The Oil Sands Weekly
Chevron's Canadian assets safe for now. . .
The Ontario Superior Court has ruled that Chevron Canada is a separate entity from Chevron Corp, and therefore cannot be held liable for debts of the parent company.
Lawyers representing Ecuadorian villagers are seeking to recover US$9.5 billion in damages and interest related to an unresolved dispute with Texaco (later purchased by Chevron) dating back to 1993. A US court previously ruled that the villagers' litigation team engaged in racketeering, coercion, bribery and fraud, throwing out all claims against Chevron's US assets.
Since Chevron has no assets in Ecuador, the villagers have been trying to seize assets in various foreign jurisdictions, including Canada.
Not surprisingly, lawyers for the villagers will be appealing the Canadian decision. Cases are still pending in Argentina and Brazil.
Another Saskatchewan pipe springs a leak . . .
A pipeline belonging to Tundra Energy has spilled 1,260 barrels of oil on First Nations land about 10 km north of Stoughton, Saskatchewan. The spill was contained to a low lying area near an old well site but away from houses, creeks and streams.
The 50 year old pipeline was shut after the leak was discovered and most of the spill has already been cleaned up. A preliminary investigation has revealed a small hole on the relatively short section of pipe, which is only 2 km long and 4 inches in diameter. The pipeline forms part of the southeast Saskatchewan crude oil gathering system that was previously operated by Enbridge but sold to Tundra last September.
A full investigation into the cause of the incident is still pending.
The NEB approves Enbridge's Line 10 . . .
The National Energy Board (NEB) has approved Enbridge’s Line 10 Westover Segment Replacement Project in southern Ontario subject to 46 conditions. The project involves the replacing of 32 km of 12 inch pipe with 20 inch pipe, connecting Enbridge’s Westover Terminal to its Nanticoke Junction Facility in Hamilton, Ontario.
The original line had a design capacity of 74,200 bbl/day but has been operating under a pressure restriction that limited throughput to 63,500 bbl/day. The Line 10 replacement project is estimated to cost $219 million.
Energy East goes back to the drawing board
The NEB also announced this week it will completely void all decisions already made on Energy East and the Eastern Mainline projects, including the list of participants, deadlines and whether or not TransCanada's application is deemed complete. The new panel will review all filed applications and release a new list of participants and revised schedule.
Energy East hearings were scrapped last August due to violent outburst in Montreal blamed on allegations of conflict of interest between panel members and former Quebec Premier Jean Charest. A new three-member panel was appointed by the federal government earlier this month.
Once the hearings are restarted, the review process will span 21 months, after which the federal government will be given another 6 months to approve or reject the project. That moves the earliest possible approval date to the spring of 2019.
Kinder Morgan still sharpening pencil on TMEP costs . . .
In their latest investor presentation, Kinder Morgan says it's still in the process of finalizing cost estimates for its recently approved Trans Mountain Expansion Project (TMEP). The last estimate was provided several years ago, pegging construction costs at $6.8 billion (CAD). The expansion will increase pipeline capacity from 300,000 to 890,000 bbl/day and add an extra 630,000 bbl/day of tanker export capacity from BC's Lower Mainland.
The company says it already has 708,000 bbl/day of volumes confirmed under 15 and 20 year take-or-pay contracts. Kinder Morgan expects to review its commitments with shippers in February and make a final investment decision sometime in the spring. If everything goes according to plan, construction should begin in September and the line will be in-service by the end of 2019.
Kinder Morgan estimates every $100 million increase in capital costs will translate into a $0.07 increase (presumably CAD per m³).
The company's 2017 budget still reflects assumptions a partner will be found to fund 50% of TMEP's costs. No word yet on the estimated value of the divestiture or whether there have been any potential suitors.
Suncor sells a wind farm but decides to tell no one . . .
Suncor Energy has sold its 50% stake in the Cedar Point II wind farm to investment firm Fiera Infrastructure. Cedar Point consists of 46 wind turbines in Lambton Country, Ontario producing 100 megawatts of power.
