The Oil Sands Weekly
CERI concludes all new oil sands projects unprofitable (at current oil prices) . . .
In their 11th annual review of oil sands supply costs, the Canadian Energy Research Institute (CERI) pegs breakeven costs at $43.31/bbl for SAGD projects (steam-assisted gravity drainage) and $70.08/bbl for a new stand-alone mine. The figures exclude blending and transportation costs but include capital expenditures.
The higher mining costs stem from higher capital requirements, higher non-fuel operating costs and higher royalty payments. CERI says those figures are down 27% for SAGD and 6% for mining operations, relative to their last update in August 2015.
Factoring in blending and transportation, WTI equivalent costs increase to US$60.52 for SAGD and US$75.73 for a stand-alone mine. Those numbers are down 25% and 16%, respectively. The big jump in SAGD costs reflect the high price of diluent required to blend the bitumen product. Diluent (typically condensate) trades almost at par with WTI.
CERI therefore concludes that no greenfield oil sands project is economically feasible under the current pricing environment.
However, the author concedes the same could be said for most new oil developments around the world, and profitability will improve considerably when oil prices recover. Eventually.
Scope changes push costs higher at Fort Hills . . .
Suncor Energy announced a scope change, construction delay and capital cost increase for its upcoming Fort Hills Oil Sands Mine. The revisions were blamed on the Alberta wildfires and design changes made to the plant's Froth Treatment facility.
A harsh winter and the spring wildfires dropped construction productivity rates last year, causing a slight creep in the budget. Suncor now anticipates capital costs will rise 10% to a range of $16.5 to $17 billion. As a consolation prize, the company boosted the facility's nameplate capacity by 8% from 180,000 to 194,000 bbl/day. Despite the cost increase, Suncor says the project's capital intensity remains in-line with its sanction guidance of $80,000 to $83,000 per flowing barrel, excluding foreign exchange impacts.
Partner Teck Resources put out a more cautious forecast and estimates the plant will produce 186,000 bbl/day over the life of the project. Factoring in a lower Canadian dollar (which has declined over 20% since the project was sanctioned in 2013), capital intensity could be as high as $91,000/bbl.
As a point of comparison, capital costs for Imperial Oil's Kearl Oil Sands project (which has a comparable process and product), were estimated at $22 billion for 220,000 bbl/day of bitumen production, or $100,000 per flowing barrel.
Teck confirmed it expects only one out of three Froth Treatment trains to be operational by year end. The other two trains are not expected to be ready until the first half of 2018. The company expects to reach 90% of nameplate capacity by the end of 2018. Suncor is reportedly exploring all options to reduce ramp-up time.
Border adjustment tax replaces social license on the agenda . . .
Prime Minister Justin Trudeau is headed to Washington next week in his first meeting with US President Donald Trump. The White House released a statement noting "President Trump and Prime Minister Trudeau look forward to a constructive conversation on strengthening the relationship between our two nations."
Alberta Premier Rachel Notley is also headed to Washington at the end of February. The premier will be meeting with representatives from the province's oil and gas sector, as well as forestry and agriculture to pull together a list of concerns for Alberta's exporters.
Unlike previous meetings with the Obama Administration that focused on climate change and social licences, this series of meetings will likely focus on trade, NAFTA and the dreaded border adjustment tax.
Who's afraid of a border adjustment tax?
Suncor CEO Steve Williams says he's confident US Secretary of State Rex Tillerson will shield Canada's oil exports from any border adjustment tax. Williams says the new US government is very supportive of the oil & gas industry, who rely heavily on the free and unrestricted import and export of crude and refined products.
The CEO says he is encouraged by the prospects of lower taxes south of the border which should revitalize the US energy sector. Williams is confident that both provincial and federal governments have at least "realized that we have to stay competitive."
Canadian oil takes the long route to China - really long . . .
Husky Energy has shipped its first cargo of Canadian crude oil from Newfoundland to China. The cargo ship is carrying 1 million barrels from Husky's White Rose oilfield, located 350 km offshore Newfoundland.
Platts is reporting the light/sweet offshore crude will likely be blended with heavy/sour oil from Venezuela on its way to China.
