The Oil Sands Weekly
Syncrude's return to normal delayed again . . .
According to Reuters, light oil shipments from Syncrude will be reduced to 5.3 million barrels in May, increasing to just 6 million in June. Syncrude's upgrader has the capacity to produce 350,000 bbl/day of light sweet crude, which translates to about 11 million barrels per month. Sources blame the setback on a leak at the facility.
Suncor had originally hoped to ship 7 million barrels during the month of June. Neither Suncor or Imperial have recently provided an update on Syncrude's return to normal operation following a fire that occurred in March.
TMEP gets the green light, despite uncertain political climate
Kinder Morgan announced a final investment decision this week on its $7.4 billion Trans Mountain Expansion Project (TMEP). The company says it has now secured enough "satisfactory financing" to commence construction activities.
Part of that financing includes spinning off its Canadian subsidiary Kinder Morgan Canada Limited (KML). The company now plans to issue 102.9 million shares at $17 a share for total gross proceeds of $1.75 billion. That was revised lower from an initial IPO plan to issue up to 90 million shares at $19 to $22 a share.
Parent company Kinder Morgan will retain a 70% ownership in its Canadian subsidiary in the form of 242 million Special Voting Shares. The deal would value KML at about $6 billion, revised lower from an earlier estimate of $7 billion. The shares should begin trading on the TSX early next week.
TMEP will transport an additional 590,000 bbl/day of Alberta crude to tidewater in Vancouver and refineries in Washington State. Customers that have booked on the expanded line include BP, Suncor, Total, Brion Energy, CNRL, Cenovus, Imperial Oil, Tesoro, Husky, Devon, MEG Energy, Teck and Athabasca Oil Corp. Once the expansion is completed, the Trans Mountain line will have a total capacity of 890,000 bbl/day.
Kinder Morgan says it has already spent $1.2 billion on the project, leaving $6.2 billion to be spent over the next two years. If all goes according to plan, the line could be in service by the end of 2019. The company admits the political climate is "not ideal" but the project needs to go ahead since financing was the final outstanding condition for the shippers' contracts.
A 2.5 km line repair goes under the microscope . . .
The National Energy Board (NEB) has decided it will hold public hearings on Enbridge's proposal to replace a 2.5 km section of the Norman Wells Pipeline in the Northwest Territories (NWT). The company plans to install a new 12 inch pipe under the Mackenzie River, abandoning the existing pipe in place.
The pipeline (also known as Line 21) normally transports 50,000 bbl/day of crude from Imperial Oil's Norman Wells facility to a terminal 870 km away in Zama, Alberta. The pipeline was shutdown last November due to slope stability issues. The shutdown prompted Imperial to cease operations at Normal Wells earlier this year.
Enbridge and the NWT government had hoped a full regulatory review was not required. The line was originally scheduled to return to service in November. It is unclear if Imperial will restart Normal Wells once Line 21 is put back into service. Imperial put the facility up for sale last September.
Two steps forward, one step back . . .
Calgary-based US Oil Sands suffered a set-back this month after a centrifuge malfunction delayed the restart of its PR Spring Project in Utah. The company says it is working with suppliers to repair the faulty equipment and hopes to resume start-up procedures by the end of the month.
Despite a US$7.5 million loan secured earlier this year, the company still has an operating deficit of almost $12 million (CAD) and is currently investigating various "financing strategies" to keep operating.
US Oil Sands has a propriety extraction process that uses a citrus-based bio-solvent to extract bitumen from the oil sands without the need for huge volumes of water or tailings storage ponds. The company says it is looking for opportunities to work with operators in the Athabasca oil sands to further commercialize their technology.
Tackling Canada's methane emissions . . .
Canada's Environment Minister Catherine McKenna released the federal government's plan to reduce methane emissions by up to 45% by 2025 (from 2012 levels). The government hopes to remove 20 million tonnes/year of methane from the atmosphere.
The regulations take effect in 2020, three years later than originally planned. The minister says implementation was delayed based on feedback from the energy sector, who need time to modify their existing facilities to capture released gases and reduce fugitive emissions.