The facility is co-owned by NextEra Energy. Terms of the deal were not disclosed. Suncor was uncharacteristically quiet on the transaction and did not issue a press release.
Fort Hills partner Teck Resources also sold its 49% stake in the Wintering Hills wind power facility in Drumheller, Alberta to IKEA Canada for US$58.6 million. The facility was jointly owned with TransAlta, who also sold their 51% share to IKEA for $61 million.
Altagas buys its way into Washington's natural gas market . . .
Calgary-based AltaGas announced the acquisition of Washington-based public utility company WGL Holdings for approximately $8.4 billion. WGL Holdings will continue to operate as a standalone company while AltaGas plans to move its US headquarters to the WGL office.
The boards of directors from both companies have approved the transaction.
Under terms of the deal, WGL shareholders will receive US$88.25 per share, representing a 12% premium to the previous day's closing price but almost 28% higher than late November when rumours of the buy-out first surfaced. The company says it plans to grow its dividend 8-10% annually through 2021.
The acquisition will be partially financed through the issuance of $2.5 billion in new AltaGas shares (TSX:ALA). Subject to regulatory approvals, the deal is expected to close in the middle of 2018.
AltaGas also announced it signed a non-binding letter of intent with an unnamed gas producer in the Montney area to construct a new gas processing plant and rail terminal. The project includes a 120 million cubic feet per day natural gas processing facility and a 10,000 bbl/day NGL separation train, estimated to cost $160-$180 million. Subject to regulatory approval, the new facilities are expected to come online in early 2019.
Trump undoes Obama's 8 year legacy in about 3 days . . .
US President Donald Trump had a very, very busy first week on the job, signing a number of executive orders and memoranda aimed at "putting America first." Trump followed through on his election promise to make energy infrastructure a priority, signing one executive order and 4 memoranda:
Memorandum #1 - Construction of Keystone XL: The president put Keystone XL back on the table, inviting TransCanada to resubmit its application. TransCanada withdrew its application in late 2015 after Obama vetoed the project and called Canadian oil "extraordinarily dirty". The new administration has concluded that the project "would serve the national interest."
TransCanada wasted little time and already resubmitted its application for a Presidential Permit this week.
Memorandum #2 - Construction of Dakota Access Pipeline: President Trump directed various federal agencies (including the Army Corps of Engineers) to expedite reviews and approvals for the remaining portion of the Dakota Access Pipeline.
The project is over 90% complete but remains stuck in limbo after Obama rejected a federal permit required for a final crossing under the Missouri river due to opposition from the Standing Rock Sioux Native American tribe. However, 99.98% of the line is installed on privately owned property no where near the reservation, with the remaining 0.02% on federal land.
Operator Energy Transfer Partners has been oddly silent on the announcement as it awaits the final federal permit and further instructions from the Army Corps of Engineers.
Memorandum #3 - America's pipelines to be "made in America": The president has directed the Secretary of Commerce to develop a plan under which all new pipelines to be installed in the US (including retrofitted, repaired, or expanded sections) are to be manufactured in the USA.
Many have already pointed out a "made in the USA" legislation would be in violation of the World Trade Organization (WTO) regulations.
Contrary to various media reports, memo #3 does not apply to Keystone XL since TransCanada has already procured several thousand kilometres of pipe, much of it currently stored in North Dakota. 50% of Keystone XL piping was manufactured in Little Rock, Arkansas.
Trump also signed a fourth memorandum related to reducing the regulatory burden for manufacturing companies and one executive order to establish a framework for expediting environmental reviews and approvals for high priority infrastructure projects.
It's about to get interesting over at the EPA office . . .
President Trump also instituted a media blackout at the Environmental Protection Agency (EPA) and has postponed the implementation of at least 30 environmental regulations brought forth by Obama's team during his last month in office.