Although the voyage is rather long, low shipping rates have allowed Asian refineries to source feedstock from Canada and the US, where crude prices trade at a discount to Brent due to domestic oversupply and pipeline constraints across the continent. BP has also recently been taking advantage of the arbitrage between West Texas Intermediate (WTI) and Brent by shipping WTI from the Gulf Coast to Asia.
TransCanada's battle for Ontario's natural gas market . . .
TransCanada is once again negotiating with Western Canada's natural gas producers to ship gas to Ontario at a reduced rate. The move comes just days after a slew of new pipeline approvals south of the border that will bring more cheap and plentiful gas from Northeastern US states into the Ontario market.
The pipeline giant failed to secure enough contract volumes in its previous negotiations, despite offering steep discounts on its Mainline pipeline. TransCanada says they have "resumed discussions to find a long-term fixed price proposal for the Canadian Mainline."
Natural gas imports into Ontario from the US have risen dramatically over recent years due to proximity, stranding production in BC and Alberta.
BC's only sanctioned LNG project seek license extension . . .
Woodfibre LNG has filed an application with the National Energy Board (NEB) to extend its export license from 25 to 40 years. The $1.6 billion project received regulatory approval in December of 2013. The license allows the company to export 2.1 million tonnes per year of LNG from its export terminal located 7 km southwest of Squamish in Howe Sound, BC.
Woodfibre is currently the only sanctioned LNG project on the West Coast. The project is backed by Pacific Oil & Gas, a subsidiary of Singapore's Royal Golden Eagle.
TSX courting Saudi Aramco's pending IPO . . .
The TMX Group is hoping Saudi Aramco will consider listing some of its shares on the Toronto Stock Exchange (TSX) when it goes public next year.
The TSX is the world's 9th largest stock exchange and has the largest concentration of oil and gas companies of any exchange in the world (by number of listings, not market capitalization). However, Canada's stock market is far less liquid than New York, London and Hong Kong, which are all frontrunners for the IPO.
Saudi's energy minister says he is considering listing on multiple exchanges including the Saudi stock market. Saudi Aramco's IPO will likely be the largest in history. The company is worth an estimated US$2 trillion, but only 5% will be made public.
Go West, young man . . .
Statistics Canada counted exactly 35,151,728 people living in the country (as of May 10, 2016), an increase of 1.7 million (about 5%) from the previous census taken in 2011. About one-third came from natural increases (births minus deaths) and the remaining two-thirds through immigration.
StatsCan says the country's population has slowly been shifting west over the past century. Population growth in Atlantic Canada has slowed considerably while Prairies provinces grew the fastest between 2011 to 2016.
Alberta's population expanded 11.6%, more than double the national average. The fastest growing cities are Calgary (+14.6%), Edmonton (+13.9%), Saskatoon (+12.5%), Regina (+11.8%) and Lethbridge (10.8%).
BC, Alberta, Saskatchewan and Manitoba now account for 31.6% of the country's population, the largest proportion in history.
DAPL gets its final permit . . .
Energy Transfer Partners (ETP) confirmed receipt of the final easement from the Army Corps of Engineers required to compete the Dakota Access Pipeline (DAPL). The easement allows the company to complete the last 1.5 mile section of pipe under a river crossing located on federal lands.
The Army Corps of Engineers granted the easement under a directive from President Trump and cancelled a new environmental impact study which began at the end of January. An assessment conducted last year determined the river crossing would not have a significant effect on the environment.
ETP says they now have all the required permits in place to "expeditiously" complete construction of the pipeline. The company expects it will take about two months to complete drilling under the lake, and another 23 days to fill the line, putting the in-service date sometime this spring.
ETP also announced they are now able to close on US$2.6 billion in financing and transactions related to completion of the project, including the sale of a minority stake to Enbridge Energy Partners. The US$3.8 billion 1,172 mile (1,885 km) DAPL stretches from the North Dakota Bakken to a terminal in Patoka, Illinois.
Other notable US energy news . . .
