The Oil Sands Weekly
BC issues "Environmental Assessment Certificate" for Trans Mountain Expansion . . .
The province of BC has granted an Environmental Assessment Certificate for their portion of Kinder Morgan's Trans Mountain Expansion. BC has added 37 new conditions, on top of the 157 conditions imposed by the National Energy Board (NEB), including consultation with aboriginal groups, a wildlife mitigation plan and worker accommodations during construction of the pipeline.
Although interprovincial pipelines are normally federal jurisdiction, BC's Supreme Court ruled that a provincial approval was also required as per BC's Environmental Assessment Act. However, the court ruled that the province could rely on the NEB's assessment, avoiding a separate review process.
Last month, Premier Christy Clark declared that all five of BC's conditions were met for approving "heavy oil" pipelines through her province.
Kinder Morgan has also agreed to pay the province up to $50 million annually (depending on pipeline transport volumes), which will be funnelled into the new BC Clean Communities Program. The grant will provide funding for local environmental projects such as land purchase for parks, restoration of natural habitats, beach clean-up and marine conservation. The payouts add up to as much as $1 billion over the next 20 years.
Kinder Morgan's Board of Directors has yet to make a Final Investment Decision on the $6.8 billion Trans Mountain Expansion. The company is actively looking for a partner to help fund the project, and has promised its shareholders it will not tap into equity markets anytime this year.
NEB appoints new Energy East Hearing Panel Members . . .
The NEB has confirmed the appointment of three new members to the Energy East Hearing Panel this week. The members include Don Ferguson, a public servant from New Brunswick, Carole Malo, a former SNC-Lavalin VP with a background in large infrastructure projects and Marc Paquin, an environmental lawyer and professor from Quebec. The same three members were appointed as temporary board members by the Minister of Natural Resources back in December.
The previous panel resigned in September due to concerns over conflicts of interest. Two of the members were reported to have met with former Quebec Premier Jean Charest, who was working as a consultant for TransCanada at the time.
The NEB has yet to communicate a new schedule for the hearings but has said in the past its timeline for the project's review process remains unchanged.
Bank of Canada sees brighter days ahead . . .
The Bank of Canada says business prospects in Canada have finally started to turn a corner since oil prices began to nosedive in the middle of 2014. In its latest Business Outlook Survey, the bank notes “the drag from the oil price shock and related spillovers is gradually dissipating.” The report points to improved domestic sales, higher investment and employment intentions and improved price growth.
Nearly all firms surveyed expect the US economy to grow over the next 12 months, with about half expecting positive spillover into the Canadian economy.
MEG Energy plans a return to growth in 2017 . . .
MEG Energy announced a major restructuring of its debt this week, extending maturity dates on existing bonds, issuing US$750 million in private notes and $450 million in new shares through bought deal financing.
The company has set a $590 million capital budget for 2017, focused on funding 20,000 bbl/day of of production growth at Christina Lake Phase 2B. Christina Lake produced about 82,000 bbl/day last year. MEG expects to exit 2017 in the range of 86,000 to 89,000 bbl/day, reducing non-energy operating costs to $5.75-$6.75 per barrel.
US Oil Sands plans another restart . . .
Calgary-based US Oil Sands has closed on previously announced US$7.5 million in financing, obtained from its largest shareholder (ACMO) at a 15% annualized interest rate. As part of the company's refinancing deal, three of its board members have been replaced with ACMO representatives.
The funds will allow the company to restart its PR Spring commercial demo project early in 2017. Construction of PR Spring was halted in early 2016 due to lack of working capital, then restarted in late spring after issuing almost $13 million in new shares. Construction was stopped again in the fall when the company ran out of cash for a second time.
US Oil Sands has patented a proprietary extraction process which uses a citrus bio-solvent to extract bitumen from oil sands without the need for tailings ponds. PR Spring is located in the Uinta Basin in northeastern Utah. Phase 1 is expected to produce 2,000 bbl/day of bitumen, which is slightly lighter and lower in sulphur than Alberta's Athabasca bitumen.
Turns out, Jane Fonda and PM Trudeau share common ideology . . .
