The Oil Sands Weekly
CNRL fined $10,000 for failing to follow Alberta's engineering standards . . .
Canadian Natural Resources (CNRL) has admitted to unprofessional conduct related to a 2007 tank collapse at the Horizon Oil Sands mine that fatally injured two contract workers.
Sinopec Shanghai Engineering Canada (SSEC) was contracted to erect 14 tanks at the Horizon tank farm during its construction in 2006/2007. SSEC was working on the Dilbit Dewatering Tank when a gust of wind caused the roof to collapse. There were 13 workers trapped in the tank at the time of the incident, 10 were Chinese, brought in under the Temporary Foreign Workers Program.
A thorough investigation by Alberta Occupational Health & Safety (OH&S) found several discrepancies in the procedures used to erect the tank and calculations for suspending the roof. The engineer who developed the procedures for supporting the roof during the tank's assembly was not a Professional Engineer in the province of Alberta and deemed unqualified by OH&S.
The company has been fined $10,000 (the maximum allowable under current legislation) and will assist APEGA (the Association of Professional Engineers and Geoscientists of Alberta) in developing new standards for outsourcing engineering work, a very common practice in the oil sands.
APEGA initially investigated the incident in 2007 and ruled there was no evidence of unskilled practice or unprofessional conduct at the construction site. The case was reopened in February 2016, almost 9 years after the OH&S report was released.
University of Calgary extols the virtues of partial upgrading . . .
The University of Calgary's School of Public Policy has concluded that partial upgrading would be in the public interest of all Canadians.
Partial upgrading is a relatively new technology where bitumen is upgraded to a point where diluent is no longer needed, freeing up capacity on export pipelines. The technology was recommended by the Alberta Royalty Review Advisory Panel as a way to increase revenues for the province.
About 40% of Alberta's bitumen is fully upgraded into light synthetic crude. The remaining 60% is diluted with a generous volume of condensate to reduce viscosity (as much as 30% by volume) and sold directly to market as heavy oil.
Full upgraders have fallen out of favour due to high capital costs and waning demand for light oil. Most of the refineries in the US are highly complex and better suited for heavy/sour crude. Rising production of light oil from US shale has also boosted the demand for heavy crude, required for blending purposes.
The authors of the study estimate that partial upgrading would increase the value of Alberta's bitumen by about $10-15 per barrel, adding $500 million per year to Alberta's GDP.
Diluted bitumen currently sells at a discount of about US$15 a barrel to the WTI benchmark. A big part of that price differential is the transport cost from Edmonton to the US Gulf Coast. Not having to ship diluent would free up space on pipelines, translating into lower shipping costs per barrel. Fully upgraded light, synthetic crude (which does not require diluent) trades at a US$4 discount to WTI.
The university recommends the provincial government enact public policies to help commercialize the technology, but stopped short of suggesting a taxpayer funded partial upgrader. The Alberta government already provides funding for partial upgrading research through its National Partial Upgrading Program (NPUP) managed by Alberta Innovates. The goal of NPUP is for 20% of all in-situ production to become partially upgraded by 2030.
Canada rings in the new year with higher gas prices . . .
Torontonians woke up to $1.15 per litre of regular gasoline on New Year's Day. Ontario's newly enacted cap-and-trade program works out to about $17 per tonne of carbon, or 4¢ per litre of gasoline.
Albertans saw gas prices increase by 4.49¢/L while diesel rose by 5.35¢/L. Retail prices at the pump in Calgary were about $1.10/L earlier this week. Alberta's carbon price is currently $20 per tonne, rising to $30 next year. About 65% of Albertans are expected to get rebate cheques, targeted to families that make less than $47,500 per year.
It could be a lot worse, however. Prices in Newfoundland soared almost 19¢ to over $1.40/L this week after the government doubled the provincial tax and HST to help patch the hole in its budget.
Gas prices in Vancouver also topped $1.35/L this week. BC's $30/tonne carbon tax works out to 6.67¢/L for gasoline. Wholesale gasoline prices in BC's Lower Mainland are governed by US West Coast pricing, which are already higher than the rest of North America due to constraints in refining capacity. The Vancouver area also has a hefty municipal transit tax of 17¢/L.