WorleyParsons was awarded a US$67 million contract to provide engineering, procurement, construction management and fabrication services for Chevron’s Salt Lake Refinery Retrofit Project in Utah. The retrofit includes the replacement of an existing Hydrofluoric Acid alkylation process unit with a proprietary new technology developed by Chevron. Under terms of the agreement, WorleyParsons will modularize the new components with an estimated US$20 million worth of modules being fabricated in Edmonton, Alberta.
A fire broke out on Thursday at the Phillips 66 Paradis Pipeline Station, located 30 minutes west of New Orleans. Six people were working at the site at the time of the incident, including three Phillips 66 employees and three contract workers. Two of the contract workers were injured while one Phillips 66 employee remains unaccounted for at the time of writing (Friday afternoon). The pipeline transports NGLs from Venice to Paradis, Louisiana.
Australia's BHP Billiton has approved its share of the Mad Dog Phase 2 project in the Gulf of Mexico for US$2.2 billion. BHP owns 23.9% of the offshore project, which is operated by BP. Phase 2 will include a new floating production platform with the capacity to produce up to 140,000 bbl/day from up to 14 production wells. First oil is expected to begin in late 2021. BP sanctioned the platform back in December. Minority partner Chevron also owns a 15.6% stake through its wholly-owned subsidiary Union Oil Company of California.
The US Energy Department (DOE) announced the sale of another 10 million barrels of oil from its Strategic Petroleum Reserves at the end of this month. Late last year, the DOE committed to selling 25 million barrels to help fund health innovation projects.
Around the world this week . . .
Workers at Canadian Natural Resources' (CNRL) Baobab and Espoir oil and gas fields in the Ivory Coast launched a 72-hour strike on Wednesday over employment conditions. The union says gas production has ceased from CNRL's platforms, disrupting 30% of the Ivory Coast's total production. The workers are demanding that third-party contractors are integrated into its workforce.
A Brazilian federal court has halted the sale of a Petrobras natural gas pipeline network to a group of investors led by Toronto's Brookfield Asset Management. The courts disagreed with the way Petrobras was proceeding with the sale.
Brookfield subsidiary Brookfield Business Partners also purchased an 85% stake in fuel distributor Greenergy. Greenergy is the UK's only national fuel supplier, providing over a quarter of the country's road fuel. The company also has a presence in Eastern Canada, Brazil and the Middle East.
Royal Dutch Shell has reportedly put its 36.7% stake in the Danish Underground Consortium (DUC) up for sale. The stake is worth an estimated US$1 billion. DUC is a joint venture between Shell, Chevron, Møller-Mærsk and the Danish government. The consortium oversees 90% of the country's total oil & gas production from the Danish North Sea.
Dublin-based DCC has agreed to purchase ExxonMobil's Norwegian gas stations for US$293 million in cash. Esso Retail Norway sells 600 million litres of gas each year across 142 stations, including supply contracts for another 108 privately-owned Esso-branded stations. DCC now operates almost 1,000 stations across the EU including recently purchased retail locations from Total and Chevron.
North Sea operator Ithaca Energy has agreed to be purchased by its largest shareholder, Delek Group, for $681 million. Delek is an Israeli listed conglomerate and one of Israel's largest companies. The group's energy and infrastructure business is active in the Eastern Mediterranean Levant Basin. The company says this acquisition will help transform it into a global E&P player. Ithaca is incorporated in Canada and trades on the TSX.
An international arbitration tribunal has ordered the country of Ecuador to pay ConocoPhillips US$380 million in damages for unlawfully expropriating assets of the company's subsidiary, Burlington Resources. Burlington owned stakes in two blocks operated by French company Perenco that were taken over by the Ecuadorean government in 2009 allegedly over a tax dispute. However, the tribunal also ordered Burlington and Perenco to pay Ecuador US$42 million for adverse impacts to the country's environment and infrastructure.
Prosecutors in a Nigerian corruption case have asked asked 11 officials from Shell and Eni to stand trial in a corruption case related to a 2011 purchase of a Nigerian oilfield by Eni and Shell for US$1.3 billion. Eni says they are confident CEO Claudio Descalzi was not involved in any wrong doing (Descalzi was head of E&P at Eni at the time). Under Italian law, a company can be held responsible if it failed to prevent a crime by one of its employees that benefited the company.