80s aerobics sensation Jane Fonda was in Alberta this week on behalf of Greenpeace, expressing her concerns over "tar sands" development, pipelines and aboriginal treaty rights. Fonda says she is aware many First Nations communities work in the energy sector and support pipeline development, but thinks those decisions were made out of poverty and desperation, adding that "when people are very poor, they're very vulnerable."
It would appear Prime Minister Trudeau might agree with Fonda, in the long run at least. The PM raised eyebrows in Alberta this week after announcing plans to shut down the oil sands - eventually. Speaking in Peterborough, Ontario, Trudeau said “We need to phase them out. We need to manage the transition off of our dependence on fossil fuels. That is going to take time and in the meantime we have to manage that transition.”
Trudeau gave up a chance to rub elbows with the world's elite at next week's World Economic Forum in Switzerland and instead embarked on a cross-Canada tour to "connect with Canadians". The PM faced backlash from both anti-energy and anti-carbon tax groups, proving once and for all, you just can't please everybody all the time.
The saga of Savanna and Total Energy Services continues . . .
Savanna Energy has open its books to potential buyers this week, and reminded its shareholders to reject Total Energy Services' hostile takeover offer. Savanna says it has received expressions of interest from potential bidders, but notes "there can be no certainty of a transaction." The company says it will continue to explore a full range of strategic alternatives.
Meanwhile over at Total Energy Services, CEO Daniel Halyk reminded Savanna shareholders that "consolidation within the North American energy services industry is required in order to better compete in an increasingly global, diversified and competitive energy industry." The company also announced it will begin purchasing Savanna shares on the open market, commencing on January 16, 2017.
Other news from the Canadian energy patch . . .
Reuters is reporting "unspecified operational issues" at the Kearl Oil Sands Mine, which has allegedly been going on for several weeks. Sources point to Kearl's abnormally low power generation at site, which is only 10% of normal operating loads.
The Alberta Court of Queen's Bench has extended creditor protection for Connacher Oil and Gas to the end of June. Connacher has been under creditor protection since it defaulted on its debt last May.
Two Ontario First Nations groups have launched a lawsuit to stop TransCanada from doing integrity digs on a section of the Mainline natural gas pipeline that crosses their territory. The work is part of the checks required to convert the gas line to a crude transport line that will form part of the cross-Canada Energy East pipeline.
The Wall Street Journal is reporting that Calgary-based AltaGas is in talks to merge with WGL Holdings, in a deal estimated to be worth over US$5 billion. AltaGas confirmed it is in talks with a third party, but no agreement has been reached. The company says it will not comment further on the matter unless a transaction is agreed upon.
Enbridge's Line 5 finds itself in the cross-hairs . . .
Wisconsin's Bad River Band has voted against renewing a lease agreement for a section of Enbridge's Line 5 that crosses their reservation. The band has decided the company should no longer be allowed to operate the pipeline due to concerns of a potential oil spill.
Enbridge was granted an easement for the 20 km section of pipe, which expired in 2013. The company has been in discussion with the tribe to renew the lease and says it was surprised to learn of the decision. Enbridge still maintains an agreement with the Bad River Band into the 2040s. The section that expired in 2013 represents only 20% of the company's right-of-way within the reservation.
Line 5 transports 540,000 bbl/day of light crude and natural gas liquids (mostly produced in North Dakota's Bakken area) from Superior, Wisconsin to refineries in Detroit and Southern Ontario. The line has been in service since 1953 without incident.
It is unclear where both parties go from here. A spokesperson for Enbridge has said his company continues to negotiate with the tribe while evaluating options for a long-term strategy. Meanwhile, the band plans to reach out to federal, state and local officials to evaluate options to have the line decommissioned and removed.
2017 looks bright for US oil producers . . .
Wood Mackenzie expects spending in the US energy patch to return to growth this year after three years of spending and exploration cuts. About a third of the projects will likely be located in deep waters. Spending on US onshore projects is expected to grow 23% to US$61 billion while spending on drilling for new and developing projects is expected to grow 3%.
