The Oil Sands Weekly
AER moves to improve air quality in Peace River . . .
In response to numerous odour complaints received from residents in the Peace River area, the Alberta Energy Regulator (AER) has unveiled new regulations related to venting and fugitive emissions.
An investigation conducted in 2014 concluded that heavy oil operators in the region were to blame for the odours. A review panel put forward 20 recommendations to eliminate the source of the odours, improve air quality and better monitor health effects in the region.
The new Directive 084: Requirements for Hydrocarbon Emission Controls and Gas Conservation in the Peace River Area addresses each one of those recommendations, which includes limits on flaring and a complete ban on uncontrolled venting. Operators in the Peace River area are now required to submit monthly fugitive emissions reports, beginning in July of this year.
Directive 084 is in addition to Directive 056 and Directive 060, which spell out regulations for energy development in general as well as acceptable flaring/venting practices. Both regulations are being updated to reflect changes specific to Peace River.
The Peace River area is home to the Gordondale formation, a bitumen deposit that contains higher levels of sulphur and aromatic compounds versus other oil sands formations across Alberta.
TransCanada construction crew knocks out Enbridge's Line 2A. . .
Enbridge has shutdown its Line 2A pipeline to repair a leak that spilled about 1,250 barrels of condensate.
The company claims the line was damaged after a third-party struck the line on February 17 near Strathcona County, allegedly a Ledcor crew working on the construction of TransCanada's Grand Rapids pipeline. The leak was contained to an excavation pit and is currently being remediated.
The National Energy Board (NEB) reported no injuries or impacts to the environment.
Line 2A transports 442,000 bbl/day of light oil and condensate 959 kilometres from Edmonton, Alberta to Cromer, Manitoba.
A 20 km section of line will need to be drained and repaired. The shutdown will likely last several weeks leaving some shippers scrambling to find alternative supplies of condensate. It remains to be seen if Alberta's condensate prices will be impacted. Enbridge says it will work with customers to help mitigate the impact of the outage.
Enbridge CEO sounds the alarm over too much pipeline capacity . . .
Enbridge CEO Al Monaco suggested this week there's one too many pipeline expansions being planned in Canada, hinting that the country's oil export capacity risks becoming under-utilized.
Enbridge's Line 3 replacement project will add another 370,000 bbl/day of export capacity from Alberta's oil sands to the US. The company also plans to boost capacity on its existing network by 175,000 bbl/day, provided it can find enough customers to sign-up for the additional volumes.
Monaco suggested that either Keystone XL or the Trans Mountain Expansion (TMEP) would be required through 2025, but not both.
Given the current rate of expansion in the oil sands, capacity on Line 3 is expected to be filled by 2020 while additional capacity on Trans Mountain should be absorbed by 2025. Should Keystone XL be built, output from the oil sands wouldn't totally fill the line until after 2030.
The other elephant in the room is Alberta's 100 Mt/year carbon emissions cap, which will be reached by about 2027 under the current trajectory.
However, it is worthwhile to note the major differences in each pipeline's customer. Most of Enbridge's pipelines, including Line 3, exports crude to the Midwest, currently the largest customer for Canadian oil. The Midwest has a refining capacity of 3 million bbl/day.
In contrast, Keystone XL would serve refineries in the Gulf Coast, which has a refining capacity of almost 10 million bbl/day and a very healthy appetite for heavy oil.
The 590,000 bbl/day Trans Mountain expansion is the shortest distance from the oil sands to tidewater, and by extension, the quickest route to a rapidly expanding Asian market. The government of Alberta seems convinced TMEP is their best bet to getting anywhere near world oil prices for its heavy diluted bitumen.
Booking, unbooking and rebooking oil sands reserves . . .
ExxonMobil reduced its 2016 proved oil reserves to 20 million barrels of oil equivalent, down 3.3 billion barrels from 2015.
Under US Securities and Exchange Commission (SEC) rules, proved reserves can only include oil and gas fields that can be produced economically within the next 50 years.
As part of the write-down, Kearl's entire 3.5 billion barrels of reserves was deemed unprofitable at 2016 prices and debooked from the balance sheet. In addition to the Kearl volumes, another 800 million barrels of oil equivalent across North America were also unbooked due to low oil prices.