The EPA has been banned from issuing press releases, blog updates or posts to the agency's social media accounts (including Twitter, ironically). Communication bans have also been ordered for various other federal agencies, including the Departments of Transport and Agriculture.
US energy executives largely optimistic . . .
- 57% of CFOs believe natural gas prices will rise this year while 64% see higher oil prices ahead
- 63% believe the energy sector will drive economic growth in 2017 (up from 60% last year)
- 66% see more M&A activity in the energy patch with private-equity firms providing much of the capital requirements.
Energy executives cited uncertainties over the regulatory environment as a top concern. However, the survey was conducted from September through November, before the US election.
This week's other US energy news . . .
Another fire broke out this week in a crude distillation unit at Valero's 335,000 bbl/day Port Arthur refinery, reducing output. One person was injured and the cause of the fire is still under investigation. The same refinery experienced a fire at its fluidic catalytic cracking unit late last year. There have been an unusually high number of blazes at refineries around the world in January (13 counted so far), which is helping to prop-up global refining margins.
Royal Dutch Shell has purchased 6.2 million barrels of oil from the US Strategic Petroleum Reserve (SPR) last week at an average price of about US$54/bbl. The Department of Energy (DOE) had previously announced intentions to sell up to 8 million barrels of oil to raise revenues required to upgrade its storage facilities. The US holds 695 million barrels in SPRs, located in salt caverns along the Gulf Coast in the states of Louisiana and Texas. Phillips 66 also purchased 200,000 barrels.
The US Senate Foreign Relations Committee narrowly approved former Exxon Mobil CEO Rex Tillerson for the Secretary of State position. The vote was split exactly across party lines, with 11 Republicans supporting Tillerson and 10 Democrats opposing the nomination. The Republican-controlled Senate still has to make a final approval.
Sticking with the Exxon theme, the world's largest publicly traded oil company (for now) has named climate scientist Dr. Susan Avery to its board of directors. Avery is the former president of the Woods Hole Oceanographic Institution and also serves on numerous climate change and sustainable development committees including NASA and NOAA (the National Oceanic and Atmospheric Administration). Exxon has been under fire from various state-level governments and enviro-activists for allegedly suppressing climate change data from its investors.
BP warns there's an "abundance of global oil resources" . . .
In their latest 2017 Energy Outlook, BP sees two billion people shifting from low-income to the middle-class, driving a 30% growth rate for all forms of energy over the next 20 years. Among the key highlights:
- All of the demand growth for oil will come from emerging markets, about half from China mostly for transportation.
- By the early 2030s, "non-combustible" use of oil, such as the petrochemicals sector, is expected to take over as the main driver of growth.
- The rapid expansion of LNG will lead to a globally integrated gas market with prices governed by the US.
- North America (which includes Mexico) will become energy independent by 2020.
- Fossil fuels will account for 75% of the world's energy supply in 2035, down from 85% in 2015.
BP warns it sees an "abundance of global oil resources" and speculates that low-cost producers in the Middle East, Russia and the US will increase their market share at the expense of higher-cost producers. The oil major also warns that high cost producers will need favourable tax and royalty regimes in order to compete.
Around the world this week . . .
Royal Dutch Shell has divested its remaining 50% stake in the petrochemicals SADAF joint venture located in Saudi Arabia for US$820 million. The JV includes six petrochemical plants producing more than 4 million metric tons per year.
Shell also won a ruling in a London court protecting its global assets from lawsuits against its Nigerian subsidiary, Shell Petroleum Development Company of Nigeria (SPDC). Villagers from the Niger Delta region are seeking legal action against Shell's parent company in the UK for spills and pollution in their communities, declaring Nigerian courts "unfit" to hear their case. Shell denies any wrong doing, attributing the pollution to acts of sabotage and illegal refining. Lawyers representing the villagers will be appealing the ruling. SPDC is jointly operated with the Nigerian government.