The province of Alberta already has a plan in place to reduce methane emissions by 45% by 2025. Methane accounts for 7% of Canada's GHG emissions, but the gas has a warming potential 25 times that of carbon dioxide.
The government is also targeting sources of volatile organic compounds (VOCs) from oil refineries, bitumen upgraders and petrochemical plants.
Making Canada less competitive . . .
Former Suncor CEO Rick George was interviewed on BNN this week, disputing claims by various levels of governments that higher taxes, an obsession with climate change and an onerous regulatory regime is making Canada more competitive. George notes uncertainty around carbon pricing and mixed messages on pipeline approvals does not make Canada "an attractive place to invest."
Former Quebec Premier Jean Charest echoed a similar sentiment, noting that Asian investors are very interested in Canada's natural resources but remain concerned about the ability to get projects completed.
This week's notable Canadian political news . . .
The Alberta Government has introduced legislation to cap electricity rates to a maximum of 6.8¢/kWh over the next 4 years. The move is intended to prevent Ontario-style skyrocketing power prices as the government increases the carbon tax and phases out coal-fired electricity generation. The government estimates the cap will cost the province about $10 million a month, which will come from carbon tax revenues.
The final votes have now been counted in BC's provincial election, confirming initial results. The ruling BC Liberals have 43 seats (one seat short of a majority), leaving the NDP with 41 seats and the Green Party with 3 seats. This is the province's first minority government in 65 years.
The government of Ontario is putting Texas on notice after the state put forward "Buy American" legislation for procurement of steel products. Premier Kathleen Wynne is threatening to cut off trade with the Lone Star State, which was worth about $12 billion last year. Texas is Ontario's 8th largest trading partner, representing 2.6% of the province's imports. Last month, the state of New York scrapped plans to implement a similar "Buy American" bill.
The federal Liberals are looking to crack down on "wealthy Canadians" that use private corporations to reduce income taxes. The move will primarily impact independent consultants, professionals and contractors who flow revenues through a corporation instead of collecting a regular salary. Finance Minister Bill Morneau promised to release a paper sometime in the next few weeks.
Other Canadian energy news . . .
Connacher Oil & Gas reported first quarter revenues of almost $47 million this week, up from about $12 million in Q1/2016. Production at its Algar SAGD facility averaged 12,053 bbl/day in the first quarter, more than double the same time last year. Operating costs declined to $18.32/bbl, down 36% y/y on higher production and higher oil prices. Connacher remains under creditor protection and says it continues to investigate opportunities to sell or restructure the company.
Penn West Petroleum is planning to change the company's name to Obsidian Energy. CEO David French says the company has undergone a significant transformation in recent years, and no longer resembles the old Penn West. French added "Obsidian is created through a geological process transforming into a substance of strength, dependability, and longevity. We'll be proud to take the name and what it means for us."
Members of the Unifor Local 21-A union have voted to ratify a new three-year collective agreement with Imperial Oil at its Strathcona refinery. Both parties agreed to a 2% wage increase in year two, increasing to 2.5% in year three.
Trilogy Energy announced plans to sell assets in the Kaybob area for $60 million. Full year 2017 guidance was left unchanged at 24,000 boe/day.
This week's notable US energy news . . .
One worker was killed and three injured after fire broke out at Anadarko Petroleum's oil tank battery outside the town of Mead, Colorado. The workers were all contractors performing maintenance at the site. This is Anadarko's third fatality in the same area, located just north of Denver. The tanks are just 4 miles north of a home explosion that killed two people in April.
The state of New Jersey has settled a US$39 million claim against ConocoPhillips for its role in contaminating groundwater with methyl tertiary butyl ether (MTBE), a gasoline additive. New Jersey has collected US$157 million in settlements from about 50 oil & gas companies as part of a lawsuit launched in 2007. ConocoPhillips says the fine will be paid by Phillips 66, who assumed legal responsibility for the NJ facilities named in the lawsuit.