BC has had a carbon tax in place since 2008. It is unclear if the tax has reduced emissions in the province since carbon emissions have risen and fallen with economic activity. Unlike other provinces, BC's carbon tax is revenue neutral, with all funds redirected to low income families and general tax reductions.
Gas prices are unlikely to go down anytime soon as the federal government mandated a minimum carbon price of $50/tonne by 2022.
Encana raises guidance for 2017 margins . . .
The year kicked off with a bang for Encana, who boosted 2017 guidance for margins this week to $10/boe, up from $8/boe just a few months ago. The company expects improved cost savings at its four core assets in the Duvernay and Montney area (in Alberta/BC) and the Permian and Eagle Fort basins in Texas.
Margins are expected to rise to $13/boe in 2018, assuming US$55 WTI and US$3 NYMEX gas, which is pretty close to the current level.
Encana expects to grow production by 20% this year and potentially up to 30% next year. About 75% of the company's oil production and 86% of its gas production is hedged. Encana stock (TSX:ECA) is now up over 400% from the lows of last February.
AltaGas gives the green light to BC's first propane export terminal . . .
Calgary-based AltaGas has given the green light to its Ridley Island Export Terminal, located near Prince Rupert, BC. The brownfield project has an estimated price tag of $450 - $500 million and will be the first propane export terminal on BC's west coast.
The terminal will be designed to ship 1.2 million tonnes/year of propane to Asia. Propane will be delivered by rail from various supply locations in BC and Alberta. Preliminary engineering and FEED study was completed late last year. Construction is slated to begin in early 2017, with an in-service date expected by the first quarter of 2019.
The export terminal should hopefully alleviate some of the oversupply in Western Canada's propane market. Prices collapsed to below zero in the summer of 2015 due to high inventories and lack of export capacity.
Calgary-based Petrogas purchased an LPG export terminal in Ferndale, Washington from Chevron in 2014. The terminal exports up to 30,000 bbl/day (about 1 million tonnes/year) of LPGs produced in Western Canada to markets in Asia. Ferndale is currently the only LPG export terminal on the west coast of North America and is also operated by AltaGas.
LPGs (liquefied petroleum gases) consist of propane, butane and iso-butane, primarily from gas fields, straddle plants and by fractionation. Western Canada produces about 150,000 bbl/day of propane, which was traditionally sold to consumers in Ontario. Propane demand in Western Canada is estimated at only 25,000 bbl/day. LPGs are used primarily as a petrochemical feedstock but are also increasingly being used in Asia to displace kerosene for heating and cooking.
This week's other Canadian energy news . . .
Pembina Pipeline received regulatory approval for its previously announced $235 million expansion of pipeline infrastructure in northeastern BC. The 145 km line will transport up to 75,000 bbl/day of natural gas liquids and condensate from the Montney area to downstream piping that connects to markets in the Edmonton area. The system is expected to be online by the end of this year.
Bellatrix Exploration has set a 2017 capital budget of $105 million. The company hopes to boost output by 10% this year and expects to exit 2017 at 35,000 boe/day.
Penn West Petroleum raised its 2017 capital budget from $150 million to $180 million. The company also expects to boost output by 10% and expects production to average 27,000 to 29,000 boe/day this year. Penn West also appointed a new CFO this week.
Labour market ends 2016 on a high note . . .
Canada gained 53,700 jobs in December 2016, mostly full-time positions in the provinces of Quebec and BC. One of the best performing sectors for the month was professional, scientific and technical services, up by 28,000 positions in December, reversing all the declines for 2016.
The national unemployment rate edged higher by 0.1% to 6.9%, as more people enter the labour force. Alberta's unemployment rate fell from 9.0% in November to 8.5% in December as the participation rate edged lower. The province created 18,500 full-time jobs last month, while 11,600 part-time jobs were lost. Calgary still has the highest unemployment rate in the province, at just over 10%. Edmonton's unemployment rate rose to 7.5% in December.
