The Oil Sands Weekly
Dismantling and relocating the NEB . . .
The NEB Modernization panel released their long-awaited review of Canada's energy regulator. This latest report is in addition to a similar report released in April on the effectiveness of the Canadian Environmental Assessment Agency (CEAA).
The NEB is currently in charge of regulating the construction and operation of interprovincial and export pipelines, tolls and tariffs on those lines, as well as LNG import/export terminals and interprovincial power lines. Aside from being a regulator, the NEB also publishes data and trends related to Canada’s energy markets.
The panel identified two major problems with the current system:
- The government's long-term goals of reducing GHG emissions and eventually "phase out" fossil fuels is completely at odds with plans to build large pipelines. The current NEB is not in a position to decide if Canada, as a country, should continue to develop its natural resources.
- There are literally thousands of different aboriginal and First Nations groups across Canada with different points of view, especially on matters of energy development. The panel concludes the NEB is ill-equipped to resolve issues relating to treaty rights and the use of traditional lands.
In order to correct these deficiencies, the panel recommends the following changes:
- Abolish the NEB and replace it with a "modernized" Canadian Energy Transmission Commission (CETC) governed by a Board of Directors. Board members should be less "energy focused" and instead represent a wider cross-section of disciplines, particularly in matters relating to Indigenous traditions and climate science.
- Before beginning the regulatory review process, the Minister of Natural Resources, Indigenous groups and various stakeholders would take one full year to determine if the project is in the national interest. An appointed Governor-In-Council would then take 3 months to either veto the project or proceed with a full regulatory review.
- A new government-funded Indigenous Major Projects Office would be responsible for defining "clear processes, guidelines, and accountabilities" for the consultation process during regulatory review.
- A full regulatory review would now be a two-year "more detailed" assessment followed by a decision rendered by a joint 5-member panel consisting of both the CETC and the CEAA. The full regulatory review process would therefore move from the current 15 months to over 3 years.
- Data reporting should be done by a separate agency, dubbed the "Canadian Energy Information Agency" similar in function to the US Energy Information Administration (EIA). The panel says the Canadian EIA would have the ability to "tell it like it is" on energy matters, have no say on energy policy or regulations, making Canadian energy statistics more "neutral and credible."
- All government agencies should be relocated to Ottawa, including CETC and the Canadian EIA, in order to restore public confidence. The panel says the regulator is currently staffed with too many people from the energy sector which is perceived as a conflict of interest.
The "modernized" regulatory process bears some resemblance to how projects are approved by the US Federal Energy Regulatory Commission (FERC), also comprised of a 5-member board where agreement is required by 3 out of 5 members. However, the entire US approval process is about 12 months. The report did not compare Canada's regulatory review process with other countries or address issues of economic competitiveness.
The federal Liberals says these reviews and overhauls are required to restore faith in the country's regulatory bodies. The Government of Canada is accepting comments on the recommendations until June 14, 2017.
This week's Keystone XL update . . .
Operator TransCanada is still in the process of reviewing shipping commitments on both sides of the border. In addition to Alberta crude, Keystone XL would also carry crude from North Dakota and Montana. However, those shippers now have access to the new Dakota Access Pipeline (DAPL), which should be fully operational by June.
Both TransCanada and producers in North Dakota are confident Keystone XL is still needed. North Dakota now produces over 1 million bbl/day of crude, making it the second-largest US oil producer, after Texas. The project is still awaiting approvals from the state of Nebraska. A decision is not expected until August. If all approvals are received on time, construction could begin as early as 2018.
Meanwhile, a group of Native American tribes behind the failed DAPL protest are now taking their grievances to Canada, this time to stop Keystone XL. The Great Sioux Nation, the Ponca tribe and leaders of Canada's Blackfoot Confederacy signed a 16-page declaration in Calgary this week, outlining their treaty rights and opposition to the project. The group is threatening "DAPL-style" protest camps along the Keystone XL route and may ask for support from the United Nations.
