WE RESPECT YOUR PRIVACY
You can opt out anytime by clicking "UNSUBSCRIBE" at the bottom of the newsletter.

The Oil Sands Weekly

The Oil Sands Weekly

AER sends Suncor rejection letter . . . 

The Alberta Energy Regulator (AER) has rejected Suncor Energy's tailings management applications for its Millennium base plant mining operation. The two applications (No. 1857270 and 1857274) outline Suncor's plan for meeting fine fluid tailings (FFT) capture under Tailings Management Directive 085.

The company submitted a plan to water-cap its FFT, citing positive results from Syncrude's Base Mine Lake. However, the AER says the company has failed to assess the risks associated with its plan to water-cap FFT, calling it an "unproven technology." 

Suncor also provided a Plan B, suggesting it could cap the FFT with tailings sand as an alternative. However, the decision to solid-cap versus water cap would not be made until 2039, 6 years after the mine has been depleted. 

The AER says the company failed to provide enough details on how it would construct the cap and expressed concerns it would take too long to reclaim the area.

Suncor is now required to submit a new tailings plan. The company says it will work with the AER to address their concerns and amend the applications.

Naphtha leak sets off explosion at Mildred Lake . . .

An explosion and fire at Syncrude's Mildred Lake upgrader on Tuesday has crippled the facility and seriously injured one Syncrude worker. A spokesperson for Occupational Health and Safety (OH&S) has confirmed the employee is in stable condition in an Edmonton hospital.

According to the company, the blaze was set-off by a leaking naphtha line. Workers reported hearing a loud bang and seeing plumes of black smoke coming from Plant 13-1, Mildred Lake's hydrotreating plant. The fire was brought under control in less than four hours. The company burned off residual hydrocarbons for about 2 days before the fire was extinguished on Thursday morning.

The rest of Syncrude’s operations remain stable with parts of the upgrader either shut down or running at reduced rates. Both OH&S and the AER will be assisting in the investigation.

Alberta banks on boost in oil sands production . . .

Alberta Finance Minister Joe Ceci tabled the government's 2017/18 budget and fiscal outlook to 2020.

The province now expects to run a deficit of $10.3 billion this fiscal year, down from an earlier forecast of $10.8 billion. The budget assumes an average oil price of US$55 a barrel. The deficit will shrink to $9.7 billion next fiscal year, then $7.2 billion in 2019/20.

The government says they have a "path to balance" and expects to eliminate its deficit by 2023/24.

That "path to balance" hinges on higher output from the oil sands and higher oil prices. Bitumen production is expected to rise by 400,000 bbl/day over the next 12 months and another 400,000 bbl/day by 2020. The government expects oil prices to average US$59 in 2018/19 and US$68 in 2019/20.

Ceci says 2017 is going to be a "year of turnaround," adding that "Alberta's economy is stabilizing and jobs are returning to the province." This year's GDP growth forecast is 2.6% on expectations of higher oil prices, more production from the oil sands, an increase in corporate taxes revenues and surpluses from new carbon levy fund.

Don't expect oil patch to return to profitability until Q4 . . .

The Conference Board of Canada (CBoC) warns the country's oil producers will likely face another rough year, although nowhere near as bad as 2016.

The industry as a whole is expected to lose $1.1 billion in 2017, down from a total loss of $8.6 billion last year. Canada's oil producers are not expected to return to positive cash flow until the fourth quarter. Capital expenditures will likely total $22 billion this year, a mere fraction of the $62 billion spent in 2014.

After contracting about 10% per year over the past few years, revenues should finally start to grow 20% annually over the next 5 years.

Looking on the bright side, the CBoC remains cautiously optimistic about recent pipeline approvals. Construction of the TransMountain Expansion, Line 3 Replacement and perhaps Keystone XL will double the country's export capacity, inject over $30 billion into the economy and narrow price discounts for Canadian heavy oil. 

The CBoC expects WTI to average US$55 a barrel this year, rising to US$70 by 2021.

Good news for Alberta's natgas producers - Part 1 . . . 