Still in Nigeria, the government has temporarily seized assets belonging to Shell and Italian oil major Eni pending the outcome of an investigation into corruption charges. The charges stem from the 2011 purchase of OPL 245 block for US$1.3 billion. The government alleges the oil majors may have committed "acts of conspiracy, bribery, official corruption and money laundering." OPL 245 holds an estimated 9.23 million barrels of oil.
Bloomberg is reporting that the Canada Pension Plan Investment Board (CPPIB) is in advanced talks to buy Shell's North Sea assets for more than US$2 billion. The bid would be part of a joint venture that includes EIG Global Energy Partners and Chrysaor Holdings. Reuters is reporting that Chrysaor will likely purchase the entire asset for US$3 billion.
Still in the North Sea, BP has agreed to sell part of its interests in the Magnus oil field, various pipeline infrastructure and part of its Sullom Voe Terminal to EnQuest for US$85 million. Under terms of the deal, EnQuest has the option of buying additional stakes in the same assets through January 2019. EnQuest is a UK-based oil & gas development firm that focuses on mature assets and undeveloped oil fields.
BP also announced the start-up of its Thunder Horse South Expansion in the Gulf of Mexico, 11 months ahead of schedule and 15% under-budget. The expansion adds a new subsea production system two miles south of the existing Thunder Horse platform, boosting production by 50,000 bbl/day. ExxonMobil owns a 25% stake in the venture, which now has the capacity to handle 250,000 bbl/day of oil and 200 million cubic feet per day of natural gas.
The Gulf of Mexico has attracted billions of investment dollars since oil prices began thawing last year. CEO Bob Dudley says BP remains on track to bringing 800,000 bbl/day of new production online by 2020.
India has struck a deal with the United Arab Emirates (UAE) allowing the UAE to store 6 million barrels of oil in India's strategic petroleum reserves to be located in the port city of Mangalore. The volumes will be in addition to reserves held for Iran and Iraq. India is building emergency storage in underground caverns to hold about 37 million barrels of crude, representing 10 days of oil demand. The UAE also holds crude oil volumes in Japan and South Korea under oil storage "leasing" agreements.
Russia overtook Saudi Arabia to become China's biggest oil supplier in 2016. Russia shipped an average of 1.05 million bbl/day to China, versus 1.02 million delivered by the Saudis. China is the world's second-largest oil buyer and the fastest-growing major importer, driven by robust demand from independent "teapot" refineries.
PetroChina is warning investors 2016 full year results will be particularly ugly, as net income is expected to be up to 80% lower than the previous year. Reason? Oversupply in the oil markets and drastic declines in Chinese natural gas prices. The company says it expects global oil market to "gradually become balanced" but warns "various uncertainties" remain on the horizon. PetroChina is China's largest publicly-traded oil and gas producer.
State-owned Saudi Aramco has initiated an audit of its reserves ahead of its mega-IPO planned for next year. The company holds about 15% of the world's oil reserves, or roughly 265 billion barrels. The Saudi Kingdom pegs Saudi Aramco's net worth at a minimum of US$2 trillion. Revenues generated from a 5% spin-off will fund the government's Vision 2030, aimed at balancing the budget and diversifying the economy.
Equatorial Guinea has begun negotiations to join the OPEC cartel. The sub-Saharan African country produces about 240,000 bbl/day of oil and 44,000 bbl/day of NGLs. Guinea agreed to cut 12,000 bbl/day as part OPEC's 1.8 million bbl/day global output reduction pact struck in November. If accepted, Equatorial Guinea would be OPEC's 14th member.
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US RIG COUNT
Crude-by-rail export volumes shot up over 70% m/m last November (the latest available data from the NEB). Rail export volumes topped 170,000 bbl/day, up substantially from a low of 43,000 bbl/day in June.
Alberta's oil sands mine operators produced 1.32 million barrels of bitumen in October (the latest available data from the AER). Roughly 1.1 million of those barrels were upgraded into light, synthetic crude.
US oil rig counts rose to a 14 month high this week, adding another 15 to the total, now at 566. An additional 17,000 bbl/day of oil production came online last week, mostly out of Alaska.