However, Exxon noted that 2017 prices are already substantially higher than last year, and those volumes will likely be rebooked in the future.
In a similar vein, ConocoPhillips also cut its proved oil sands reserves in half, from 2.4 billion to 1.2 billion barrels. In all, the company unbooked 1.7 billion barrels of oil equivalent. The company owns a stake in the Surmont, Christina Lake, Foster Creek and Narrows Lake leases south of Fort McMurray. If current oil prices hold, the company also says it will likely rebook some or all of those barrels.
TransCanada takes another shot at Mainline tolls . . .
TransCanada now plans to offer flat tolls on its Mainline natural gas network that runs from Alberta and Northeastern BC to the Dawn hub in Southern Ontario.
TransCanada cancelled its previous open season late last year after gas producers complained rates were too high over too long a time frame. The company is now offering a flat $0.77 per GJ rate on a 10 year term.
TransCanada says this most recent offer will make Western Canadian producers more competitive with US gas supplies coming out of the Marcellus and Utica basins. The company says it has "received a positive response" and expects to secure enough contracts to proceed with the offering. Any agreement is still subject to approval by the NEB.
The current open season expires on March 9 with a target in-service data of November 2017.
Alberta's fiscal update - Part 1 . . .
Alberta's Finance Minister Joe Ceci is sticking to his deficit forecast of $10.8 billion for this fiscal year despite major creep in government spending. In this week's third quarter update, the finance minister says "the storm clouds are starting to recede with a little more sunshine peaking through" but the province is not out of the woods just yet. Ceci points to more spending in the oil sands and an increase in drilling activity versus the same time last year as possible green shoots.
Despite higher oil prices through the new year, income taxes will be $927 million lower than initially planned and over $200 million lower than the second quarter forecast from last November. However, resource revenues are now $1.1 billion higher than the original budget. In total, government revenues will increase to $42.9 billion, $240 million more than the Q2 forecast.
Assumptions for West Texas Intermediate (WTI) have been increased from US$42 to US$48 per barrel.
Despite the big hole in the budget, the government is sticking to its plan to phase out coal province-wide. Alberta will book a $1.1 billion charge this fiscal year, to be paid out to various coal power producers over the next 14 years. Ceci says the coal-phase out will benefit the environment and create jobs as some facilities get retooled from burning coal to natural gas.
More money has been allocated towards education, healthcare and social spending, blamed in part on Alberta's higher-than-average population growth. The province's total expenses will increase to $53.7 billion this year, up $935 million from the November forecast and $2.7 billion higher than the original budget. Alberta's $700 million contingency fund has now vanished, absorbed into the government's expenses.
The finance minister reiterated that social spending should not be held hostage to oil prices, which is largely outside of the government's control. As outlined in the original 2016 budget, Alberta will need to borrow $14.5 billion this year.
The government expects provincial GDP to expand 2.4% in 2017 which will hopefully translate into more jobs and higher tax revenues.
Alberta's fiscal update - Part 2 . . .
The Conference Board of Canada (CBoC) says growing oil production, new pipeline approvals, rebuilding efforts in Fort McMurray and the restart of several stalled oil sands projects will return Alberta to the top spot as Canada's hottest economy.
However, inn their Winter 2017 Provincial Outlook, the agency does not foresee a major increase in oil prices this year or the next. Their forecast for WTI is about US$60 through the end of next year.
The CBoC is forecasting Alberta's real GDP will grow 2.8% in 2017.
In a salary survey released last week, the CBoC says 77% of oil and gas companies believe business conditions will improve this year, although workers shouldn't expect a huge pay raise anytime soon.
All provinces are expected to have a relatively good 2017, except Newfoundland and Labrador which is expected to contract another 1.8% this year.
In other Canadian energy news . . .
Husky Energy announced a 30,000 bbl/day expansion of its Lloydminster upgrader. Engineering work has already been initiated on the Lloydminster Asphalt Project and a final investment decision is expected later this year. A major 7-week turnaround has also been planned for the upgrader sometime this spring. Husky is also continuing to work towards increasing its capacity to refine heavy crude at both its Lima and Toledo refineries.