This week's Canadian energy statistics . . .
According to Statistics Canada, Canada produced a record 4.05 million bbl/day in November of last year (the latest available data). About 1 million of those barrels were put through Canadian refineries, 3.5 million bbl/day exported (mostly to the US), requiring 600,000 bbl/day to be imported from the US into Eastern Canadian refineries.
The growth in Canadian oil production comes exclusively from diluted bitumen produced from the oil sands. Production of light and medium conventional crude continued its slow decline through the end of last year.
This week's US energy statistics . . .
The US Energy Information Administration (EIA) has revised its estimates (slightly) for global oil inventories and US oil production. The agency is projecting a 300 million barrel build globally for 2016, but sees a decline of 40 million barrels this year followed by a build of 70 million barrels in 2018.
The EIA sees little growth in domestic oil production this year, now projected to average 9.0 million in 2017, up slightly from 8.9 million bbl/day last year. However, the agency forecasts US production will increase to 9.5 million bbl/day next year, which would be the highest since 1970s.
This week's OPEC production update . . .
Platts is reporting OPEC's January output at 32.16 million bbl/day, down 690,000 bbl/day from December or 1.14 million bbl/day from October levels:
- Platts says some members haven't quite reached their quotas yet, but those misses were more than offset by "overcompliance" from Saudi Arabia, Kuwait and Angola.
- Reuters has a more conservative estimate, pegging OPEC production closer to 32.3 million bbl/day,
- Saudi Arabia's January production is estimated at 9.98 million bbl/day, the lowest since February 2015
- Libya, Nigeria and Iran all posted gains. Libya's January output rose to an average of 700,000 bbl/day. Nigeria averaged somewhere between 1.5 to 1.7 million bbl/day in January, 30% below its target of almost 2 million bbl/day.
OPEC remains open to extending its production cuts through the second half of 2017. The committee in charge of monitoring compliance is due to release its first report on February 17. Qatar’s Energy Minister Mohammed Al Sada said "it’s too early to make a judgement," noting that markets may not rebalance unit the third quarter of this year. Al Sada also says he would like to see global inventories reduced from their current record high to their 5-year average level.
This week's other notable production and trade data . . .
In the International Energy Agency's (IEA) latest Oil Market Report, the IEA revised 2016 global demand growth to 1.6 million bbl/day, their third monthly upward revision. This year's growth was tempered to 1.4 million bbl/day. The IEA expects non-OPEC output to rise 400,000 bbl/day this year, on increasing production from US, Canada and Brazil. OECD oil stockpiles declined nearly 800,000 barrels in Q4/2016, the largest decline in three years.
Chinese crude imports are up 27.5% from the same time last year. The country imported 8 million bbl/day in January, down from a record 8.57 million bbl/day in December. China's is now tied with the US for the highest volume of crude imports (excluding refined products). The Asian superpower produces 4.5 million bbl/day but consumes about 12 million bbl/day.
Venezuela has delayed and canceled almost 7 million barrels worth of crude shipments due to insufficient supply. The country has also fallen behind on its crude-for-cash loan repayments promised to China and Russia. The shortfall is being blamed on persistent operational problems.
This week's Canadian economic data . . .
The country's trade balance widened to a surplus of $923 million on higher energy exports. Total nominal exports rose 0.8% to a record $46.4 billion in December, despite declines in most non-energy categories. Energy exports rose 16% to $8.5 billion, the highest since November 2014. Crude oil and bitumen exports rose 17.2% to $5.7 billion while natural gas exports gained 36.0% to $1.1 billion. Overall, prices rose 16.5% while volumes were down 0.6%. Excluding energy, exports declined 2.1% for the month.
Canada added another 48,000 jobs in January, split about one-third full-time and two-thirds part-time. The national unemployment rate ticked lower from 6.9% to 6.8%. Among the key highlights:
- Alberta added another 24,600 part-time jobs for the month, offsetting 24,300 full-time job losses. The province's unemployment rate increased to 8.8% as the participation rate rose from 72.7% to 72.9%. January's full-time job losses completely reverse large gains booked in December, which proves just how volatile month-to-month data can be.