Despite the rosy outlook, global upstream spending in 2017 will still be 40% below 2014 levels. The company sees a supply/demand gap of 20 million bbl/day by 2025, as production growth will not be enough to offset declines in the coming years.
WoodMac also says 2017 won't be a negative year for the oil sands, but don't expect any huge spending increases.
In a similar report released this week, Barclays says it expects North American exploration and production spending to increase 27%, while international spending is expected to rise just 2%. However, spending on offshore projects globally is expected to continue to decline, falling as much as 25% this year.
This week's random US energy news . . .
Outgoing President Barack Obama has penned a paper in Science Magazine, pointing out that carbon emissions have decoupled from economic growth during his tenure in office. The President gives four reasons why the trend towards clean energy is irreversible, including tightened fuel standards, a shift from coal to natural gas, falling prices for renewable energy and tax credits. Obama warns the incoming administration against reneging on its agreements under the Paris Accord.
The US Energy Information Agency (EIA) sees US carbon emissions continuing to decline over the next 25 years due to the rising use of natural gas, despite expectations that Obama's Clean Power Plan (CPP) will be rejected by the incoming administration. The CPP would have required states to develop plans to reduce CO₂ emissions from existing power plants that use fossil fuels. Carbon emissions in the US have fallen an average of 1.4% annually between 2005 to 2016, and is expected to decline 0.2% a year through 2040.
The US Office of Government Ethics has cleared Scott Pruitt, President-elect Donald Trump's nominee to lead the Environmental Protection Agency (EPA). Pruitt currently serves as Oklahoma's attorney general and has repeatedly sued the EPA over various clean energy and anti-fracking legislation. Environmental groups have serious concerns that Pruitt will roll back environmental regulations put in place by the Obama Administration over the past 8 years.
Former Texas Governor Rick Perry has resigned from the board of Energy Transfer Partners and Sunoco Logistics Partners, the two companies behind the Dakota Access Pipeline. Perry still owns stock in the two companies but will need to divest his holding within three months of being confirmed as the country's new energy secretary. The Senate Energy and Natural Resources Committee is expected to hold a hearing on Perry’s nomination next week.
Abnormally cold temperatures in the Gulf Coast last weekend (as low as -3°C) forced the shutdown of several units at Exxon Mobil's 334,600 bbl/day Beaumont Refinery, including a 120,000 bbl/day fluidic catalytic cracking unit and a 65,000 bbl/day hydrocracking unit. The units have since been restarted, allowing the facility to return to normal operations.
Reuters is also reporting that Exxon is planning to overhaul its Baytown, Texas hydrocracker facility beginning March. Several of the refinery's units will need to be shutdown during the upgrade. The 584,000 bbl/day Baytown refinery is the second largest in the US.
Houston-based NRG Energy and Japan's JX Nippon Oil & Gas announced the completion of a new carbon capture and storage (CCS) plant in Texas. The Petro Nova project captures flue gas from a nearby coal plant, and has the capacity to sequester 1.6 million tons of CO₂ per year. The CO₂ will be injected deep underground, to be used for Enhanced Oil Recovery at nearby fields. The US$1.04 billion project received US$190 million in grants from the United States Department of Energy and US$250 million in loans from the Japanese government. Petro Nova is now the largest CCS plant in the world, surpassing Shell's Quest CCS plant near Edmonton and Sask Power's Boundary Dam facility near Estevan, both largely taxpayer funded.
The oil-rich state of North Dakota has drafted a number of new "protest laws" in response to ongoing confrontations with Dakota Access Pipeline opponents. The laws include banning face coverings during protests and allowing the state to recoup policing costs. State residents are frustrated with the ongoing protests, leaving taxpayers stuck with a US$22 million law enforcement bill and straining local prisons.
Elsewhere in the world . . .
Montreal-based SNC-Lavalin (SNC) was awarded a five-year extension on its existing engineering services contract with Saudi Aramco. Under terms of the deal, SNC will be allowed to bid on front-end engineering (FEED), detailed engineering and project management services for Saudi Aramco’s projects in Saudi Arabia, including onshore oil and gas production, processing facilities, infrastructure projects, as well as refining and petrochemical facilities.