TransCanada says it has secured enough binding contracts on its Canada Mainline at a fixed price of $0.77/GJ. The Mainline transports natural gas from the Western Canada Sedimentary Basin (WCSB) in BC and Alberta into the Dawn hub in Southern Ontario. The contracts are on a 10-year term with an option to exit at year 5. The system has been underutilized in recent years as cheap gas from the US has been flooding into Ontario at lower prices, stranding gas produced in BC and Alberta. TransCanada says it has secured 1.5 bcf/day worth of volumes under the new deal 

The company has files for approval with the National Energy Board (NEB). If all goes according to plan, service is expected to begin on November 1, 2017.

Good news for Alberta's natgas producers - Part 2 . . . 

Not to be outdone by its competitor, Enbridge and partner Veresen is gauging interest for gas shipments on its Alliance Pipeline, which runs from the WCSB to Chicago

The pipeline currently transports 1.6 bcf/day, representing about 90% of capacity. If there's sufficient interest, the company says it could add another 0.5 bcf/day through the addition of a new compressor station without interrupting existing deliveries.

Alliance VP Dan Sutherland says the system was originally designed to handle over 3 bcf/day, signalling it could further expand the line if there's sufficient volumes.

Interested parties are asked to signal their support by April 7, after which the company will conduct a feasibility study and potentially commence a binding open season sometime in the fall. 

Other notable Canadian energy news . . . 

Suncor Energy has shipped its first cargo of light/sweet crude from Hibernia to Indian Oil Corp, estimated at 1 million barrels. According to Reuters, several cargos of crude have been shipped from Atlantic Canada to China this month. Sales of Canadian crude to non-US customers are exceeding rare, averaging about 1 cargo load per month in 2016.

TransCanada and M² Infrastructure have signed a Memorandum of Understanding to construct 6.2 million barrels of new crude oil storage in Cushing, Oklahoma, with an option to expand to 20 million barrels. The tanks will be constructed and operated by TransCanada but owned by M² Infrastructure. M² Infrastructure is an affiliate of Houston-based Lone Star Capital.

Western Energy Services has raised its bid for Savanna Energy Services by $0.21 per share to be paid in cash to Savanna shareholders. The new offer values Savanna at $386 million, much higher than Total Energy Services' offer of $225 million.

Despite the higher offer from Western Energy, Total Energy insists they offer better value for Savanna shareholders given the "significant indebtedness, limited financial flexibility and a high cost of capital" of both Savanna and Western Energy. 

When your inbox gets ridiculously full . . . 

Former ExxonMobil CEO Rex Tillerson apparently used an alias email account under the name "Wayne Tracker" for emails with employees and board members. "Wayne" is Tillerson's middle name while "Tracker" is assumed to be a reference to his days as a Boy Scout.

The CEO's mailbox was bombarded with thousands of emails daily from climate change activists and other members of the general public. A spokesperson for Exxon says the alias was for inbox management purposes and not a deliberate attempt to avoid discussions on climate change.

Exxon has handed over 2.5 million pages of emails and documents to New York's Attorney General, who is investigating whether Exxon misled shareholders on the risks of climate change. 

Current CEO Darren Woods says neither he nor anyone in his company uses an alias email account.

Fuel efficiency standards on Trump's latest hit list . . . 

President Trump announced plans to review US vehicle fuel standards introduced during the Obama Administration. Trump made the announcement in Michigan declaring intentions to return the state to "the car capital of the world."

Obama and the US Environmental Protection Agency (EPA) agreed to mandate an average fuel efficiency of 36 miles/gallon by 2025 averaged across both cars and trucks. The low mileage standard forces car companies to produce more smaller cars (mostly in Mexico) to offset large gas-guzzling SUVs and trucks. Auto manufacturers have complained that US drivers have so far expressed very little desire to purchase sub-compact vehicles.

Although the EPA was supposed to evaluate the feasibility of implementing the standard sometime this year, the regulation was passed just four days before Obama left office.

Newly minted EPA head Scott Pruitt says the standards are "costly for automakers and the American people." News of the pending rollback was well received by the Alliance of Automobile Manufacturers but scoffed by environmental groups who argue the rollback will drive up gasoline consumption and reduce innovation in the auto sector.

