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The Oil Sands Weekly

The Oil Sands Weekly

Nexen idles the Long Lake upgrader indefinitely . . .

Nexen announced the indefinite shutdown of its Long Lake upgrader this week, opting instead to sell diluted bitumen directly to market. The upgrader was idled after last January's fatal explosion. The move will result in 350 job cuts.

The Long Lake upgrader was considered a step-out technology when first commissioned in 2008. The upgrader uses OPTI's proprietary OrCrude™ technology which converts asphaltene by-products into hydrogen and fuel, reducing natural gas consumption. The facility was plagued by a series of operational issues and only averaged 30,000 bbl/day in 2015, less than half its nameplate capacity.

The company also announced the completion of its independent investigation of last year's pipeline rupture. Nexen blames buckling that occurred when bitumen in the pipeline was allowed to cool down during a shutdown, spilling about 30,000 barrels of oil. The pipeline corridor where the spill occurred has since been fully remediated.

The AER finalizes tailings management regulations . . . 

The Alberta Energy Regulator (AER) finally released details of its new tailings management regulations for oil sands mine operators. Directive 085: Fluid Tailings Management for Oil Sands Mining Projects replaces the old Directive 074, which was suspended in March of 2015 due to compliance difficulties.

Under the new regulations, mine operators now have 10 years to reclaim tailings ponds once the mine has ceased operations. Instead of imposing penalties, companies will be asked to curtail production if tailings volumes increase far beyond regulatory limits. Existing operators are required to submit fluid tailing management applications by November 1, 2016 with yearly performance reports to the AER.

Directive 074 only gave operators 5 years to reclaim tailings and prohibited the long-term storage of fine tailings, which was difficult to achieve with current reclamation technology.

Alberta government encourages more investment in conventional oil & gas . . . 

Alberta's NDP government has introduced two new programs to help encourage investment and production from underdeveloped and yet-to-be-developed conventional deposits:

  1. The Enhanced Hydrocarbon Recovery Program, which aims to increase production through enhanced recovery methods. This program replaces the existing Enhanced Oil Recovery Program.
  2. The Emerging Resources Program, which aims to encourage development of new oil and gas resources in higher-risk and higher-cost areas that have large resource potential.

The new regulations are part of the government's Modernized Royalty Framework and takes effect January 1st, 2017. The government hopes to put more oil rigs into service and move Albertans off the unemployment line.

Another climate change advisory committee in the works . . .

The Alberta government also announced yet another Oil Sands Advisory Group to advise on its Climate Leadership plan. The 15 member panel will consist of industry representatives, environmental groups and Indigenous community members. The government is capping GHG emissions from the oil sands to 1,000 megatonnes per year (Mt/y), excluding allowances for upgrading and co-generation of power. Although current emissions are far below that cap (closer to 55 Mt/yr), it is unclear how the cap will affect future oil sands growth.

The group will serve a 24 month term and deliver an interim report within 6 months. 

Fort Mac wildfires take a toll on Canada's manufacturing sales . . . 

Statistics Canada reported that May's manufacturing sales declined 1.0% to $49.9 billion, the third decrease in five months. 

Sales of petroleum and coal products were down 2.2% in May, following gains in March and April. Manufacturing sales in Alberta fell 2.0% after two consecutive monthly gains. The decline was mostly attributed to production outages caused by the Fort McMurray wildfires and turnaround work at Alberta's refineries and upgraders.

Small and medium sized businesses get a boost . . . 

ATB Financial and the Business Development Bank of Canada (BDC) have teamed up to offer $1 billion in new loans to the province's small and medium sized businesses. The duo hope to spur economic growth and job creation in the battered province. ATB is owned by the Alberta government while the BDC is a crown corporation.

CPP managers takes an interest in Canadian pipelines . . .

Wolf Midstream has purchased Devon Energy's 50% stake of the Access Pipeline for $1.4 billion. The Access Pipeline system includes both diluted bitumen and diluent lines that run between Christina Lake and Edmonton. Devon has committed to a 25 year contract for bitumen/diluent deliveries on the pipeline which will add US$100 million per year in operating costs for their Jackfish SAGD facility.

MEG Energy has put their 50% share of the Access Pipeline for sale but has yet to announce a buyer. Wolf Midstream is backed by the Canadian Pension Plan Investment Board (CPPIB). This is CPPIB's third oil & gas deal in the past few months.

TransCanada dangles thousands of jobs for trades unions . . . 