- Saskatchewan lost 3,000 full-time positions last month but gained 2,300 part-time jobs. A lower participation rate has lowered the province's unemployment rate from 6.6% to 6.4%.
- Newfoundland and Labrador also shed another 3,000 full-time positions for the month.
- BC remains the strongest labour market in the country, adding 25,400 full-time positions in January. BC's unemployment rate declined from 5.8% to 5.6%.
Wage growth in Canada is still tracking near 1%, the lowest since statistics have been kept in the 1990s. That's about half the rate of inflation and one-third the wage growth seen south of the border.
President Trump promised to unveil a "phenomenal" tax plan in the next few weeks, said to benefit both consumers and corporations south of the border (and Canadian corporations that do business in the US). Enthusiasm over tax cuts have powered all North-American markets to new all-time highs this week.
The TSX surpassed its old highs of September 2014, when oil prices were closer to US$85 WTI. Canadian markets are now being propelled higher primarily by finance and banking stocks. The Canadian energy sector actually peaked in June 2008 and is no where near those old highs.
Suncor Energy (SU) reported an operating loss of $83 million for the full year 2016 on earnings of $445 million. The company says it reached a production record of 738,500 boe/day in the fourth quarter thanks to its purchase of an additional stake in the Syncrude operation. However, production dipped slightly at Suncor's base oil sands operation due to unplanned maintenance, declining 1.4% to 433,400 bbl/day. Oil sands operating costs in Q4/2016 declined to $24.95, down from $28/bbl in the previous year quarter. Average refinery throughput was 427,300 bbl/day in the quarter, down 0.7% from Q4/2015. The company raised its quarterly dividend 10% to $0.32 per share. Suncor says it sees no significant capital investments post-Fort Hills and will use any excess cash to buy back shares and increase its dividend.
Fourth quarter losses at MEG Energy (MEG) widened to $305 million, including an $80 million impairment charge. For the full year 2016, net losses shrank to $429 million, substantially narrower than the $1.2 billion loss recorded in 2015. Annual production rose to a record 81,245 bbl/day last year, bringing operating costs to a record low of $8 per barrel. MEG expects to further optimize its Phase 2B wells and hopes to exit 2017 at 86,000 bbl/day. The company plans to boost output at the Christina Lake thermal in-situ facility through a series of staged brownfield expansions, which will each add 10,000 to 20,000 bbl/day of production.
Calgary-based ARC Resources (ARX) reported a 2016 profit of $201 million, much improved from a $343 million loss in the previous year. The company produced 118,671 bbl/day last year, up 4% from 2015. ARC says its balance sheet remains strong, allowing it to "selectively" hunt for acquisitions and increase its 2017 capital budget to $750 million.
Oilfield service provider Precision Drilling (PD) reported a $156 million net loss for 2016, down from a loss of $363 million the previous year. Capital spending was cut in half last year to $196 million, down from $449 million in 2015. The company has put over 100 rigs into service in the second half of 2016 and says it has begun to increase pricing in more active markets, particularly in the US and Canada's Deep Basin natural gas field.
Birchcliff Energy (BIR) reported a 2016 net loss of $1.57 billion, wider than the $1.14 billion loss in the previous year. This year's production is expected to average between 70,000 and 74,000 boe/day, up from its 2016 average of just under 50,000 boe/day. The big increase is attributed to the company's acquisition of various Gordondale assets from Encana last July. About 50% of the company's 2017 natural gas production is hedged at an average AECO price of $3.02/GJ. Birchcliff’s board of directors has approved a 2017 capital budget of $355 million, which includes drilling 46 new wells.
Trucking and logistics firm Mullen Group (MTL) reported a fourth quarter profit of $40.2 million, down 18.5% from the previous year quarter on a 10% decline in revenues. Full year revenues were $1.035 billion, down 15% y/y due to "drastically lower" drilling programs. Lower revenues in the company's oilfield drilling business were offset by greater demand for services related to large diameter pipeline construction projects. Net income for 2016 was $52 million, almost triple the profits of the previous year.