Canadian fuel standards are generally aligned with US standards since the same models are normally sold on both sides of the border.

Calculating the social cost of carbon, or not . . . 

Bloomberg is reporting that President Trump is also poised to sign a directive reversing Obama's instruction that government agencies factor in the "social cost of carbon" during environmental reviews. Obama used the carbon factor to reject Keystone XL and introduce numerous climate change regulations.

The American Energy Alliance says the former president "created such a labyrinth of rules and orders and regulations to cement his agenda across practically every agency," calling the carbon rule "a constraint deliberately set up by the previous administration to make it difficult to utilize coal, oil and natural gas."

Environmental groups are concerned the directive is just the first step in repealing Obama's Clean Power Plan, leaving the door open for higher methane emissions and increased use of coal-fired power.

Other notable US energy news . . . 

Sticking with the Donald Trump theme, the latest White House 2018 Budget is proposing a 31% cut to the EPA's budget, which could potentially translate into 3,200 job cuts.

The budget also eliminates US$100 million previously allocated to research and international programs on combating climate change. The State of California has distributing recruitment fliers to discontented federal EPA employees in Washington that read "Fight Climate Change, Work for California." 

The president is also proposing completely scrapping the Chemical Safety Board (CSB). The CSB is in charge of investigating incidents to help shape regulations related to workplace safety and first responders.

Under pressure from US civil liberties groups, Facebook has banned its developers from handing user data over to law enforcement for surveillance use. Over the past few months, Facebook has been forced to turn over data related to protests and riots related to Donald Trump's inauguration and other acts of civil disobedience. Most recently, police in Whatcom County, WA issued a warrant to Facebook asking the company to handover photos, videos and posts related to a February Dakota Access Pipeline protest in Bellingham, where a major interstate was blocked for several hours. The county has since withdrawn their search warrant.

Delta Air Lines is considering selling its 185,000 bbl/day refinery in Trainer, Philadelphia. The company purchased the refinery 5 years ago in a bid to protect itself from skyrocketing jet fuel prices. The refinery has lost a total of US$125 million over the past 5 years.

Phillips 66 has launched open season on its Reeves-Odessa Origination (Rodeo) Project, which runs from the Delaware Basin in Texas to various terminals and hubs near Wink, Odessa and Midland, Texas. The Rodeo Project has an initial throughput capacity of 130,000 bbl/day but could be expanded to 450,000 bbl/day, if there's sufficient demand. The network should be in service by the middle of 2018.

Australia's looming gas shortage . . . 

Australia is pressuring the country's largest natural gas producers to boost output in response to supply shortages and soaring gas prices. Australia's energy market operator is warning that insufficient supply will likely lead to power outages in 2019.

Ironically, the country is track to become the world's largest LNG exporter, causing a domestic supply shortage. Australia's annual LNG exports are set to rise to 66 million tonnes by the middle of this year, a 40% increase from just a year ago. 

The surge in exports have caused local natural gas prices to more than triple from US$4.60 to US$17/GJ. Australia's chemical sector, which uses natural gas as a feedstock, has been hit especially hard. The country is even looking at building an LNG import terminal to help lower prices.

A majority of Australia's exports are destined for Japan. Major players in the sector include ExxonMobil, Royal Dutch Shell, Chevron, BHP Billiton and ConocoPhillips

Consolidation in the EPC world . . . 

Aberdeen-based Wood Group announced an all-stock takeover of UK engineering firm Amec Foster Wheeler for US$2.7 billion (or £2.2 billion). Amec shareholders will receive 0.75 "new" Wood Group shares, a premium of almost 30% to the previous day's close.

Amec is technically the larger company, with more employees, more offices and higher sales. However, the company has been under considerable pressure in recent years to reduce its debt-load and improve its shrinking margins. 

Amec's fiscal troubles began in January 2014 when it purchased Foster Wheeler for US$3.2 billion (or £1.9 billion). The deal included a cash payment of £1 billion, most of which Amec was forced to borrow. Oil prices have since crashed from over US$100 a barrel, drying up capital spending in the energy patch.