For the full year 2016, 214,000 new jobs were created (60,000 full-time + 154,000 part-time positions), versus 155,000 total jobs in 2015. Employment declined by 5,700 positions in Newfoundland and Labrador, 6,900 in Saskatchewan and 19,000 in Alberta. In contrast, BC added 72,000 jobs, Ontario gained 81,000 and Quebec added 90,000 new jobs for the full year.
The worst hit sectors in 2016 were manufacturing (down 53,000), natural resources (down 29,000 positions) and agriculture (down 14,000).
This week's other notable economic data . . .
Canada posted a surprise trade surplus of $526 million in November, the first surplus since September 2014. Exports rose 4.3% on higher shipments of ferrous and non-ferrous metals and record exports to ex-US countries, reaching a record $12 billion. Most of that increase was driven by higher commodity exports. Imports edged up slightly by 0.7%, mostly on higher imports of crude into Eastern Canada from Norway, Algeria and Saudi Arabia. Exports to the US accounted for 73.8% of all Canadian exports in November.
November's Industrial Product Price Index (IPPI) rose 0.3% from the previous month, driven by higher prices for autos and non-ferrous metals. After rising 5.0% in October, prices for energy and petroleum products fell 2.2% in November, led lower by gasoline (-5.5%) and jet fuel (-3.5%). Refined petroleum products are now down 3.5% for the year while gasoline prices are 3.7% lower.
November's Raw Materials Price Index (RMPI) declined 2.0% m/m, also on lower crude oil prices. Conventional crude declined the most, falling 7.4% for the month. However, over the past 12 months, crude prices are still up 2.3%.
Insurance claims topped a record $4.9 billion last year due to (you guessed it) the spring wildfires in the Wood Buffalo area. The Insurance Bureau of Canada (IBC) says the wildfires resulted in $3.7 billion in insured damages, making it twice as expensive as the 2013 Calgary floods. IBC is blaming the rising cost of claims on climate change, calling on all levels of government "to come together and implement expansive climate policies that will better prepare Canadians and their communities for when disasters strike." The bureau says insurance claims have risen 500% since the 1980s but neglected to account for a 500% gain in average home prices across the country over the past 35 years.
Trudeau to Trump: You've got a friend in me . . .
Prime Minister Justin Trudeau and Canada's ambassador to Washington, David MacNaughton, have released a YouTube video aimed at the incoming US Congress.
PM Trudeau said “There is no relationship in the entire world quite like the Canada-US relationship ... we’ve built an economic relationship that supports jobs in every congressional district. We’re the largest international customer for goods and services made in the USA.” MacNaughton added “Canada stands beside you, ready to work with you to make all of our citizens’ lives better, safer and more prosperous.”
President-elect Trump has made much noise this week about new tariffs and trade barriers, targeting squarely at Mexico. Trudeau has largely avoided any criticism of Trump, despite his promise to scrap or renegotiate NAFTA. About 75% of Canada's total exports and 99% of the country's energy exports are destined for the US.
On a related topic, the US ambassador to Canada, Bruce Heyman, will leave his post when Trump takes office on January 20th. Trump has ordered all politically appointed ambassadors put in place by President Obama to be out of their posts by inauguration day. Heyman is considered to be an Obama loyalist and prominent fundraiser.
Tillerson's retirement package is worth how much?
Confirmation hearings for Secretary of State nominee Rex Tillerson are set to begin on January 11. Tillerson served as CEO of ExxonMobil since 2006 and has been en employee of the company for 43 years. The former CEO has been forced to cut all ties with Exxon and will need to transfer over 2 million XOM shares to an independently managed trust if confirmed as Secretary of State. The shares, worth an estimated US$180 million, are part of Tillerson's retirement package. Tillerson has also agreed to sell all 600,000 Exxon shares he currently owns and give up over US$7 million in additional shares, bonuses and benefits.
The ex-CEO needs to win over a majority of the 10 Republicans and 9 Democrats on the Senate Foreign Relations Committee to clinch the position. Republicans are largely supportive of the nomination, but the Democrats - well, not so much. The main point of contention is Tillerson's ties to Russian President Vladimir Putin. US intelligence officials have concluded that Russia intervened in the US election and was directly responsible for Trump's surprise win over Hillary Clinton.