Saudi Arabia says they still plan to IPO 5% of Saudi Aramco sometime next year. Saudi Energy Minister Khalid Al-Falih says he expects oil prices to rebound nicely as oil markets come back to balance under OPEC's leadership. The IPO is likely to create the world's largest publicly traded company and finally shed light into Saudi Aramco organizational structure and energy reserves.
Iran is seeking US$32 billion in foreign investment to help build 25 petrochemical plants. Iran's National Petrochemical Company says it is open to either joint ventures or individual investors. The country is also investigating options for providing feedstock to the facilities.
About 10,000 unionized employees in Nigeria began strike action this week, in protest of job cuts and salary disputes, with some workers claiming they have not been paid. The strike has affected supplies to fuel service stations, tanker transport and pumping operations throughout the Niger Delta region.
Royal Dutch Shell employees in Gabon began an "unlimited" strike this week, on concerns of pending layoffs. Shell has put its assets in Gabon up for sale, including an oil export terminal. Workers want a guarantee their jobs will be preserved by the purchaser of the assets. The oil major produces 55,000 bbl/day from the central African nation.
Exxon Mobil announced a new oil discovery offshore Guyana. Drilling results revealed a new reservoir containing 100-150 million barrels of oil equivalent. The Stabroek block straddles a border region involved in a long-standing territorial dispute with Venezuela. The exploration project is led by Exxon, who holds a 45% stake in the field. Hess Corporation and CNOOC are also partners in the venture.
Paris-based Total has acquired an additional 21.57% interest in the Uganda Lake Albert oil project from UK-based Tullow for US$900 million, bringing its share to 54.9%. Total CEO Patrick Pouyanne says Lake Albert fits with his company's strategy of acquiring resources for less than US$3 per barrel. In April 2016, the Government of Uganda agreed to pipeline oil from Lake Albert to Tanzania's Port of Tanga for export.
Argentina has reached a deal with labor unions and energy companies, which will hopefully open the door to oil and gas exploration. Argentina is home to the Vaca Muerta shale formation in Patagonia, one of the largest unconventional reserves in the world. As part of the deal, the government will offer a subsidized price of US$7.50/MMBtu of natural gas produced from new wells through 2020, more than double the current spot price. Vaca Muerta contains 308 trillion cubic feet of gas and 16.2 billion barrels of oil, but the formation remains largely undeveloped.
Severe smog and poor visibility has caused major traffic jams at key Chinese ports, leaving hundreds of tankers stuck as sea unable to unload. China issued a "red alert" last week when smog levels reached near record levels, forcing the shutdown of factories and high-emission vehicles. Experts say coal-fired power plants and steel and cement mills are the main contributors to year-round smog, but household coal-burning in rural areas is thought to be a major cause of pollution spikes in winter. China's coal imports are up more than 50% from the same time last year due to high power demand. A colder-than-normal winter has boosted demand for all forms of energy in Asia.
State-owned PetroVietnam has signed an agreement with Exxon Mobil to develop the country's biggest gas project to be used for power generation. The Blue Whale gas field holds an estimated 150 billion cubic metres of reserves, located in the South China Sea about 80 km offshore. The project is slated to begin production by 2023. Vietnam is one of many Asian countries trying to make the switch from coal-fired to gas-fired power plants.
+41k ▲ 1.2%
BBL/D CDN EXPORTS TO US
+176k ▲ 2.0%
BBL/D US PROD'N
+4.10M ▲ 0.9%
BBL US INVENTORIES
-7 ▼ 1.3%
US RIG COUNT
October data from the NEB showed a revival in Canada's crude-by-rail exports to the US, more than double June volumes. However, at 103,000 bbl/day, October's rail transport volumes are still way below the record 179,000 bbl/day transported at the end of 2014. Both CN and CP Rail are due to report fourth quarter earnings in the next few weeks.
US oil production jumped 2% last week, approaching 8.95 million bbl/day, the largest weekly increase since May 2015. Stockpiles of crude oil, gasoline and distillates all rose south of the border, as production and imports of petroleum products remain strong. US oil production is now up 500,000 bbl/day since early October.