This week's Trans Mountain update . . .
Alberta Premier Rachel Notley says she remains committed to the Trans Mountain Expansion (TMEP), and isn't worried about opposition from BC's NDP and Green Party, who are both staunchly opposed to the project (and all pipelines in general). Notley says she disagrees with the view that "one province or one region can hold hostage the economy of another province" or the entire country. The Greens and NDP now hold the balance of power in the BC legislature with a total of 44 seats, one seat more than the ruling Liberal Party.
Alberta's NDP government was also granted intervenor status in lawsuits filed against TMEP. The move allows Alberta to defend the interests of province and its key industries in court. The Federal Court of Appeal is scheduled to hear the court case against TMEP sometime this fall.
In a desperate bid to remain relevant, Greenpeace has sent the Alberta Securities Commission (ASC) a request to halt Kinder Morgan Canada's upcoming IPO until the company fully discloses the risk of climate change to its shareholders. The ASC says they'll think about it.
A federal backstop on carbon . . .
The federal Liberals officially unveiled their "Federal Carbon Pricing Backstop" for those provinces that fail to introduce a carbon tax or cap-and-trade system by 2018.
Revenues generated within a province will go back to the province, although exact details of how those funds will be redistributed have yet to be determined.
Saskatchewan Premier Brad Wall remains opposed to the plan and says Ottawa has no right to implement a provincial tax. Saskatchewan refused to sign-on to the Pan-Canadian Framework on Clean Growth and Climate Change and has even threatened to take the federal government to court.
Manitoba remains on the fence over carbon pricing, refusing to sign-on to the deal but not rejecting it outright either. The province is working towards reducing GHG emissions, but the federal Liberals say that isn't good enough.
Environment Minister Catherine McKenna says the federal government has every right to implement a provincial tax since environmental protection is federal jurisdiction and the carbon tax isn't technically a "tax" for raising revenues but rather an "environmental manoeuvre intended to change behaviour."
The minimum carbon price starts at $10/tonne in 2018, rising $10 annually to $50 per tonne by 2022. That's substantially higher than current provincial carbon prices. BC levies $30/tonne. Alberta's carbon tax is currently $20 rising to $30 next year. Both Quebec and Ontario will reach about $20/tonne by 2020.
The government insists putting a price on carbon will help reduce emissions and grow a clean economy. Canada accounts for 2% of the world's GHG emissions.
Eliminating fossil fuel "subsidies" . . .
Canada's Auditor General released their latest review of fossil fuel subsidies as part of the G20's commitment "to phase out and rationalize ... inefficient fossil fuel subsidies."
Fossil fuel "subsidies" in Canada are generally in the form of tax credits for exploration, development expenses and depreciation of capital costs. Last year, Canada, the US and Mexico agreed to eliminate all subsidies by 2025.
Among the Auditor's key conclusions:
- Six tax credits were reformed or eliminated since 2009, including accelerated deductions for mining exploration and capital cost depreciation for all Canadian mines. Accelerated capital cost depreciation for new LNG facilities will be phased-out by 2025.
- Canada's commitment to eliminate all subsidies by 2025 lacked details around what exactly constitutes a subsidy, a plan on how those subsidies would be eliminated and a clear timeline for phase-out.
- The federal Department of Finance refused to provide the Auditor with information requested on tax measures specific to fossil fuel producers. The Auditor concludes the federal government therefore has no way of knowing the "social, economic, and environmental aspects" of these subsidies, leaving it unable to fully implement its G20 commitment.
The report did not address the issue of economic competitiveness versus other big oil producers in the G20, which include the US, Russia, Saudi Arabia and China.
This week's other notable political news . . .
