  • Bonterra Energy (TSX:BNE): Increased from $26 to $28 at BMO Capital Markets.
  • Painted Pony Petroleum (TSX:PPY): Increased from $6.25 to $8.50 at BMO Capital Markets.
  • Penn West Petroleum (TSX:PWT): Increased from $1.90 to $2 at BMO Capital Markets.
  • PraireSky Royalty (TSX:PSK): Increased from $25.50 to $27 at BMO Capital Markets.
  • Teck Resources (TSX:TCK/B): Increased from $12 to $13 at Scotiabank and from $17 to $20 at TD Securities.

NEXT WEEK'S EVENTS

Monday:

  • US markets closed for Independance Day
  • RBC Manufacturing PMI @ 9:30am ET
  • Bank of Canada Business Outlook Survey released @ 10:30am ET

Tuesday:

  • Canadian Balance of Trade (imports/exports) for May released by Statistics Canada @ 8:30am
  • API Weekly Statistics Bulletin released @ 4:30pm ET

Wednesday

  • Canadian exports data for May released by Statistics Canada
  • FOMC minutes from June meeting released @ 2:00pm ET

Thursday:

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

Friday:

  • Statistics Canada Labour Force Survey for June
  • Baker-Hughes Rig Count released @ 1:00pm ET
  • Kick-off of the Calgary Stampede.

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

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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