TransCanada signed a Memorandum of Understanding (MOU) with several major pipeline trades unions and associations for work on the Energy East Pipeline Project. The MOU guarantees any trades work on the pipeline will be awarded to members of:

  • the Pipe Line Contractors Association of Canada (PLCAC)
  • the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada (UA)
  • Labourers International Union of North America (LiUNA)
  • International Union of Operating Engineers (IUOE) and
  • Teamsters Canada.

The $15.7 billion Energy East Pipeline runs from Alberta to New Brunswick and has the potential to create 14,000 jobs during construction and start-up of the line. The project is currently under review by the National Energy Board.

Other news in the Canadian energy patch this week . . . 

Lightstream Resources announced a recapitalization plan which will see US$904 million in debt converted to equity, giving creditors 95% of the company's shares. The move will cut Lightstream's interest payments by US$86.1 million per year. The Alberta Court of Queen's Bench has approved the move but shareholders and creditors still need to approve the plan. The company defaulted on its debt payments in mid-June.

SECURE Energy Services purchased the remaining portions of its La Glace and Judy Creek terminals from its joint venture partners for $26.7 million. The company now owns 100% of both assets.

Superior Plus has commenced legal action to recoup the $25 million termination fee it owes to Canexus after it abandoned merger plans. The company maintains Canexus breached terms of their agreement. Superior canceled the merger on June 30 after the US Federal Trade Commission voiced opposition to the deal. Canexus has also launched a lawsuit against Superior claiming it is owed a $25 million termination payment.

Bank of Canada pins an end date to misery from oil price crash . . . 

Bank of Canada Governor Stephen Poloz maintained the overnight lending rate at 0.5% this week, delivering a rather gloomy forecast for the rest of the year. Among the key highlights:

  • First quarter GDP was revised to 2.4% but the economy is expected to contract by 1% in the second quarter due to the Alberta wildfires
  • Full year 2016 GDP growth was revised lower to 1.3% from the previous estimate of 1.7%
  • Q3 GDP is expected to expand by 3.5% due to rebuilding efforts in Fort McMurray. The bank expects the aftermath of the oil price shock will largely be over by the end of this year.
  • 2017 full year GDP growth was revised down slightly to 2.2%.
  • The federal Liberal's fiscal stimulus plan is expected to add 0.5% growth to the economy both this year and next, mostly attributed to the new Child Care Benefit program and infrastructure spending.
  • Brexit will shave 0.1% of Canada's GDP by 2018, caused primarily by a 0.2% decline in the global GDP.

Despite dismal manufacturing and exports data, the bank insists the lower Canadian dollar will help spur exports to the US. Poloz remains optimistic that non-resource sectors will lead the charge in economic growth over the next few years.

BC Premier Christy Clark in search of a plan B . . . 

Royal Dutch Shell and partners delayed a Final Investment Decision on its $40 billion LNG Canada project yet again this week, citing global industry challenges. This is the second deferral this year. CEO Andy Calitz notes this is a delay, not a cancellation and site prep work will continue.

Spreads between domestic and Asian LNG prices have been cut in half since the project was first announced. Almost 60% of additional LNG capacity will be added over the next 5 years, adding to an already oversupplied market.

BC Premier Christy Clark promised to wipe out the government's debt and add 100,000 new LNG-related jobs during her last election campaign. The premier will have to come up with a new plan when she comes up for re-election next year.

Although there are over 20 LNG projects unofficially on the books, only 2 projects are progressing: the $1.8 billion Woodfibre LNG in Squamish and the $37 billion Pacific Northwest LNG, led by Malaysia's Petronas. 

Woodfibre was approved by the federal government in March much to the dismay of local governments who largely oppose any development on BC's West Coast. The project is backed by Singapore-based RGE Group and could be operational by 2018.

Pacific Northwest LNG is still waiting for federal government approval and faces considerable opposition from several anti-LNG lobbyists.

Kinder Morgan held a fire-sale this week . . .

Valero Energy has purchased Kinder Morgan's 50% stake of the Parkway Pipeline joint-venture, giving it 100% interest in the project. The 141 mile (215 km) Parkway Pipeline transports 110,000 bbl/day of refined petroleum products from Valero's refinery in Norco, Louisiana to Kinder Morgan's Plantation Pipeline System in Collins, Mississippi. The deal will be funded in cash but financial terms were not disclosed. Valero noted the line could eventually be expanded to 200,000 bbl/day.

Kinder Morgan also announced the sale of its 50% stake in the 7,600 mile Southern Natural Gas pipeline system to Southern Company for US$1.47 billion. Kinder Morgan will continue to operate the network. Southern Company is one of the nation's largest natural gas distributors.