In this month's Short Term Energy Outlook, the Energy Information Agency (EIA) released their latest forecast on US oil and gas production:
- US crude oil production is expected to average 8.9 million bbl/day in 2016, rising to 9.0 million bbl/day this year and 9.3 million in 2018. The EIA sees production increases in the Gulf of Mexico and rising output of tight oil. The US produced an average of 9.4 million bbl/day in 2015.
- Natural gas production is estimated to have averaged 72.4 billion cubic feet (Bcf) per day in 2016, a decline of 2.4% from the previous year and the first decline since 2005. The EIA is forecasting an increase of 1.4 Bcf/day this year and another 2.8 Bcf/day in 2018.
Reuters is reporting that US imports of Venezuelan crude has reached a 25 year low and is expected to decline further this year. The country's exports have been hampered by insufficient diluent imports required to blend the heavy oil. The decline likely also helps explain why imports of Canadian crude into the US remains near record highs. Canadian and Venezuelan heavy crudes are relatively similar in quality and density.
Energy traders seem convinced OPEC and non-OPEC members are abiding by their agreed production cuts. OPEC's December production fell by an estimated 310,000 bbl/day to 33.1 million bbl/day. Among this week's key highlights:
- Iraq exported a record 3.51 million bbl/day from its port in Basra in December. The country plans to increase exports to a record high through February. However, Iraq's oil minister has said the country has cut it oil production by 160,000 bbl/day and will comply with its agreed production cut of 210,000 bbl/day in the first half of 2017.
- Iran has sold more than 13 million barrels of oil stockpiles being held in tankers at sea. The sale has reduced the country's inventories to just 16.4 million barrels. Iran was exempted from OPEC's productions cuts.
- Saudi Arabia has cut January oil output by 486,000 bbl/day to 10.06 million bbl/day, a level not seen since early 2015. The country is reducing exports of heavy crude to India and Malaysia, but will be protecting its market share in the rest of Asia.
- Angola has cut output by 78,000 bbl/day to 1.67 million bbl/day as part of their commitment to reduce output.
- Russia's output has fallen by 100,000 bbl/day in the first week of January to a total of 11.1 million bbl/day, down from 11.25 million in October. Russian Energy Minister Alexander Novak has set a target of 10.947 million bbl/day sometime in the first half of the year. Frigid temperatures in Siberia, which fell as low as -60°C over the past few weeks, crimped drilling activity and halted maintenance work at oil fields. Russia is not a member of OPEC but committed to reducing output by 300,000 bbl/day.
OPEC brokered a deal in November to cut output by 1.2 million bbl/day starting January.
Norway raised its guidance for oil and gas production in 2017 and 2018, after producing more than expected last year. Oil production for 2017 is now expected to hit 1.6 million bbl/day, on par with 2016 production. Gas production is expected to average 114.5 billion cubic metres (bcm), revised higher from a previous forecast of 107.9 bcm. The country says it sees improved efficiencies in its energy sector and expects several shelved projects to restart sooner than previously anticipated.
The British Pound slumped almost 1% this week after Prime Minister Theresa May revived fears of a hard Brexit. The US dollar also took a big hit on Thursday, blamed on Donald Trump's press conference.
The EIA updated their forecast for oil and gas over the next two years:
- Brent crude is expected to average US$53/bbl in 2017, rising to US$56 in 2018
- West Texas Intermediate (WTI) is expected to trade at a US$1 discount to Brent in both 2017 and 2018.
- The Henry Hub natural gas spot price averaged US$2.51/MMBtu in 2016 and is expected to rise to an average of $3.55/MMBtu in 2017 and $3.73/MMBtu in 2018.
JP Morgan recommends investors in energy stocks should "sell in May and go away", suggesting that oil prices will be capped at US$60/barrel and are unlikely to move much higher.
Seven Generations Energy (VII -11.7%) warned investors that capital spending and production will be lower than expected in 2016. The company says the shortfall was caused by "completion delays and the temporary shutting in of producing wells adjacent to completion operations." However, 7Gen plans a big return to growth in 2017, boosting production to about 185,000 boe/day and increasing capital spending to about $1.5 billion.