Things haven't been much better over at Wood Group. The company's revenues are more focused in the declining North Sea basin. Profits were cut in half last year, forcing the firm to destaff 18% of its employees.

Wood Group says it sees significant opportunities for "revenue synergies" across the two companies which should result in annualized savings of US$134 million. Chairman Ian Marchant says the combined company will be "leaner and more competitive."

Once the merger is complete, 60% of the combined company's revenues will come from the oil and gas sector. The new Wood Group will employ 64,000 people worldwide, 36,000 of which will come from Amec.

This week's notable carbon news . . . 

The German government will release a plan next week for G20 economies to address climate change. In order not to offend US delegates, the plan will not include references to coal, auto fuel standards and only a brief mention of the Paris Accord. Germany will present the climate plan next week as global environment ministers meet for the G20 Sustainability Working Group.

The International Energy Agency (IEA) says global energy-related carbon dioxide emissions were flat for a third year in 2016, despite a 3.1% growth in the economy:

  • Total global emissions from the energy sector were estimated at 32.1 gigatonnes last year. 
  • Declines were driven by a 3% drop in the US due to an 11% drop in coal use. US carbon emissions are now the lowest since 1992.
  • China's emissions also fell 1% while emissions in the UK and EU were relatively unchanged.
  • Declines in both the US and China offset rising emissions in the rest of the world. 

The IEA says the use of gas-powered electricity is only about 5-6% in both China and India, suggesting both countries have plenty of room to further lower their carbon footprint.

Around the world this week . . . 

Reuters is reporting that Chevron is close to selling its South African assets to China Petroleum and Chemical Corp (Sinopec) for about US$1 billion. The assets include a 110,000 bbl/day refinery in Cape Town.

Reuters is also reporting that ExxonMobil is in the process of selling its 2,500 Esso branded gas stations in Italy. The deal is estimated to be worth over US$500 million. Shell and Total also exited the country last year. Italy has 21,000 gas stations, double that of France and almost three times as many as the UK.

Total announced the start-up of its Moho Nord oil field, located 75 km offshore the Republic of Congo. The facility has a production capacity of 100,000 boe/day and is the largest development in the Congo. 

A Brazilian court has cleared the way for PetroBras to continue to sell assets, including a contentious sale of its fuel distribution unit, BR Distribuidora. PetroBras is trying to sell US$21 billion worth of assets over the next two years to help pay down debt. Various oil workers unions have been challenging the divestures but have been unsuccessful so far. New transparency rules put in place by the courts now require PetroBras to publicly disclose a list of interested bidders for its asset sales.

Australian commodities advisors Macquarie has agreed to purchase oil trader Cargill Petroleum from parent company Cargill for an undisclosed amount. Cargill says it will still provide hedging and derivatives for the energy sector.



WEEKLY ENERGY STATISTICS

US IMPORTS OF CANADIAN CRUDE
million bbl/day • preliminary data by EIA
US OIL INVENTORIES
million bbls • data by EIA

US OIL PROD'N & RIG COUNT
million bbl/day • data by EIA & Baker Hughes

3,230k
-197k ▼ 5.7%
BBL/D CDN EXPORTS TO US
9,109k
+21k ▲ 0.2%
BBL/D US PROD'N
528.16M
-0.24M ▼ 0.0%
BBL US INVENTORIES
631
+14 ▲ 2.3%
US RIG COUNT
CHANGE WK/WK  

US commercial crude oil stockpiles dipped slightly this week for the first time in 9 weeks, led by a sizeable drop in inventory volumes in the Gulf Coast. In contrast, inventories at Cushing and on the East Coast both rose by over 2 million barrels.

Highlights of this month's Oil Market Report from the IEA:

  • Global oil supplies increased 260,000 bbl/day in February to 96.52 million bbl/day on higher production out of OPEC and non-OPEC members. However, that number is 170,000 bbl/day lower than February of 2015.
  • OPEC output rose by 170,000 bbl/day in February to 32 million bbl/day on higher production from Saudi Arabia.
  • The IEA estimates OPEC's quota compliance was 91% in February, down from 98% in January.
  • Oil inventories in OECD countries unexpectedly rose by 48 million barrels in January to just over 3 billion barrels. This is the first inventory increase in 6 months. However, stockpiles are expected to ease in February.