Analysts are speculating KMI will use the cash to boost their dividend.

This week's global energy news. . . 

BP warned investors it will take another US$2.5 billion write-down in the second quarter related to the Deepwater Horizon disaster. That brings BP's total cumulative pre-tax charge to US$61.6 billion or US$44.0 billion after tax.

ConocoPhillips announced intentions to sell its 35% interest in three exploration blocks off the coast of Senegal for US$350 million. The divestiture is part of Conoco's previously announced intentions to exit from deepwater exploration in West Africa. The deal is expected to close by year end.

Royal Dutch Shell faces the possibility of strike action on several North Sea platforms as its maintenance contractors have unanimously rejected a 30% pay cut. The company does not expect the move to disrupt production.

West Africa's Ivory Coast hopes to double its oil and gas output by 2020, mostly in the form of offshore oil developments in the Gulf Of Guinea. Players in the Ivory Coast include Total, Exxon Mobil, Anadarko and Canadian Natural Resources. The region currently produces about 100,000 boe/day, evenly spilt between oil and gas.

Nigeria's oil worker's union has suspended strike action after commencing talks with the government. The country is still working towards restoring its oil exports. Exxon Mobil once again declared force majeure on exports of its Nigeria crude, citing a  "system anomaly" at their loading facility. Exxon denied reports earlier this week that the Niger Delta Avengers had blown up their their 48" Qua Iboe export pipeline.




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

2,877k
+259 ▲ 9.9%
BBL/D CDN IMPORTS TO US
8,485k
+57 ▲ 0.7%
BBL/D US PROD'N
521.8M
-2.5 ▼ 0.5%
BBL US INVENTORY
357
+6 ▲ 1.7%
US RIG COUNT
CHANGE WK/WK  

The US Energy Information Administration (EIA) estimates US production averaged 8.6 million bbl/day in June, 200,000 bbl/day lower than the previous month and 1.1 million bbl/day lower than June of 2015. US production rebounded slightly last week as output from Alaska rebounded. Baker Hughes reported that rig counts in the US ticked up again for the 4th week in a row.

The International Energy Agency (IEA) warned investors to curb their enthusiasm despite the recent rebound in oil prices. Highlights from their latest Oil Market Report:

  • OPEC production reached an 8 year high of 33.2 million bbl/day in June thanks to near record production from Saudi Arabia and improving output from Nigeria.
  • Output from the Middle East remains above 31 million for the third month in a row. Ex-OPEC production declined by 900,000 bbl/day.
  • OECD stockpiles rose by 13.5 million barrels to 3,074 million barrels, mostly in the form of floating storage.
  • Refinery outages continue to reduce crude runs around the world, down 1.5 million bbl/day from the same time last year.
  • Global oil demand was increased by 100,000 bbl/day due improved economic outlook in China, India and surprisingly, Europe.

The IEA warned that record high inventories remain a threat to any meaningful oil price recovery, noting that "the road ahead is far from smooth". Traders are increasingly storing crude in supertankers as storage tanks on land are at capacity. Analysts continue to warn that China's crude oil imports will decline dramatically once the country completes fillings its Strategic Petroleum Reserves, which is expected to happen later this summer.




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

96.56
+0.23 ▲ 0.2%
USD INDEX
77.30
+0.61 ▲ 0.8%
CDN DOLLAR
1.60%
+0.23 ▲ 16.8%
US 10Y Bond
1.12%
+0.16 ▲ 16.7%
CDN 10Y Bond
CHANGE WK/WK  

Theresa May was proclaimed the new UK Prime Minister this week. May pledged to make a success of Brexit. Governor Mark Carney held the overnight lending rate unchanged this week, helping to boost the pound sterling by 1.8%.

Japan announced plans for the mother-of-all-stimulus programs in a last ditch effort to fight on-going deflation. The yen was the biggest loser in currency markets, falling 4% this week. Japan's efforts to devalue the currency and spur inflation in recent years have largely failed.




OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group
47.61
+0.85 ▲ 1.8%
BRENT USD/BBL
45.95
+0.54 ▲ 1.2%
WTI USD/BBL
42.41
+0.63 ▲ 1.5%
CDN LT USD/BBL
32.35
+1.14 ▲ 3.7%
WCS USD/BBL
CHANGE WK/WK  

The heavy oil discount narrowed to US$13.60/bbl this week.

The EIA is sticking to its forecast of $44/bbl for both Brent and WTI in 2016, increasing to US$52/bbl in 2017. Oil prices are in steep contango (i.e., prices for delivery later this year and are much better than the current contract month), further encouraging producers to store their oil and sell production at a later date.