According to Reuters, Husky is also considering the sale of various offshore assets in Atlantic Canada. The company has an interest in White Rose and Terra Nova in the Jean d'Arc region offshore Newfoundland as well as several exploration licenses in the Flemish Pass. Husky is majority owner and operator of White Rose (owned jointly with Suncor) but minority owner of Terra Nova (operated by Suncor). Husky is partnered with Statoil in the Flemish Pass basin. Reuters speculates the company would use proceeds from the sale of Canadian assets to purchase cheaper assets in South America, Africa or Asia. Husky currently produces about 34,300 bbl/day offshore Atlantic Canada.
Keyera's Alberta EnviroFuels facility in Edmonton was shutdown for repairs earlier this week. The plant experienced an operational issue last weekend which damaged a piece of equipment. Keyera expects the facility to be out of service for about one month while it completes the repairs. The EnviroFuels plant is the largest iso-octane manufacturing facility in the world, producing 13,600 bbl/day of iso-octane from field grade butane. Sulphur-free iso-octane is primarily used as a blending component in premium gasoline.
Imperial Oil's Sarnia refinery reported an "internal operating issue" on Thursday evening, causing the plant to flare excessively. Shortly after the event, a grass fire broke out just south of the property. It is unclear whether the two events are related. No injuries or changes in air quality were reported. Imperial is investigating the incident.
Veresen has agreed to sell its power business for $1.18 billion to an undisclosed buyer. Power is the company's largest division, comprised of 12 facilities that produce 631 MW of electricity (net). Veresen says it will use the proceeds to fund $1.4 billion worth of projects in its core natural gas and NGL infrastructure business. Veresen also says the divestiture will give it greater flexibility to fund growth projects over the next 18 months.
According to Statistics Canada's latest enterprise statistics, Canada's oil and gas sector reported an operating loss of $2.2 billion in the fourth quarter of last year, the eighth consecutive quarterly loss. Canadian corporations as a whole earned a combined profit of $86.8 billion in Q4, up 3.6% from Q3.
This week's US energy news . . .
After a rather contentious and drawn out lawsuit from an unhappy shareholder, ExxonMobil finally closed on its US$2.5 billion takeover of InterOil this week. Although InterOil is not a huge energy producer, the company owns one of Asia’s largest undeveloped gas fields, Elk-Antelope, located in Papua New Guinea. The field holds an estimated 6.2 trillion cubic feet of natural gas. InterOil stock has been delisted from the NYSE.
An explosion and fire broke out at PBF Energy's Torrance Refinery last week, just days before a planned protest. No injuries were reported but one unit was damaged. The incident occurred almost exactly two years after a major blast took the complex offline for more than a year. ExxonMobil (who owned the refinery at the time) was fined US$500,000 for safety violations. PBF Energy bought the Torrance facility from Exxon in September of 2015. The 151,000 bbl/day refinery, located near Los Angeles, supplies about 10% of California's gasoline.
Energy Transfer Partners has completed drilling under Lake Oahe in North Dakota and will soon install the last stretch of pipe on the Dakota Access Pipeline. The company says the line will be complete and ready for first oil sometime between March 6 and April 1. The protest camp has now been cleared with another 46 arrests made this week. Several court cases are still pending on the matter.
Around the world this week . . .
China's "teapot" refiners are increasingly sourcing crude from Canada and the US, taking advantage of widening discounts in the oil markets. OPEC's production cuts have been largely medium and heavy blends, which typically sell at a discount. China's independent refineries are protecting their profits buy buying heavy blends, mostly produced in Canada but shipped out of ports in the Gulf Coast.
China's state-owned Zhenhua Oil has signed a preliminary deal with Chevron to buy the company's natural gas fields in Bangladesh. The assets are estimated to be worth about US$2 billion. Chevron produces gas from the Bibiyana, Jalalabad and Moulavi Bazar fields, which account for more than half of the country's total gas output. The gas is sold to state-owned Petrobangla. Bangladesh has hired Wood Mackenzie to assess the country's reserves before auctioning off the assets.
Norway has approved plans by ExxonMobil to extend operation of its Sigyn offshore production facility to 2022. Production was originally slated to end sometime this year. Statoil has 60% stake in the facility, which produces mostly condensate and natural gas.