This week's other US energy news . . .
Williams Partners received regulatory approval this week for its Atlantic Sunrise Project. The project will expand the existing Transca natural gas pipeline from the Marcellus shale to markets in the mid-Atlantic and Southeastern US. Williams plans to begin construction in the middle of this year and expects the system to be in service by mid-2018. The US$3 billion expansion will increase deliveries by 1.7 billion cubic feet per day.
DCP Midstream Partners, LP (DMP) has acquired various assets from DCP Midstream, LLC (a 50/50 joint venture between Phillips 66 and Spectra Energy) for $424 million in cash, becoming the largest natural gas liquids (NGL) producer and gas processor in the US. The "simplified" joint venture will be renamed DCP Midstream, LP, trading under the new ticker "DCP" on the NYSE. DPM also announced construction of a new 200 million cubic feet per day cryogenic natural gas processing plant in Colorado, to be completed by the end of 2018. The company also plans to expand of its Sand Hills NGL pipeline to 365,000 bbl/day by the end of this year. Sand Hills transports NGLs from New Mexico and Texas to the Mont Belvieu NGL hub in East Texas.
Activist hedge fund Elliott Management is pressuring Marathon Petroleum to consider selling its Speedway retail business in the US, as well part of its refining and pipeline business. Marathon confirmed plans to accelerate the transfer of US$1.4 billion in assets to its MLP and says it will consider selling its retail gas stations. Elliott has a 4% stake in Marathon Petroleum. Marathon will provide an update by the middle of this year.
Boiler problems at Philadelphia Energy Solutions' (PES) 335,000 bbl/day refinery complex has forced cuts in both diesel and gasoline production. The company has advanced a planned maintenance turnaround on a 44,000 bbl/day reformer unit along with a 60,000 bbl/day hydrotreater after a fire broke out last month. PES is a subsidiary of Energy Transfer Partners.
Fire broke out in a Gulf of Mexico platform belonging to Renaissance Offshore earlier this week. The platform is located 80 miles (130 km) south of Grand Isle, Louisiana. Four people were evaluated and no injuries were reported. The cause of the incident is still under investigation.
Denver-based SM Energy announced the sale of various Eagle Ford shale assets in South Texas to Venado Oil & Gas for US$800 million. The assets include 37,500 net acres and related pipeline infrastructure, which produce about 27,000 net boe/day. Venado is owned by US private-equity firm KKR.
The head of the American Petroleum Institute (API) says his agency is hopeful America will have "an opportunity to change the national conversation when it comes to energy policy" when the new Congress comes into power later this month. At this year's 2017 State of American Energy event, CEO Jack Gerard says the government "must reexamine the regulatory onslaught of the last few years that has proposed or imposed some 145 regulations and other executive actions on our industry and instead work to implement smart energy regulations that are focused on the consumer, help to grow our economy, protect workers and continue to improve the environment."
This week's OPEC update . . .
The Wall Street Journal reported this week that Saudi Arabia has indeed cut production by about 500,000 bbl/day since last October, as part of their commitment to OPEC's output quotas. The kingdom has allegedly reduced output to 10 million bbl/day, down from 10.544 million in October. Reuters is reporting that OPEC output declined 200,000 bbl/day in December on lower production in Nigeria and Saudi Arabia. Saudi Aramco has also begun negotiating a 3-7% cut in shipments with its global customers.
Libyan officials confirmed the country has increased its production to 700,000 bbl/day, up from 600,000 bbl/day in December. All of its 9 export terminals have now been reopened and the government expects output to reach 1.2 million bbl/dal by the end of this year. Libya was exempted from OPEC's production quotas as it struggles to return to "normal" after 2 years of civil war. The country produced 1.6 million bbl/day in 2011.
Nigeria's state-run National Petroleum Corporation (NNPC) has awarded contracts to 39 firms for this year, for a total of 1.31 million bbl/day. The firms include BP, Total, Duke Oil, Sinopec, Glencore and 16 Nigerian firms. Nigeria normally produces about 2 million bbl/day but output has been below normal due to supply disruptions caused by militant attacks.