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

Williams Co. stock (NYSE:WMB +11.7%) spiked this week after Reuters reported that their Canadian assets have apparently attracted at least 7 suiters, including Enbridge, Pembina Pipeline, Keyera and several public investment funds including the CPPIB. Williams has invested more than $2 billion in the oilsands, converting upgrader offgas into natural gas and NGLs. The sale is expected to net the company between US$1 and $2 billion.

This week's 52-week highs on the TSX include TransCanada (TRP), Peyto Exploration (PEY), Birchcliff Energy (BIR) and Canadian Natural Resources. On US markets, Exxon Mobil (XOM) and Chevron (CVX) hit fresh yearly highs.

Both the S&P500 and the Dow Jones Industrial Average hit record highs this week as investors pile into the perceived safe-haven of US markets.

Many Canadian energy companies are due to report second quarter earnings in the coming weeks.

UPGRADES

  • Birchcliff Energy (TSX:BIR): Upgraded from Sector Perform to Focus Stock at Scotiabank and from Hold to Buy at TD Securities.
  • Cenovus Energy (TSX:CVE): Upgraded from Underweight to Overweight at Barclays.
  • ConocoPhillips (NYSE:COP): Upgraded from Underweight to Neutral at JPMorgan.
  • Devon Energy (NYSE:DVN): Upgraded from Sector Outperform to Focus Stock at Howard Weil.
  • Statoil (NYSE:STO): Upgraded from Underperform to Neutral at Bank of America.
  • Tesoro (NYSE:TSO): Upgraded from Sector Perform to Sector Outperform at Howard Weil.

DOWNGRADES

  • Pengrowth Energy (TSX:PGF): Downgraded from Buy to Hold at Canaccord Genuity.
  • Baker Hughes (NYSE:BHI): Downgraded from Buy to Hold at GMP Securities.
  • Marathon Petroleum (NYSE:MPC): Downgraded from Sector Outperform to Sector Perform at Howard Weil.
  • Total (NYSE:TOT): Downgraded from Buy to Neutral at Bank of America.
  • Phillips 66 (NYSE:PSX): Downgraded from Sector Outperform to Sector Perform at Howard Weil and from Overweight to Equal Weight at Barclays.

 

PRICE TARGET CHANGES

  • Canadian Natural (TSX:CNQ): Price target increased from $39 to $44 at Barclays.
  • Cenovus Energy (TSX:CVE): Price target increased from $18 to $19 at JP Morgan.
  • Encana (TSX:ECA): Price target increased from $8 to $9 at Barclays.MEG Energy (TSX:MEG): Price target increased from $6 to $7 at Barclays.
  • BP (NYSE:BP): Price target increased from US$31 to US$33 at Jefferies Group.
  • Chevron (NYSE:CVX): Price target increased from US$114 to US$116 at Jefferies.
  • Devon Energy (NYSE:DVN): Price target increased from US$38 to US$43 at Barclays.
  • Exxon Mobil (NYSE:XOM): Price target increased from US$82 to US$88 at Deutsche Bank.
  • Halliburton (NYSE:HAL): Price target increased from US$XX to US$56 at Jefferies Group.
  • Marathon Oil (NYSE:MRO): Price target increased from US$12 to US$14 at Barclays.

NEXT WEEK'S EVENTS

Monday:

  • August contract expiry for Western Canadian Select

Tuesday:

  • API Weekly Statistics Bulletin released @ 4:30pm ET
  • World Economic Update by the IMF

Wednesday

  • EIA Petroleum Status Report released @ 8:30am ET
  • August contract expiry for West Texas Intermediate
  • Halliburton Q2 earnings release
  • Canadian Pacific Railway Q2 earnings release

Thursday:

  • May Employment Insurance and Wholesale Trade released by Statistics Canada
  • 2016 Summer Meeting of Canada’s Premiers in Whitehorse, Yukon
  • EIA Natural Gas Report released @ 10:30am ET
  • EIA Annual Energy Outlook
  • European Central Bank interest rate decision
  • Mullen Group Q2 earnings release
  • Encana second Q2 earnings release
  • Precision Drilling second Q2 earnings release

Friday:

  • June Consumer Price Index released by Statistics Canada
  • Baker-Hughes Rig Count released @ 1:00pm ET
  • Husky Energy Q2 earnings release
  • Schlumberger Q2 earnings release

Next edition of the Oil Sands Weekly: Friday July 22, 2016 @ 8pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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