Russia's Rosneft has signed a cash-for-crude deal with the semi-autonomous region of Kurdistan straddling Northern Iraq. Kurdistan began exporting its own crude through Turkey after allegations it was not getting its fair share of Iraq's oil revenues. The recent collapse in oil prices has forced the region to borrow up to US$3 billion from various trading houses, repayable in crude sales. Iraq insisted the sales were illegal but has since softened its stance.
Singapore is considering the addition of a carbon tax in the range of US$7 to US$14 a tonne, beginning 2019. The government says the tax would cover 30 to 40% of large emitters including power stations and petrochemical facilities. The country has a refining capacity of about 1.4 million bbl/day split between three refineries operated by Shell, ExxonMobil and the Singapore Refining Company (a JV between PetroChina and Chevron). The government is currently seeking public consultations on the new tax.
Saudi Aramco has called on JPMorgan Chase, Morgan Stanley and four Chinese banks to assist with its upcoming IPO. The Saudi government is planning to spin-off 5% of the state-owned oil giant in 2018 as part of its Vision 2030 diversification plan. Last March, Deputy Crown Prince Mohammed bin Salman estimated the oil giant was worth about US$2 trillion. However, industry insiders are casting doubt on those figures, with some agencies calculating something closer to $400 billion.
Iran announced the discovery of 2 billion barrels of light shale oil reserves in the western province of Lorestan. The country expects to confirm volumes of shale gas by October.
US crude oil exports hit another record high of 1.2 million barrels last week, up from just 600,000 bbl/day earlier this month.
The US Energy Information Agency (EIA) is also forecasting domestic natural gas production will rise in six out of seven shale regions. Seven shale basins (Bakken, Haynesville, Niobrara, Utica, Marcellus, Permian and Eagle Ford) account for more than 50% of the country's gas production.
Goldman Sachs remains concerned about high inventory levels despite OPEC's production cuts. Goldman points to recent surges in US oil inventories, weak economic data out of India, sluggish US gasoline demand and forecasts of higher US shale output. However, the investment firm does expect higher demand to fully offset higher production out of the US.
This week's update on OPEC's production cuts . . .
- Qatar's oil minister Mohammed al-Sada says major oil producers outside of OPEC aren't cutting production as much as they had pledged. According to international shipping data, OPEC has lost about 5% of its market share in Asia in the past four months alone.
- February shipping data shows OPEC members actually increase exports, although it is unclear if those barrels came out of storage.
- Saudi Arabia's production cuts have moved it to the #2 position as the world's top crude oil producer, now surpassed by Russia. Russia produced 10.5 million barrels in December, a tad higher than Saudi Arabia. The US is a distant third at about 8.8 million barrels, excluding condensate.
- Iran expects oil production to reach 4 million bbl/day by April, rising to 4.7 million over the next 5 years. Iran’s five-year plan includes drilling 500 new wells. January's output was close to 3.9 million barrels. Iran was exempted from OPEC's production quotas.
Iranian officials warn that high oil prices would not be in the best interest of OPEC members. Oil Minister Bijan Zanganeh said "if oil prices specifically surge over $55 or $60 per barrel, non-OPEC producers will increase their crude production to benefit the most from the price hike."
Translation: it wouldn't be fair for the US to benefit from both higher oil prices and higher production while OPEC is forced to cut back on output.
In an interview with Bloomberg, Total S.A. CEO Patrick Pouyanne expressed deep desires for OPEC and Russia to extend their production cuts to the end of the year. Or at least until global oil inventories meaningfully decline.
This week's Canadian economic data from Statistics Canada . . .
- Wages across Canada rose 1% in December (from November), now averaging $971 a week. Year-over-year, Canadian salaries are up just 1.2%
- Wages in Alberta also perked up 1% m/m to an average of $1,130. However, compared with 12 months earlier, average weekly earnings in Alberta are still down 1.5% led by declines in professional, scientific and technical services.
- Retail sales declined 0.5% in December on sluggish Christmas spending and slow car sales. Higher gas prices helped boost receipts at gasoline stations by 6.6%.
- January's national Consumer Price Index (CPI) rose 2.1% y/y on higher transportation and shelter costs. Inflation was led higher by a 21% jump in gasoline prices. The natural gas index also increased 15.6%.