Iran's oil ministry confirmed it received 29 bids for oil & gas development in the country, including Shell, Schlumberger, Total, Eni, Petronas, Gazprom, Lukoil, CNOOC, Sinopec and several other entities from Austria and Japan. UK's BP was notably absent from the party, allegedly due to concerns over the potential for renewed tensions with Iran after Trump takes office.
Vitol, the world's largest oil trader, has extended Iran's state-owned National Iranian Oil Company (NIOC) a €1 billion loan at about 8% interest backed by future exports of refined products. Vitol is a private company headquartered in Rotterdam, The Netherlands.
Venezuela's President Nicolas Maduro appointed a new oil minister this week. Nelson Martinez, who has led the US-based refiner Citgo, will replace outgoing minister Eulogio Del Pino. Del Pino will remain as president of state-owned PDVSA.
Iraq's Prime Minister Haider al-Abadi is accusing the autonomous Kurdish region of exporting more than their allocated quota, as per the recent OPEC agreement on production cuts. Iraq is OPEC's second largest member and committed to reduce output by 200,000 bbl/day to 4.351 million bbl/day. The Kurds were allocated 250,000 bbl/day of exports from oilfields under its control. The autonomous region built their own oil export pipeline to Turkey in 2013 without approval of the Iraqi government in 2013.
OPEC and non-OPEC members will meet (informally) in Vienna later this month to discuss compliance. It should be noted the quotas apply to production, and not exports. Members can pull volumes out of storage to maintain their export commitments.
Elsewhere in the world this week . . .
The Mexican government raised gas prices by 20%, causing widespread protests and mayhem, resulting in 4 deaths and over 700 arrests. The price hikes are part of the government's promised deregulation of gas prices paid at the pump.
A Dutch court has rejected calls for further production cuts out of the Gronigen gas field. The government ordered production cut in half to 24 billion cubic meters (bcm) per year due to concerns over earthquakes. The production cap is in effect until 2021 with the option to increase output for abnormally cold winters. Several groups had sued the government to further reduce output or stop production completely. Gronigen is the largest gas field in Europe.
Chevron has resumed LNG exports at Train 1 of its US$54 billion Gorgon project off the coast of Western Australia after being out of service for more than a month for "performance variations." Gorgon has suffered a number of hiccups since its start-up last March, including problems with its propane refrigeration unit and a gas leak that forced a full shutdown and evacuation last summer. Gorgon is currently the world’s largest natural gas project with a production capacity of 2.6 billion cubic feet of natural gas and 20,000 barrels of condensate per day.
Russian officials reported December's oil production held steady at 11.21 million bbl/day, near a 30-year high. The government says it is preparing to cut output by 300,000 bbl/day sometime in the first half of 2017.
China Petroleum & Chemical (more commonly known as Sinopec) has hired six investment banks (including Citigroup, Goldman Sachs and Morgan Stanley) to help restructure its fuels distribution unit ahead of a planned IPO on the Hong Kong stock exchange. Sinopec Marketing operates 23,000 gas and retail stations and is expected to raise about US$12 billion in its IPO.
Lebanon's new "business-friendly" government has paved the way for tendering offshore reserves for the first time since 2013. The country has an estimated 96 trillion cubic feet of natural gas reserves and 865 million barrels of oil offshore, but has been unable to extract the reserves due to internal political squabbling. The government hopes the new revenues will help it pay down debt and resolve its chronic power shortages.
+12k ▲ 0.4%
BBL/D CDN EXPORTS TO US
+4k ▲ 0.0%
BBL/D US PROD'N
-7.05M ▼ 1.5%
BBL US INVENTORIES
+4 ▲ 0.8%
US RIG COUNT
US oil rig counts rose for the 10th week in a row this week, bringing drilling activity to a 18 month high.
US imports of Canadian crude continue to be strong, reported at 3.4 million bbl/day during the last week of December. Trade data from the US Energy Information Agency (EIA) shows total US foreign oil imports declining over the past month, while total exports have risen sharply since the end of October.
In their latest Annual Energy Outlook 2017, the EIA now estimates the US will be energy independent by 2026, shifting the country from a net energy importer to a net exporter. The last time the US was a net energy exporter was 1953.