The IEA blames the recent weakness in oil prices on high inventories in the US, brought on by higher domestic production, a rise in imports and lower refinery throughputs.

In their March edition of the Monthly Oil Market Report, OPEC says it saw improvements in the global economy last last year, which should extend well into 2017. GDP growth is expected to decelerate in China and India, but be better than expected in the US, EU and Japan. Brazil and Russia are expected to emerge from their recessions sometime this year.

OPEC says its "OPEC/Non-OPEC Declaration of Cooperation" has been successful and is "likely to further enhance the global oil industry, leading to even more global economic growth and hence higher oil demand growth" this year. 

In contrast to IEA numbers, OPEC estimates its February production declined 14,000 bbl/day to 31.96 million bbl/day.


WEEKLY MARKET SUMMARY

CURRENCIES • WEEKLY CLOSE
Friday close • data by Bank of Canada & ICE

100.11
-1.00 ▼ 1.0%
USD INDEX
74.98
+0.70 ▲ 0.9%
CDN DOLLAR
2.50%
-0.08 ▼ 3.1%
US 10Y Bond
1.76%
-0.05 ▼ 2.8%
CDN 10Y Bond
CHANGE WK/WK  

Among this week's notable Canadian economic data:

  • January manufacturing sales rose for the third month in a row, led by increases in petroleum and chemical products. Sales of energy products rose 7% to $5.5 billion on both higher volumes and higher prices. This is the fourth consecutive monthly gain.
  • Statistics Canada also reported the country's non-financial wealth rose 1.4% in the fourth quarter (versus the third quarter) to $9.92 trillion. The gains were attributed to higher home and commodity prices.
  • The average Canadian household was worth $281,300 in Q4, led higher by higher home prices and good stock market performance. Total Canadian debt reached $2.03 trillion. Household debt to disposable income reached a record 167.3% in Q4, from 166.8% in Q3 of last year.
  • Echoing a similar report from TransUnion last week, Equifax is reporting total Canadian consumer debt rose 3.1% in the fourth quarter, to a record $1.718 trillion (including mortgages). Delinquencies are up 4.6% nationally over the past 12 months, led by major increases in "energy dependant" provinces Alberta, Saskatchewan and Newfoundland.

As expected, the US Federal Reserve raised the overnight lending rate by 0.25% and signalled two more rate hikes are likely this year. The US dollar declined on the news, presumably on expectations the bankers would be more aggressive tightening interest rates later this year.


OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group

51.76
+0.39 ▲ 0.8%
BRENT USD/BBL
48.78
+0.29 ▲ 0.6%
WTI USD/BBL
46.38
+1.11 ▲ 2.4%
CDN LT USD/BBL
36.38
+2.39 ▲ 7.0%
WCS USD/BBL
CHANGE WK/WK  

The price of light synthetic crude oil (SCO) from the oil sands spiked this week on news of the Syncrude upgrader outage. Traders were advised output from the facility would be cut in half for the rest of March and into April. At one point, SCO prices were trading US$4.00 higher than WTI.

Differentials for Canadian Light and Western Canadian Select (WCS) also tightened considerably this week on expectations of reduced output.

Investment firm Goldman Sachs says oil markets are rebalancing and supply will align with demand sometime this year. The firm does not believe OPEC members will extend production cuts through the second half of the year, and instead sees the cartel returning to record production later this year. Coupled with the recent rise in US shale production, Goldman warns oil prices may remain below its US$50/bbl long term price forecast.