- Alberta's new carbon levy helped boost gasoline prices by 34% in the province, while natural gas costs are 42% higher than the same time last year. Ontario's new cap and trade program raised gasoline prices by 20% and natural gas by 13%.
- Excluding gasoline, Canada's inflation rate is tracking at 1.5%.
Citigroup has raised its Brent forecast by US$5 to an average of US$55 per barrel this quarter.
Natural gas prices have suffered their worst start to the year since 2006, blamed on a mild winter on the East Coast. Higher US production likely isn't helping either.
Enbridge (ENB) and Spectra Energy (SE) closed on their long-awaited merger this week. Spectra Energy stocks will be delisted from the NYSE on Monday. The "new" Enbridge now has an enterprise value of $166 billion, significantly increasing its weighting on the TSX.
Pengrowth Energy (PGF) announced plans to use its $530 million cash reserve to retire $127 million in debt and pre-pay US$300 million in US denominated senior notes. After the bond repurchases, the company will be left with a debt load of $1.1 billion. Pengrowth says it is still looking at selling some assets and renegotiating with lenders to further strengthen its balance sheet.
Husky Energy (HSE) posted a fourth-quarter profit of $186 million. Excluding the one-time items, Husky posted a loss of $6 million. For the full year, Husky reported a net loss of $655 million, versus a gain of $149 million booked the previous year. Among the key highlights:
- The company's average production declined 8% y/y to 327,000 boe/day in Q4. The decline was attributed to asset sales, planned maintenance turnarounds and natural declines.
- For the full year, Husky produced an average of 346,000 bbl/day and processed 313,000 bbl/day of crude through its refineries.
- Net thermal production was 120,000 bbl/day at the end of 2016, including Sunrise, Tucker and Lloyd. The Edam East, Vawn and Edam West Lloyd thermal projects averaged 28,500 bbl/day, 15% above design capacity.
- Total capital expenditures were $1.9 billion last year. The company reduced its net debt by 40% to about $4 billion.
- CEO Rob Peabody said 2016 "has been challenging for the sector, but ... Husky is well positioned for the next phase of growth."
Blackpearl Resources (PXX) reported a $2.2 million loss in the fourth quarter, bring total 2016 losses to almost $20 million. For the full year 2016, production averaged 10,077 boe/day, a 21% increase from the previous year. The company's debt was reduced to zero thanks to proceeds from the sale of royalty interest in its Onion Lake SAGD operation. Blackpearl says it has commenced construction of the Phase 2 expansion at Onion Lake, which will double capacity to 12,000 bbl/day by the middle of 2018. The company says the expansion is expected to cost about $180 million but it will not need issue more shares.
Midstream player Pembina Pipeline (PPL) reported full year 2016 earnings of $466 million, an increase of 15% from the previous year. Despite the spring wildfires, throughput on its oil sands pipelines increased 11% y/y to 975,000 bbl/day, bringing total volumes to an average of 1.9 million boe/day. The company's third Redwater fractionator is 90% complete while the Phase III Expansion near Fox Creek is over 60% complete. Both facilities are expected to come on line by the end of this year. Work is also progressing on Pembina's Canadian Diluent Hub and the recently sanctioned propane dehydrogenation plant in Redwater. CEO Mick Dilger expects 2017 to be a "transformational" year for the company.
Enerplus (ERF) reported a full year net profit of almost $400 million, much improved over a $1.5 billion loss reported in 2015. Funds from operations declined 38% y/y to $305 million on lower commodity prices and lower hedging gains. Net debt was cut by 69% last year to $375 million. Full year production averaged 93,125 boe/day, while capital spending came in at $209 million. For this calendar year, Enerplus expects to spend $450 million and produce about 90,000 bbl/day.
Crescent Point Energy (CPG) reported a 6% decline in production in the fourth quarter, to an average of 165,100 boe/day. Net losses in Q4 widened to $510.6 million. The company spent $1.1 billion last year (excluding land acquisitions) and added 1,000 new drilling locations, primarily in the Williston and Uinta Basin. Annual operating costs declined to $11.27 per boe, down from its original guidance of $12.25. The company expects to produce 170,000 boe/day in the first quarter and exit the year at 183,000 bbl/day. Capital expenditures for the full year were boosted to $1.45 billion.