Last weekend's OPEC compliance meeting concluded that compliance is - well, "fantastic" with reductions currently estimated at 1.5 million bbl/day:
- Russian Energy Minister Alexander Novak told reporters "The deal is a success ... results are above expectations." Novak expects 1.7 million bbl/day to come off the market by the end of January.
- Iraq has reduced its oil production by around 180,000 bbl/day and plans to cut a further 30,000 bbl/day before the end of the month. Iraq agreed to a 210,000 bbl/day production cut despite initially asking to be exempted from the production quotas.
- Libya's output appears to be stuck at 700,000 bbl/day as militant attacks continue to hamper production. Government officials estimate more than US$10 billion is needed to bring output back to its pre-civil war production of 1.6 million bbl/day. The country intends to reopen its energy sector to foreign investment, for the first time in five years.
- Meanwhile in Nigeria, the country's oil minister says he thinks the cuts will bring prices back to the mid-US$60s "over the next few months." The country is now pumping about 1.5 million bbl/day due to ongoing militant attacks and civil unrest, down from a high of almost 2 million early last year. Nigeria was exempted from production cuts but says it might consider reducing output once production returns to 1.8 million bbl/day.
- Reuters is estimating Saudi Arabia's January output will fall to 9.9 million bbl/day, down from 10.5 million in December.
The next compliance meeting is scheduled for mid-March in Kuwait.
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US 10Y Bond
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Following two consecutive monthly increases, the Conference Board of Canada’s consumer confidence index dipped 2% in January on deteriorating household finances and the continued shift from full-time to part-time employment in the labour market.
This week's notable economic data out of Statistics Canada:
- Wholesale sales edged up just 0.2% m/m in November to $56.9 billion, slightly softer than economists were expecting. Gains were led by lumber and building materials (+3.8%) and farm products (+6.1%), offsetting declines in motor vehicle parts (-5.8%). Wholesale sales rose in Alberta (+0.8%) for the second month in a row.
- Average weekly earnings rose 0.8% in November to $961 across Canada (before taxes and payroll deductions). Wages rose in every province except Alberta, were salaries declined 1.6% y/y to $1,114 a week, led lower by the professional, scientific and technical sector.
- The national job vacancy rate was unchanged in the third quarter of last year, as just over 400,000 position remained unfilled. Ontario saw a 20,000 increase in the number of vacant positions while Alberta saw a decrease of 18,000.
US fourth quarter GDP rose just 1.9%, down from 3.5% in the third quarter and much lower than the 2.2% economists were expecting. The miss was blamed on a sharp decline in exports, particularly in agricultural products. However, business investment spending improved for the first time in five quarters. Spending in the energy and mining sectors were also very strong. Full year 2016 GDP growth is now estimated at 1.6%, down from 2.6% in 2015.
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CDN LT USD/BBL
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Most US markets broke out to record highs earlier this week, including the Dow, which closed above the 20,000 milestone for the first time. The TSX also came close to breaking above its September 2014 record close, before pulling back at the end of the week.
Despite much lingering uncertainty over US trade policy, the volatility index (VIX) is at its lowest level since 2014.
Enbridge (ENB) announced it will acquire all outstanding shares of US subsidiary Midcoast Energy Partners (NYSE:MEP) for about US$170 million. The deal is part of Enbridge's ongoing efforts to simplify its corporate structure.
This week's new 52 week highs on the TSX include: Canadian Energy Services (CEU), Enbridge Income Fund (ENF), Encana (ECA), Enerflex (EFX), Gibson Energy (GEI), TransCanada (TRP) and Veresen (VSN).
A big improvement in upstream performance helped Chevron (CVX) swing back to black in the fourth quarter. Net income rose to US$415 million, the first quarterly profit since Q3/2015. Chevron's upstream business improved considerably but refining continued to be weak. For the full year 2016, the company reported a net loss of US$497 million (versus a profit of US$4.6 billion in 2015) despite a 7% increase in revenues. Full year 2016 production came in at 2.67 million boe/day, roughly unchanged from the previous year. The company cut capital and operating costs by US$14 billion last year (to US$22 billion) and has no plans to "loosen its belt" this year.