A big part of that forecast is expanding natural gas production, which continues to grow in the US. Gas exports will increase sharply in 2020 thanks to several LNG export facilities expected to come online over the next few years. US imports of natural gas from Western Canada is expected to continue to decline, while US exports to Eastern Canada will increase due to proximity to the Marcellus shale basin.
US oil production is expected to peak at 11 million bbl/day as extraction from tight oil formations moves into less productive areas and productivity gradually decreases. However, the EIA concedes production from unconventional plays can be difficult to predict since extraction technology continues to evolve.
Much of the EIA's forecast is predicated on the price of oil, which they expect will top US$100 a barrel by 2040 (in 2016 dollars).
The US gained 156,000 jobs in December, slightly less than analysts were expecting. The jobless rate remained relatively flat at 4.7%, as more people returned to the workforce. Wages rose 2.9%, the most since 2009.
Fed minutes released this week revealed concerns over where the US economy is headed under the new administration and the potential for higher-than-expected inflation. The famous "fed dot plots" are predicting three rate hikes in 2017. The US dollar touched a new high in the middle of the week before settling lower.
WTI prices touched US$55/bbl on the first trading day of the year (Tuesday), the highest in 18 months. However, prices fizzled on Wednesday but managed to recover by the end the week.
Investment firm Goldman Sachs expects Brent crude will hit a high of US$59 a barrel sometime in the first half of 2017, thanks to OPEC's production cuts and robust global demand. However, Goldman expects the upside in oil prices to be capped as idled US shale production returns to the market in the second half of the year.
Natural gas prices took a big tumble this week, falling over 10% on expectations of a warmer January. Earlier forecasts had predicted most of the US would be stuck in a deep freeze through most of January.
Enbridge (ENB) raised their quarterly dividend by 10% to $0.583 per share. Spectra Energy (SE) also boosted their dividend by 14% to US$0.44 per share on a quarterly basis. Spectra's merger with Enbridge is expected to close in the first quarter of this year. The combined company expects to continue to increase its dividend for at least 10% a year through 2024.
This week's 52 week highs on the TSX this week included:
- Athabasca Oil Corp (ATH)
- Calfrac Well Services (CFW)
- Canadian Energy Services (CEU)
- Enbridge Income Fund (ENF)
- Inter Pipeline (IPL)
- Gibson Energy (GEI)
- MEG Energy (MEG)
- Penn West Petroleum (PWT)
- Savanna Energy Services (SVY)
- Secure Energy Services (SES)
- Suncor Energy (SU)
New 12 month highs on the US markets included:
- BP (BP)
- Halliburton (HAL)
- Marathon Petroleum (MPC)
- Royal Dutch Shell (RDS.A)
- Statoil (STO)
- Total (TOT)
- Williams Companies (WMB)
UPGRADES & DOWNGRADES
- Altagas (TSX:ALA): Upgraded from Neutral to Outperform at CIBC.
- Chevron (NYSE:CVX): Upgraded from Neutral to Buy at Bank of America.
- Imperial Oil (TSX:IMO): Downgraded from Buy to Hold at TD Securities. The company increased its price target from $50 to $51.
- Parkland Fuel Corp (TSX:PKI): Upgraded from Neutral to Outperform at CIBC.
- Precision Drilling (NYSE:PDS): Upgraded from Underperform to Neutral at Credit Suisse and from Neutral to Overweight at Piper Jaffray Companies.
NEXT WEEK'S EVENTS
- Bank of Canada Business Outlook Survey - Winter 2017
- President Obama delivers farewell speech in Chicago @ 9:00pm ET
- EIA Short Term Energy Outlook
- API Weekly Statistics Bulletin released @ 4:30pm ET
- EIA Petroleum Status Report released @ 10:30am ET
- Donald Trump's first post-election news conference in New York City
- Confirmation hearings begin for Secretary of State Nominee Rex Tillerson.
- EIA Natural Gas Report released @ 10:30am ET
- Fed Chair Janet Yellen delivers speech @ 7:00pm ET
- Baker-Hughes Rig Count released @ 1:00pm ET