Energy infrastructure player Altagas (ALA) reported a net income of $48 million in the fourth quarter, down from $56 million last year. For the full year, net income rose 9% to $153 million. The company has a number of projects on the books this year, including expansion of the Townsend gas processing facility, the North Pine NGL Project and the Ridley Island Propane Export Terminal near Prince Rupert, BC. The company expects 2017 to be much improved over last year thanks to higher output, lower administrative costs and "normal seasonal weather."
Calfrac Well Services (CFW) reported a net loss of $198 million in 2016, down from a loss of $222 million the previous year. Revenues declined 50% to $735 million. The company says activity has been strong in Canada so far this year and expects to be able to increase pricing for its services in the first quarter of this year. Calfrac is also bullish on the US and Argentina but remains cautious on Russia and Mexico.
Trican Well Services (TCW) reported a fourth quarter profit of $57 million, up from a loss of $16.5 million reported in the previous year/quarter. For the full year 2016, the company reported a loss of $41 million on revenues of $325 million, a decline of 50% from the previous year. The company says business substantially improved through the end of last year despite a very wet fall. Pricing for its services is also expected to improve by about 10% through the first quarter of this year.
This week's new 52 week highs on the TSX include Canadian Energy Services (CEU) and Pembina Pipeline (PPL).
Independent oil and gas producer Whiting Petroleum (WLL) reported a net loss of US$173 million in the fourth quarter on revenues of US$343 million. The company expects to spend US$1.1 billion this year, up from US$554 million in 2016. Full year production is expected to average about 125,000 boe/day.
Dallas-based refiner HollyFrontier (HFC) reported a net income of US$53 million in the fourth quarter on a 27% decline in refining margins. For the full year 2016, the company lost US$260 million, versus a US$740 million profit reported in 2015. The company processed 272,520 bbl/day of crude through its refineries in 2016, up 14% from the previous year.
Natural gas producer Chesapeake Energy (CHK) posted a fourth-quarter net loss of US$741 million on a 24% decline in revenues. For the full year 2016, production averaged 635,400 boe/day, roughly unchanged from the previous year.
Apache Corp (APA) reported a US$1.4 billion loss for the full year 2016, much improved from a US$10.3 billion loss reported the previous year. The company expects to produce about 500,000 boe/day this year, down from 522,000 boe/day in 2016. Apache has boosted its 2017 capital spending by 60% US$3.1 billion.
- PrairieSky Royalty (TSX:PSK): Upgraded from Hold to Buy at TD Securities.
- Precision Drilling (TSX:PD): Upgraded from Underperform to Sector Perform at Scotiabank.
- Total (NYSE:TOT): Upgraded from Buy to Conviction Buy at Goldman Sachs Group.
- Encana (TSX:ECA): Downgraded from Buy to Hold at GMP Securities.
- ExxonMobil 2017 Analyst Meeting
- Q4/2016 earnings: PrairieSky Royalty, Vermillion Energy and Whitecap Resources
- January Producer Price Index (PPI) released by StatsCan @ 8:30am ET
- BP strategy update
- U.S. Q4/2016 GDP (final figures)
- API Weekly Statistics Bulletin released @ 4:30pm ET
- President Trump's State of the Union Address
- Q4/2016 earnings: Gran Tierra Energy, Pengrowth Energy, Veresen
- Bank of Canada Interest Rate Announcement released at 10:00am ET
- Finance Minister Bill Morneau meets with US Treasury Secretary Steven Mnuchin in Washington, DC
- EnerCom annual investor conference kicks off in Dallas, Texas
- EIA Weekly Petroleum Status Report released at 8:30am ET
- Q4/2016 earnings: Secure Energy, Peyto Exploration, Horizon North Logistics, Strad Energy Services and Trinidad Drilling
- December and Q4/2016 GDP released by StatsCan @ 8:30am ET
- Bank of Canada Deputy Governor Timothy Lane gives speech in Montreal, QC
- EIA Weekly Natural Gas Storage Report
- Q4/2016 earnings: Canadian Natural Resources, Advantage Oil & Gas, Bonavista Energy, Enerflex, Crew Energy, Parkland Fuel and TORC Oil & Gas.
- Baker-Hughes Rig Count released @ 1:00pm ET
- Federal Reserve Chair Janet Yellen gives speech in Chicago