The Auditor General also released a rather scathing report of the Temporary Foreign Workers Program (TFW), accusing several companies of firing Canadian employees while hiring lower-wage foreigners. Employers were also not required to prove they had attempted to hire domestically. The number of TFW dropped from 163,000 in 2013 to about 90,000 in 2015. The Liberals plan to spend $305 million over the next 5 years to improve compliance with the program. Last April, the Alberta government implemented a 2 year moratorium on hiring temporary foreign worker for 29 high-skilled job categories where unemployment rates remain stubbornly high.
A group of First Nations chiefs behind the $14 billion Eagle Spirit Energy Pipeline is planning to challenge the federal government's Oil Tanker Moratorium, which will ban all crude shipments in and out of BC's northern coast. The $14 billion pipeline would run from Fort McMurray, AB to Prince Rupert, BC. Eagle Spirit is a private company backed by Vancouver's Aquilini Group. The group accuses the Liberals of "forging ahead on proposals without the consent of many Indigenous communities."
Alberta's Progressive Conservatives (PC) and the Wildrose announced a deal to merge their two parties this week, forming the United Conservative Party (UCP). The deal still requires approval from 75% of Wildrose members and more than 50% of PC members. If approved, the new UCP will elect a new leader at the end of October. A combined PC/Wildrose party would stand a good chance of stealing a majority of seats from the ruling NDPs.
Interim Conservative Leader Rona Ambrose announced her retirement from federal politics this week, effective just before the summer break. Ambrose will take on a new position in the private sector as a visiting fellow at the Canada Institute of the Wilson Center, a public-policy think tank located in Washington, DC. Ambrose currently sits as MP for Sturgeon River - Parkland, near Edmonton, AB. The MP took over as interim PC leader after Stephen Harper resigned from federal politics in 2015. The Conservative Party will announced a new leader on May 27.
Building LNG - this time on the East Coast . . .
Calgary-based Pieridae Energy is joining forces with Quebec's Petrolia to raise funds for its proposed Goldboro LNG project, located in Guysborough, Nova Scotia. The terminal would export up to 10 million tonnes/year of LNG. The project was approved by the province of Nova Scotia in 2014 and already has received its export licences in 2015. The company is now looking to raise about $7.5 billion to finance the project, which has an estimated in-service date of 2021.
Pieridae CEO Alfred Sorensen says he's now looking to buy about 200 MMcf/day of natural gas production to supply the LNG terminal. Those assets would preferably be in Western Canada or the US Marcellus shale.
Other Canadian energy news . . .
The Alberta government has agreed to lend the Orphan Well Association (OWA) $235 million to help speed up the clean-up and reclamation of abandoned wells across the province. $30 million will come from the federal government, allocated to Alberta during the last federal budget. The funding will create about 1,650 jobs in the oilfield and environmental services sector. As of the end of March, the OWA had 2,084 orphaned wells under its care.
Pembina Pipeline and Petrochemical Industries of Kuwait officially announced plans to commence FEED (font end engineering design) for its proposed propylene and polypropylene production facility in Sturgeon County, Alberta. The facility will process 22,000 bbl/day of propane into about 1.2 billion pounds per year of polypropylene. The plant has an estimated capital cost of about $4 billion. If the project goes ahead, the Province of Alberta has promised to kick-in $300 million in royalty credits. FEED is expected to be completed by the end of 2018 after which the two companies will make a final investment decision on the facility.
SECURE Energy Services has agreed to acquire Ceiba Energy Services for $26 million and the assumption of $11 million in debt. Ceiba is in the business of water treatment for oil and gas operations in Western Canada. SECURE CEO Rene Amirault says the transaction will "enhance customer value," noting that there are "numerous opportunities at the Ceiba facilities to optimize and expand existing services and throughput." The deal represents a 64% premium for Ceiba shareholders. The transaction has been approved by both board of directors.
Cenovus Energy has received all regulatory approvals and closed on its deal to purchase Western Canadian assets from ConocoPhillips. The company says it will now work towards integrating staff from Conoco's Deep Basin properties and continue working towards divesting assets, including Pelican Lake and Suffield. The company plans to provide an update on its future plans during its Investor Day on June 20, 2017.