Chevron's Canadian subsidiary produced an average of 50,000 bbl/day of synthetic crude from its Albian Sands facilities, up from 47,000 bbl/day in 2015.
Halliburton reported a Q4 loss of US$149 million, including several one-time impairment charges. Fourth quarter revenues came in at US$4.02 billion, up 5% from the previous quarter. CEO Dave Lesar says his company has returned to operating profitability in North America, where margins have improved to 65%. Lesar calls the oilfield services business “a tale of two cycles" highlighting that the North America market is improving but "the international downward cycle is still playing out." Full year 2016 revenues were US$15.9 billion, 33% lower thanthe previous year.
Baker Hughes reported a net loss of US$417 million in the fourth quarter, much improved from a US$1.0 billion loss reported in Q4/2015. Full year revenues declined to US$9.8 billion, down from US$15.7 billion in 2015. Baker says 2016 was "another difficult year" for the oilfield services sector but the company has made significant progress towards improving its balance sheet. Activity is expected to pick up in the US but continues to be soft internationally.
Hess Corporation (HES) reported another US$4.89 billion loss in the fourth quarter, including a one-time impairment charge of US$3.75 billion. For the full year, net losses totalled US$6.1 billion, double the net loss of 2015. Production averaged 311,000 boe/day in Q4 and is expected to be flat to lower this year. However, Hess remains optimistic for a turnaround, noting it sees "2017 as the start of an exciting new chapter."
Enbridge Energy Partners (EEP) expects 2017 earnings to come in at US$1.7 to $1.8 billion this year, down US$100 million from last year. The declines reflect weakness in the company's natural gas gathering and processing business on expectations for lower prices and lower volumes.
Valero Energy (VLO) boosted its quarterly dividend by 17% to US$0.70 per share.
This week's notable 52 week highs on the NYSE include Halliburton (HAL), Statoil (STO) and camp-operator Civeo (CVEO). Civeo stock shot up 24% this week on expectations the company will benefit greatly from the resurgence of pipeline construction on both sides of the border.
UPGRADES & DOWNGRADES
- Canadian Natural Resources (TSX:CNQ): Upgraded from Hold to Buy at TD Securities.
- Cenovus Energy (TSX:CVE): Downgraded from Neutral to Underperform at Macquarie.
- Encana (TSX:ECA): Upgraded from Neutral to Outperform at Macquarie.
- Husky Energy (TSX:HSE): Upgraded from Neutral to Buy at Goldman Sachs and downgraded from Outperform to Sector Perform at RBC.
- Imperial Oil (TSX:IMO): Downgraded from Neutral to Underperform at Macquarie.
- Phillips 66 (NYSE:PSX): Upgraded from Hold to Buy at Citigroup.
- Suncor Energy (TSX:SU): Downgraded from Outperform to Neutral at Macquarie.
NEXT WEEK'S EVENTS
- November GDP released by StatsCan @ 8:30am
- December Industrial Product & Raw Materials Price Index released by StatsCan @ 8:30am
- Bank of Canada Governor Stephen Poloz delivers speech at the University of Alberta
- API Weekly Statistics Bulletin released @ 4:30pm ET
- Q4/2016 earnings releases: Imperial Oil, Exxon Mobil and Valero Energy
- March contract expiry for Brent crude
- EIA Petroleum Status Report released @ 8:30am ET
- FOMC meeting announcement @ 2:00 pm ET
- Q4/2016 earnings release: Anadarko Petroleum
- EIA Natural Gas Report released @ 10:30am ET
- Q4/2016 earnings releases: ConocoPhillips, Royal Dutch Shell and Valero Energy
- Baker-Hughes Rig Count released @ 1:00pm ET
- Q4/2016 earnings release: Phillips 66