ExxonMobil and Saudi Basic Industries Corporation (SABIC) have agreed to begin engineering and design work for a new petrochemical complex to be located in San Patricio County, Texas. The facility will include an ethane steam cracker capable of producing 1.8 million tonnes/year of ethylene, a monoethylene glycol unit and two polyethylene units.
Exxon also announced the mechanical completion of two new lines at its plastics plant in Mont Belvieu, Texas, capable of producing 650,000 tons/year of polyethylene. Production is expected to begin sometime in the third quarter of this year.
Midstream player Plains All American (PAA) is considering mothballing its 1.2 million bbl/day Capline pipeline which delivers crude imports and production from the Gulf of Mexico to refineries in the Midwest. The pipeline has seen a sharp decline in volumes as growing US shale production gets pumped to the East Coast and Gulf Coast. PAA called the line "redundant" and suggested it could be shutdown by 2021. Capline is the largest pipeline in the US but only transported 360,000 bbl/day last year, operating at less than one-third of capacity. Marathon Petroleum and BP have a minority stake in the line.
Producer EP Energy and independent refiner Tesoro Corp have formed a 50/50 joint venture to drill 60 oil and gas wells in the Uinta basin in Utah. Tesoro will provide the capital and has agreed to purchase all oil production from the wells. EP Energy will operate the JV.
Measuring emissions from diesel vehicles . . .
Following in the footsteps of Volkswagen, the US Department of Justice (DOJ) is investigating Fiat Chrysler for allegedly rigging emissions software on 104,000 diesel vehicles, mostly Jeep Grand Cherokees and Dodge Ram 1500 trucks.
An private law firm in Detroit is accusing GM of the same, suing the automaker on behalf of 705,000 owners of Silverado and Sierra diesel trucks. GM calls the accusation "deceptive and false."
Volkswagen was found guilty of altering software on 500,000 US diesel vehicles, which cost the company US$25 billion to remediate. Independent investigations in Europe have found that nearly every diesel-powered vehicle emits far more pollution than measured in laboratory tests.
Around the world this week . . .
BP announced first oil from its Quad 204 project offshore the UK in the Shetland region. The field first began producing oil in 1998 but a major redevelopment has extended the field's life to at least 2035. Production is expected to continue to ramp up through 2017, eventually reaching its nameplate capacity of 130,000 bbl/day. This is BP's third of seven major upstream projects expected to come online this year.
Royal Dutch Shell and partners in Brazil announced the start-up of FPSO (floating production storage and offloading) facility P-66 located in the deep-waters of the Santos Basin. The facility can process up to 150,000 bbl/day of oil and 6 MMcf/day of natural gas. The FSPO is one of several standardized vessels to be operated by Petobras.
Shell and ExxonMobil are considering a legal appeal against the Dutch government's recent decision to cut production at the Groningen gas field by 10%. The production cuts are in response to earthquakes in the northern region of the country, which have resulted in significant property damage. Shell and Exxon call the decision "disproportionate" and ignored previously agreed safety norms. The cuts would take effect in October but interested parties have until July to file an appeal.
For the first time in 80 years, a private company has begun drilling for oil offshore Mexico. The well is located in the Sureste Basin, estimated to hold anywhere from 100 to 500 million barrels of crude. The rig is operated by Houston-based Talos Energy. This is the first offshore exploration well not run by state-owned Pemex since the country nationalized its oil industry in 1938.
Protestors in Tunisia turned up the heat this week, forcing the closure of several oil & gas facilities and pumping stations in the Tatatouine province. Protestors are demanding more jobs and a greater share of the country's energy revenues. Tunisia produces about 44,000 bbl/day.
Nigeria's oil workers' labour union suspended its strike action this week in parts of the Niger Delta region, although other facilities across the country are still being impacted. The group is protesting ExxonMobil's dismissal of 150 employees last December. The Nigerian government is trying to mediate the two sides.