A 112 million year old fossilized dinosaur unearthed from Suncor's Millennium Mine in 2011 has gone on display at the Royal Tyrrell Museum in Drumheller, AB. This new species of nodosaur (armoured dinosaur) is the oldest dinosaur known from Alberta, and best preserved armoured dinosaur ever found. The dinosaur's fossilized skin and gut contents are still intact, revealing "tile-like plates and a grey patina of fossilized skins." Funding for the nodosaur was supported through the National Geographic Society, featured in the magazine's June 2017 issue.
Other notable US energy news . . .
Anadarko Petroleum has voluntarily agreed to permanently disconnect all 1-inch low-pressure return lines from every vertical well following a home explosion that occurred near Denver in mid-April. Investigators concluded the blast occurred after a severed 1-inch supply pipeline leaked gas into the home. The pipeline was believed to be out of service but investigators found it was still connected to a nearby well. Two people were killed in the explosion and a third was badly burned.
Energy Transfer Partners (ETP) was issued a stop order from US federal regulators (FERC) after the company spilled 2 million gallons of drilling fluid (mostly water and clay) in Ohio wetlands last April. The incident occurred during the installation of the US$4.2 billion Rover pipeline, a 3.25 Bcf/day natural gas line that stretches from Pennsylvania to Ontario's Dawn Hub. The Ohio Environmental Protection Agency fined ETP US$431,000 for various water and air pollution violations. ETP says the ban will not materially impact cost or schedule. Phase I of Rover is expected to be in-service by July.
Oregon's Coos County has overwhelmingly rejected a proposal that would have blocked natural gas exports from its shores. The proposal was in response to plans by Calgary-based Veresen to build an LNG export terminal in the area. Veresen was denied a permit to build the US$7.5 billion Jordan Cove LNG terminal last year, citing insufficient demand. Veresen has since resubmitted its application with FERC.
President Donald Trump headed to Saudi Arabia this week in his first official state visit. Departing from the usual oil-for-weapons discussions, Trump is now looking for the Saudis to invest billions in the US economy, particularly in technology and infrastructure. The kingdom looks to deploys billions from its sovereign wealth fund. Trump will be joined by the heads of Exxon, Boeing and several big US banks. Saudi investment in US infrastructure was frowned upon by previous US governments for reasons of national security.
Trump then moves on to Israel, Italy and Belgium. In recent history, Canada has traditionally been the first (Obama, Clinton, Bush Sr.) or second (Bush Jr., Reagan) official foreign state visit for new US presidents. So far, Trump has no plans to head north.
Around the world this week . . .
ExxonMobil announced the discovery of yet another "high-quality sandstone reservoir" near the Muruk-1 block in the Papua New Guinea (PNG) North Highlands. Size of this most recent discovery was not disclosed. The company says the positive results underpins the economic case for expanding LNG export from PNG. Exxon and its partners currently export 7.9 million tons/year of LNG from the region.
Exxon also announced plans to invest US$300 million in Mexico over the next decade, bringing its Mobil-branded gasoline stations to the country later this year. Exxon says "recent energy reforms present a unique opportunity to help meet the growing demand for reliable fuel supplies and quality service in Mexico." Mexico is now a net importer of US energy, primarily refined products and natural gas.
Unionized workers in Nigeria have extended strike action to facilities belonging to Shell, Chevron and Eni this week in protest of 150 members destaffed by ExxonMobil last December. Nigeria's labour union is also calling for a shutdown of all Exxon facilities across the Niger Delta region. So far, the strike has not affected production but has disrupted administrative duties.
Greece's energy ministry is hoping to drum up interest in offshore oil and gas exploration and development. Exxon, Total and Hellenic Petroleum are expected to put in bids for exploration blocks located south of Crete. Total, Hellenic Petroleum and Italy's Edison won bids for offshore gas drilling in the Ionian Sea last year. Recent discoveries in Egypt's Mediterranean waters have raised hopes for more finds in the region.
The government of South Africa announced plans to enter the shale gas market and may award its first exploration licence later this year. Interested parties include Royal Dutch Shell, Falcon Oil and Gas and Bundu Gas & Oil. The country is looking to replace declining offshore gas reserves and reduce reliance on coal-fired power. Recoverable gas reserves from onshore and offshore gas fields is estimated at about 19.5 trillion cubic feet. Government officials say it would take about a decade to significantly develop its resources.
Train 1 at Chevron's Gorgon LNG export terminal in Australia was shutdown again this week due to a faulty flowmeter. The shutdown will last about a month. Trains 2 and 3 are operating normally. The US$54 billion facility has been plagued by a number of reliability issues since its start in March of 2016. The three trains have a combined export capacity of 15.6 million tonnes/year.
China North Industries (Norinco) has signed a memorandum of understanding with Saudi Aramco to build a refinery and chemicals complex in China's Liaoning province. The facilities include a 300,000 bbl/day refinery and 1 million tonnes/year ethylene complex at an estimated cost of about US$10 billion. Norinco is China's state-run defence company now dipping its toes in the energy sector.
BP CEO Bob Dudley took a pay-cut this week after shareholders unanimously voted to cap incentives to no more than 5-times base pay. Dudley's maximum payout (excluding pension) is now limited to just US$15.3 million. Shareholders are still miffed the CEO gave himself a 20% pay raise (to US$19 million) last year despite record losses at the UK oil major.
US oil exports continued to slowly creep higher this week. Crude exports are averaging closer to 1 million bbl/day, more than double the historical average. Total petroleum exports (which includes refined products) are inching closer to 6 million bbl/day.
According to Baker Hughes, US oil rig counts rose for the 18th week in a row, now at 720. Rig counts in Canada are also recovering from the spring thaw, adding 7 to a total of 36. The total North American oil and gas rig count is now 986, more than double the same time last year.
According to the EIA's latest Drilling Productivity Report, productivity from new wells drilled in the Permian, Bakken, Niobrara and Eagle Ford shale basins appears to be growing a slightly slower pace.
This week's OPEC chatter . . .
- Russia and Saudi Arabia have agreed that production should be curtailed at least until March of 2018. The two countries produce about 20 million bbl/day of crude, over 20% of the world's total production. Saudi Arabia needs a decent oil price in order to get fair market value for its upcoming 5% IPO of Saudi Aramco.
- Both Kuwait and Iraq say they support extending the production cuts. Iraq, Kuwait and the UAE have achieved most of their production cuts through scheduled maintenance shutdowns.
- Output from Libya dipped to 683,000 bbl/day this week due to a power outage. The head of Libya's National Oil Corporation says he expects production to return to a more normal level of about 810,000 bbl/day by the weekend and hopes to hit 1 million bbl/day by the summer.
According to a recent report from the EIA, OPEC's 2016 revenues fell to just US$433 billion, 15% lower than the previous year and the lowest since 2004. The EIA estimates revenues will improve to $539 billion this year, rising to US$595 billion next year.
The International Energy Agency (IEA) pegs OPEC production at 31.78 million bbl/day in April, up 65,000 bbl/day from March. The rise was attributed to higher output from Nigeria and Saudi Arabia, offsetting declines from Libya and Iran.
The IEA also says global oil supply fell by 140,000 bbl/day in April, blamed on the Syncrude outage in Fort McMurray. World oil supply sits at 96.17 million bbl/day, 90,000 bbl/day less than the same time last year. Non-OPEC supply is expected to increase 600,000 bbl/day in 2017.
A rather dull forecast for Alberta . . .
ATB Financial is forecasting a provincial growth rate of 2.7% this year, falling to 2.3% in 2018 and just 2.0% in 2019. Rebuilding efforts in Fort McMurray will strengthen the economy this year, but US protectionism and a saggy oil price will act as headwinds going forward.
Alberta's labour market is improving but ATB notes the shift from high-paying to low-paying jobs continues to deteriorate the picture. The unemployment rate is expected to decline from 8.3% this year to 8.1% in 2019. The bank expects net out-migration to taper off later this year.
This week's notable economic data out of StatsCan . . .
- About 551,100 Canadians received Employment Insurance (EI) benefits in March, down 0.5% from February.
- The number of EI beneficiaries in Alberta declined by 4.1% to 84,400, marking the third consecutive monthly decline. The number of new EI claims in the province also continues to trend lower, falling 5.5% for the month.
- Canada's Consumer Price Index (CPI) rose 1.6% y/y in April, led by higher energy energy prices. Gasoline prices were up almost 16% from the same time last year.
- Manufacturing sales increased 1.0% to a record $53.9 billion in March. Sales in Alberta rose 1.6% to $5.8 billion.
- Retail sales rose 0.7% in March to $48.3 billion. Retail sales in Alberta fell 0.5% m/m, the first decline in 8 months.
The US Dollar had a complete meltdown this week, falling back to its pre-election breakout point.
Oil prices staged a nice 5% rally this week, in part due to a lower US dollar. West Texas (WTI) peaked over US$50 this week for the first time since mid-April.
This week's 52-week highs include Paramount Resources (POU) and Veresen (VSN). Bonterra Energy (BNE), Imperial Oil (IMO) and Cenovus Energy (CVE) hit new 52-week lows.
Pengrowth Energy has been warned it is at risk of being delisted from the NYSE since the company's US-listed stock (NYSE:PGH) has traded below US$1 for more than 30 days. After hitting an intraday low of US$0.76 on May 5, the stock has since rebounded to over US$1 a share. The company says it intends to "cure this price deficiency and return to compliance" with the US exchange.
ConocoPhillips (COP) reduced their second quarter guidance from 1.6 to about 1.4 million boe/day in light of its divestment of assets in Western Canada. Once the sale is fully factored in, production will be reduced further to about 1.15 million boe/day, including the loss of production from its recently sold San Juan Basin assets.
Activist shareholder Elliott Management is ratcheting up pressure on Australia's BHP to divest its petroleum business. BHP has so far rejected calls to divest its US shale operations but has agreed to sell non-core parts of its US business. CEO Andrew Mackenzie maintains the company's energy portfolio has added a lot of value to the bottom line and now is not the best time to be selling oil & gas assets. Elliott owns a 4.1% stake in BHP.
Billionaire George Soros' Management Fund disclosed the purchase of 402,500 ConocoPhillips (COP) shares and 9,900 Chevron (CVE) shares during the first quarter of this year.
Both the S&P 500 and NASDAQ hit all-time record highs earlier this week, before tanking on Wednesday.
- ConocoPhillips (NYSE:COP): Upgraded from Hold to Buy at Jefferies.
- Marathon Oil (NYSE:MRO): Downgraded from Buy to Hold at Jefferies.
- Penn West Petroleum (TSX:PWT): Upgraded from Sell to Hold at ValuEngine.
- Valero Energy (NYSE:VLO): Downgraded from Buy to Neutral at Goldman Sachs.
- TSX closed for Victoria Day.
- API Weekly Statistical Bulletin released @ 4:30pm ET
- Royal Dutch Shell 2017 AGM in The Hague, The Netherlands
- Bank of Canada Interest Rate Decision @ 10:00am ET
- EIA Weekly Petroleum Status Report released @ 10:30am ET
- MEG Energy 2017 AGM in Calgary, AB @ 3:00pm MT
- 172nd (Ordinary) OPEC Meeting in Vienna, Austria
- EIA Weekly Natural Gas Storage Report released @ 10:30am ET
- Baker Hughes Rig Count released @ 1:00pm ET
- Conservative Party Leadership Race in Toronto, ON
- Total 2017 AGM in Paris, France