This week's notable 52-week highs on the TSX include fracking chemicals provider Canadian Energy Services (CEU) and pipe fabricator ShawCor (SCL).
After losing US$5.6 billion in 2015, BP reported another loss for the full year 2016, narrowing to just US$1 billion. The company says 2016 was "challenging" with respect to feeble Brent and natural gas prices as well as weak refining margins. Net debt widened from US$27.2 billion in 2015 to US$35.5 billion by the end of 2016, resulting in a debt-to-capitalization ratio of 26.8%. Production averaged 3.27 million boe/day in 2016, up 1% from the previous year. About 500,000 boe/day of new capacity is expected to come online by the end of 2017. BP plans to spend US$16 to $17 billion this year and expects to divest another US$5 billion worth of assets. The company has also raised its breakeven price from US$50-$55 WTI to US$60/bbl.
Tesoro (TSO) turned a US$724 million profit in 2016, down from US$1.54 billion the previous year. The company says they've made "excellent progress" in 2016 and expects a significant improvement in refining margins this year. The independent refiner hopes to achieve about US$500 million in cost savings in 2017 and expects to make US$1.2 billion in capital investments.
Statoil (STO) reported a US$2.8 billion loss in the fourth quarter, bringing the full year loss to US$2.9 billion. Losses were blamed on exploration costs, high maintenance activity and a US$2.3 billion impairment charge on lower oil and gas prices. Statoil says it trimmed costs by US$3.2 billion in 2016 and hopes to achieve another US$1 billion in reductions this year. The company expects to grow production by up to 5% in 2017 by investing about US$11 billion "organically."
Paris-based Total SA (TOT) reported a profit of US$8.3 billion last year, down 21% from 2015 but better than analysts were expecting. The company boosted average annual production 4.5% y/y to 2.452 million boe/day. Production costs have declined to an average of US$5.90/boe. Total sees strong production growth out of its joint ventures in Brazil, Uganda and Iran. The company plans to spend US$16 to US$17 billion this year and hopes to further cut operating costs by US$3.5 billion. Total remains the most profitable of all publicly-traded oil majors. The company also raised its dividend by 1.6%.
Spectra Energy (SE) raised its quarterly dividend by 14% to US$0.44 per share. The company expects to further boost dividend by 15% post-Enbridge merger, then 10-12% per year through 2024. Spectra's merger with Enbridge is expected to close by the end of the first quarter.
- Altagas (TSX:ALA): Upgraded from Neutral to Outperform at Macquarie.
- ARC Resources (TSX:ARX): Upgraded from Hold to Buy at TD Securities and from Sector Perform to Outperform at National Bank Financial.
- Enerplus (TSX:ERF): Upgraded from Market Perform to Outperform at BMO Capital Markets.
- Gran Tierra Energy (TSX:GTE): Upgraded from Neutral to Outperform at Credit Suisse.
- MEG Energy (TSX:MEG): Upgraded from Market Perform to Outperform at Raymond James. The company lowered its price target from $8.50 to $8 a share.
- Mullen Group (TSX:MTL): Downgraded from Buy to Hold at Canaccord Genuity.
- Precision Drilling (TSX:PD): Upgraded from Underperform to Market Perform at Raymond James. The company increased its price target from $6.50 to $8.25 a share.
- Prime Minister Justin Trudeau meets with US President Donald Trump in Washington, DC
- OPEC Monthly Oil Market Report - February 2017
- API Weekly Statistics Bulletin released @ 4:30pm ET
- Q4/2016 earnings releases: Keyera, Devon Energy, North American Energy Partners
- EIA Petroleum Status Report released @ 8:30am ET
- Q4/2016 earnings release: Marathon Oil
- March contract expiry for Canadian Light and Western Canada Select
- December Employment Insurance data released by StatsCan @ 8:30am
- EIA Natural Gas Report released @ 10:30am ET
- Prime Minister Trudeau addresses European Parliament in Strasbourg, France
- Q4/2016 earnings releases: Cenovus Energy, Inter Pipeline, TransCanada, Encana
- Baker-Hughes Rig Count released @ 1:00pm ET
- Q4/2016 earnings releases: Enbridge, Enbridge Energy Partners and Spectra Energy