The Venezuelan government is trying to figure out a path forward to repay China and Russia some US$50 billion in loans and another US$16 billion owed to foreign oil firms. The country produces about 2 million bbl/day, some of which is used in lieu of cash for debt repayment. The government says it is "looking at all options" which may include the issuance of new bonds. The Venezuelan economy is set to shrink 3.5% this year, after contracting 19% last year.
Production out of the US Permian Basin is now at 2.5 million bbl/day, up 25% from the same time last year and quickly closing in on a new all-time record. The Permian accounts for about 25% of total US oil production.
The US added only two new oil rigs last week, the 19th consecutive weekly increase. Canada added four new oil rigs, to a total of 40. The number of gas rigs also increased by four to 53.
The US Administration is hoping to sell 270 million barrels of crude held within its Strategic Petroleum Reserves (SPR) to help reduce the national debt. If approved, the sale would be phased over the next decade, releasing approximately 100,000 bbl/day into oil markets. Late last year, the government approved a plan to sell 185 million barrels of SPR to fund various government spending programs, including upgrades to SPR infrastructure. The US currently holds about 685 million barrels of light, sweet crude in SPR, held mostly in the Gulf Coast.
This week's OPEC chatter . . .
As telegraphed, OPEC and 11 non-OPEC members agreed to extend their 1.8 million bbl/day production cuts through at least the spring of 2018. Oil markets were disappointed the cuts weren't deeper or longer than previously advertised.
Saudi Arabia's Energy Minister Khalid Al-Falih said "the market is now well on its way toward rebalancing. We have more work to do in lowering inventories toward the last five-year average, but we are on the right track." The minister says the group considered longer or deeper cuts but thinks 9-months will be enough to shrink global inventories.
The Bank of Canada kept the overnight lending rate unchanged at 0.5% this week, noting that the country "adjustment to lower oil prices is largely complete and recent economic data have been encouraging." The Bank says the economy is expected to cool through the second half of the year despite strong consumer spending, a hot housing sector and improvements in the labour market.
The CFIB's Business Barometer Index rose 2.4% to 66 in May (measured on a scale of 0 to 100), the highest reading in over two years and returning to levels before the oil price collapse. Business confidence has improved greatly in Alberta (now 61.9), getting closer to the national average. The mood is somewhat more sombre in Saskatchewan, where confidence declined sharply to 49.1. Optimism among businesses in the natural resources sector remains subdued, at just 56.8.
The federal government ran a $10.4 billion deficit in the month of March. Revenues increased by $1 billion while expenses grew $1.7 billion. For the past 12 months, the Liberals ran a $21.8 billion deficit, up from a $2 billion deficit reported for the 2015/16 fiscal year. Revenues grew only $600 million while government spending widened by $21.7 billion. The Liberals had projected a $23 billion deficit in their 2016/17 budget.
This week's economic updates from StatsCan . . .
- Average weekly earnings were unchanged in March at $966, now up a meagre 0.9% from the same time last year. Wages in Alberta were also flat for the month. Nationally, earnings are tracking far below the advertised rate of inflation, which is closer to 2%.
- Wholesale sales rose 0.9% in March, surpassing the $60 billion mark for the first time in history. Building materials and chemical products rose the most. Sales in Alberta rose 1.5% to $6.4 billion, a sixth consecutive monthly increase.
- Canadian corporations earned $91.9 billion in operating profits in the first quarter of this year, down $7.3 billion or 7.4% from the fourth quarter of 2016. Manufacturing was the biggest drag, falling 3.9% from the previous quarter. Wholesale trade, finance and insurance profits were also lower for the quarter.
- The median after-tax income of Canadian families and unattached individuals was $56,000 in 2015, virtually unchanged from 2014. Median after-tax income has increased just 2.9% since 2012.
This week's notable US economic data . . .
- First quarter GDP estimates were revised higher from 0.7% to 1.2% y/y. Strong consumer spending led the gains.
- Real disposable incomes rose 1.7% in Q1, revised higher from an initial estimate of 1%. Corporate profits rose 3.7%, the third quarterly gain.
- The Federal Reserve reiterated plans to eventually sell US$4.5 trillion held in treasury notes and said another interest rate hike was likely coming soon. The FOMC promised to hold-back interest rate increases until economic data improves. The chances of a rate hike in mid-June has increased to 83%.
Moody's Investors Services downgraded China's credit rating by one notch to A1 from Aa3, citing rising debt-loads and an eroding economy. China's Finance Minister says the downgrade was based on "inappropriate methodology" and underestimates the government's ability to stimulate domestic demand.
The British Pound suffered a set-back this week on a narrowing of the Conservative Party's lead over the Labour Party, falling from 25% to only 5%. The shifting sentiment was blamed on last week's attacks in Manchester and soft economic data.
Canadian Natural Resources (CNQ) issued US$3 billion in unsecured notes and $1.8 billion (CAD) in medium term notes, for a total of about $5.9 billion. The notes range in duration from 3 to 30 years. The company says it will use the funds to finance its recent acquisition of oil sands assets from Royal Dutch Shell.
Meanwhile over at Shell, Reuters is reporting the Dutch oil major has hired several investment banks to sell its 98 million CNQ shares acquired as part of its transaction with CNRL. No decision has been made with respect to timing or whether the shares would be sold in one block. At current CNQ prices, the shares are worth about $4.1 billion, representing 8.8% of all CNQ shares outstanding.
Statoil disclosed the sale of its entire stake in Vancouver-based International Petroleum Company (IPCO). The 22 million shares sold represent over 20% of the company's outstanding shares. IPCO was spun-off from Lundin Petroleum last month. The company has E&P assets in Malaysia, France and the Netherlands.
Canadian energy stocks had an ugly week, falling an average of 4%. All energy components ended the week lower except for TransCanada (TRP), who managed to eek out a 1% gain.
New 52-week lows include Bellatrix Exploration (BXE), Bonterra Energy (BNE), Crescent Point Energy (CPG), and Cenovus Energy (CVE). Paramount Resources (POU) bucked the trend and reached another 52-week high.
S&P Global downgraded ExxonMobil's (XOM) credit rating from stable to negative, noting that the company has not reduced its debt level as quickly as expected. The ratings agency also says the company's high dividend spend is leading to large "cash flow deficits." S&P downgraded Exxon from its AAA status to AA+ in April of last year.
As a result of the XOM downgrade, S&P also downgraded Imperial Oil (IMO) from stable to negative. The ratings agency acknowledges that Imperial is a core holding for Exxon, providing "good long-term growth prospects and attractive investment opportunities". However, Exxon is not under any legal obligation to guarantee Imperial's debt.
Schlumberger (SLB) hit a new 52-week low on the NYSE this week. Total's ADR (TOT) hit a 52-week high.
- Chevron (NYSE:CVX): Downgraded from Neutral to Underperform at BNP Paribas. Imperial Oil (TSX:IMO): Downgraded from Outperform to Neutral at CIBC.
- Kelt Exploration (TSX:KEL): Downgraded from Action List Buy to Buy at TD Securities.
- PraireSky Royalty (TSX:PSK): Upgraded from Sector Perform to Outperform at RBC.
- Raging River Exploration (TSX:RRX): Upgraded from Buy to Action List Buy at TD Securities.
- US markets closed for Memorial Day
- April industrial and raw materials price index released by StatsCan @ 8:30am ET
- Husky Energy 2017 Investor Day in Toronto, ON
- Q1 and March GDP released by StatsCan @ 8:30am ET
- API Weekly Statistical Bulletin released @ 4:30pm ET (holiday schedule)
- Working and Net Available Shell Storage Capacity released by the EIA (Q3/2016 update)
- ExxonMobil 2017 AGM in Dallas, Texas
- EIA Weekly Petroleum Status Report released @ 11:00am ET (holiday schedule)
- EIA Weekly Natural Gas Storage Report released @ 10:30am ET
- April trade balance released by StatsCan @ 8:30am ET
- Q1 labour productivity data released by StatsCan @ 8:30am ET
- Baker Hughes Rig Count released @ 1:00pm ET