This week's 52 week highs on the TSX include Calfrac Well Services (CFW -4.4%) and Enbridge Income Fund (ENF +0.48%). MEG Energy (MEG -17.3%) was the worst performing energy stock on the TSX this week, giving back most of December's gains.
Shares in natural gas infrastructure-player Williams Company (WMB -11.9%) tanked this week after the company announced it will be issuing 65 million common shares at a 9% discount to the previous day's close. The company says it will use the proceeds to purchase newly issued shares in its subsidiary, Williams Partners (WPZ +3.0%). Williams also increased the quarterly dividend by 50% for WMB shares and cut its WPZ dividend by 29%. The company is planning to divest US$2 billion worth of non-core assets, with the proceeds going towards debt reduction at Williams Partners.
Hess Corporation (HES -4.9%) announced it will boost capital spending from US$1.9 billion in 2016 to US$2.25 billion this year. The company plans to deploy more rigs in the North Dakota Bakken field, develop fields in Guyana and restart drilling in Norway. Hess expects to produce about 300,000 boe/day this year, down from an average of 320,000 boe/day in 2016. The company also warned it will take a US$4.6 billion write-down in the fourth quarter, blamed on tax adjustments and the deferral of two natural gas fields.
Bloomberg is reporting that private-equity firm Blackstone Group has abandoned plans to buy a US$5 billion stake in Energy Transfer Partners (ETP -3.5%), for reasons undisclosed.
Anadarko Petroleum (APC -0.7%) agreed to sell its Eagleford Shale assets in Texas for US$2.3 billion to Sanchez Energy Corporation (SN +21.8%) and Blackstone Group. Anadarko's MLP will continue to operate the assets, which produce about 45,000 barrels of liquids per day and 131 million cubic feet of natural gas per day.
New 12 month highs on the NYSE include PetroChina (PTR), Statoil (STO) and Total (TOT), all foreign ADRs. US energy stocks all ended the week lower except for Kinder Morgan (KMI +2.8%).
UPGRADES & DOWNGRADES
- ConocoPhillips (NYSE:COP): Upgraded from Hold to Buy at Societe Generale.
- Crew Energy (TSX:CR): Downgraded from Outperform to Sector Perform at RBC.
- Encana (TSX:ECA): Upgraded from Sell to Hold at Societe Generale.
- ExxonMobil (NYSE:XOM): Downgraded from Outperform to Market Perform at Wells Fargo & Company.
- Devon Energy (TSX:DVN): Downgraded from Outperform to Market Perform at Wells Fargo.
- PrairieSky Royalty (TSX:PSK): Upgraded from Hold to Buy at GMP Securities.
- Valero Energy (NYSE:VLO): Downgraded from Buy to Hold at Jefferies Group.
NEXT WEEK'S EVENTS
- US markets closed for Martin Luther King Jr Day
- IMF World Economic Outlook (January 2017 update) released @ 9:00am ET
- API Weekly Statistics Bulletin released @ 4:30pm ET
- World Economic Forum kicks off in Davos, Switzerland
- February contract expiry for Western Canadian Select and Canadian Light
- November employment data released by StatsCan @ 8:30am ET
- Bank of Canada Monetary Policy Report and interest rate decision @ 10:00am ET
- Confirmation hearing for EPA Administrator Nominee Scott Pruitt
- November manufacturing sales data released by StatsCan @ 8:30am ET
- EIA Natural Gas Report released @ 10:30am ET
- EIA Petroleum Status Report released @ 1:00pm ET (holiday schedule)
- January Oil Market Report released by the International Energy Agency (IEA)
- European Central Bank interest rate decision
- Confirmation hearing for US Energy Secretary Nominee Rick Perry
- December CPI and retail sales data released by StatsCan @ 8:30am ET
- Schlumberger Q4/2016 earnings conference call @ 8:30am ET
- February contract expiry for West Texas Intermediate
- Baker-Hughes Rig Count released @ 1:00pm ET
- 58th Presidential Inauguration of Donald J. Trump in Washington, DC