ENERGY SECTOR PERFORMANCE
Friday close • data by TSX & NYSE
CANADIAN & US EQUITIES
Friday close • data by TSX & NYSE

SECTOR SUMMARY
Friday close • data by TSX & NYSE
TSX ENERGY STOCKS • WEEKLY CHANGE

Fourth quarter earnings have mostly drawn to a close in the Canadian energy patch. Among this week's notable earnings releases:

  • Penn West Petroleum (PWT) reported a net loss of $696 million for 2016, narrower than a $2.6 billion loss a year earlier. Annual average production declined 36% to 54,990 boe/day due to several asset sales. CEO David French says "2016 was a year of reshaping and rebuilding" for the company. Long-term debt at Penn West was slashed 76% last year to just $469 million.
  • Birchcliff Energy (BIR) reported a full year loss of $24.3 million, about half the losses of the previous year. Production averaged 49,236 boe/day last year, up 26% y/y due to the acquisition of various assets in the Gordondale area. The company expects 2017 average production to be in the range of 70,000 to 74,000 boe/day.
  • Bellatrix Exploration (BXE) reported a full year net loss of $26.7 million, down from a $444 million loss in 2015. The company produced an average of 31,888 boe/day last year, down 22% y/y due to divestiture of non-core assets. Total net debt at Bellatrix was reduced 45% to $747.6 million.
  • Spartan Energy (SPE) reported a net loss of $18.6 million in 2016, down from a loss of $77.7 million the previous year. Average daily production rose to 11,748 boe/day, up 33% y/y due to the recent acquisition of several assets in the Southeast Saskatchewan area. The company hopes to average 21,080 boe/day this year.
  • Bonterra Energy (BNE) reported a full year net loss of $9 million on revenues of $197 million. Cash flow was cut in half last year to $109 million on lower oil prices. The company produced an average of 12,656 boe/day in 2016, down 4% from the previous year.
  • Pine Cliff Energy (PNE) reported a 2016 loss of $50.4 million, double the loss of 2015. However, production more than doubled to an average of 22,465 boe/day. Pine Cliff reduced its net debt by 55% last year to $64 million.
  • Camp operator Black Diamond Group (BDI) reported a full year loss of $64 million in 2016, versus an $8.4 million profit the previous year. The company says it is experiencing "unfavourable utilization" rates in Northern Alberta. However, it expects business to pick up in the second half of this year. Black Diamond was recently awarded a contract for the sale and installation of a new 328 bed camp south of Fort McMurray for an undisclosed client.

This week's 52 week highs on the TSX include Gibson Energy (GEI) and steel pipe manufacturer ShawCor (SCL). 52-week lows include Baytex Energy (BTE), Cenovus Energy (CVE) and Spartan Energy (SPE).

NYSE ENERGY STOCKS • WEEKLY CHANGE

UPGRADES & DOWNGRADES
  • Bonterra Energy (TSX:BNE): Upgraded from Sector Perform to Outperform at AltaCorp Capital.
  • Clean Harbors (NYSE:CLH): Upgraded from Market Perform to Outperform at CIBC and Oppenheimer Holdings.
  • Kinder Morgan (NYSE:KMI): Upgraded from Hold to Overweight at US Capital Advisors.
  • Occidental Petroleum (NYSE:OXY): Upgraded from Neutral to Buy at Bank of America.
  • Penn West Petroleum (TSX:PWT): Upgraded from Hold to Buy at TD Securities.

NEXT WEEK'S EVENTS

Monday:

  • January Wholesale Trade released by StatsCan @ 8:30am ET
  • Alberta Finance Minister Joe Ceci delivers speech at the Calgary Chamber of Commerce

Tuesday:

  • January Retail Sales released by StatsCan @ 8:30am ET
  • April contract expiry for West Texas Intermediate (WTI)
  • API Weekly Statistics Bulletin released @ 4:30pm ET

Wednesday:

  • EIA Weekly Petroleum Status Report released at 8:30am ET
  • January Federal Budget Balance released @ 11:00am ET
  • Federal Finance Minister Bill Morneau tables Budget 2017
  • Saskatchewan Finance Minister Ken Krawetz delivers 2017/18 Budget
  • ExxonMobil 2016 Financial & Operating Review released at 8:00am CDT

Thursday:

  • January Employment Insurance figures released by StatsCan @ 8:30am ET
  • EIA Weekly Natural Gas Storage Report

Friday:

  • January Inflation Rate released by StatsCan @ 8:30am ET
  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday March 24, 2017 @ 8pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly