The Oil Sands Weekly
One and done: Why Enbridge is all Canada needs . . .
Speaking at an investor day conference in Toronto this week, Enbridge Executive VP Guy Jarvis told shareholders his company's pipeline expansion plans are Canada's best shot at expanding crude export capacity.
Although Jarvis didn't specifically mention Trans Mountain or Keystone XL, the VP suggested "competing pipelines" may never get built, even if approved. Jarvis thinks the replacement of Enbridge's Line 3 and upgrades of existing export pipelines will be enough to meet industry needs until 2028.
Line 3, Keystone XL and the Trans Mountain Expansion will add 1.8 million bbl/day of additional export capacity, exceeding growth plans in the oil sands. That has left some shareholders worried that too much capacity on the horizon will reduce tolls and profitability for the midstream companies.
Besides Line 3, Enbridge has other expansion plans on the horizon, including expanding the Southern Access line to 1.2 million bbl/day and adding another 250,000 bbl/day on its Flanagan South/Seaway pipeline. Enbridge thinks it can add up to 750,000 bbl/day of additional capacity through small debottlenecking projects over the next 5 years.
Minnesota regulators have now begun public consultations on the Line 3 replacement, with several litigation teams already lined up in protest. Replacing the 50 year-old pipe will bring capacity back to 760,000 bbl/day from the current 390,000 bbl/day. Hearings will run through November and a final decision is expected by next April. If all goes according to plan, construction on the US portion of the line will begin in the latter-half of next year, putting the in-service date in mid-2019. The pipeline has already been approved in Wisconsin and North Dakota.
Unclear on the concept of lowering transportation costs . . .
Earth scientist David Hughes penned a report for the Parkland Institute that suggests a pipeline to tidewater (specifically, the Trans Mountain Expansion) will not help reduce the heavy oil discount. Hughes says international and North American crude prices are "now nearly identical" and shipping Canadian oil overseas would actually lower prices for Alberta crude.
WTI (the North American benchmark) trades at a US$2 discount to Brent (the international benchmark). More and more heavy crude from Alberta is now making its way to the Gulf Coast by rail and and by pipeline. Growing volumes of Canadian crude are also being shipped out of the Gulf Coast to Chinese customers, presumably at a profit.
The author also points out that Enbridge's Line 3 Replacement and Keystone XL would be enough to meet growing output from the oil sands, which would be capped by Alberta's 100 Mt/year carbon emissions limit.
Pipeline regulations under the microscope in Saskatchewan . . .
Saskatchewan's provincial auditor Judy Ferguson has accused the province of failing to prevent pipeline spills by "allowing oil companies to regulate themselves."
In her latest report to the Ministry of the Economy, Ferguson also says the government does not have written policies and procedures in place, making it unable to evaluate existing pipelines.
The Saskatchewan government has allegedly implemented just two of five recommendations made back in 2012. Minister Doug MacKnight acknowledged gaps in how the province regulates its pipelines but says the government has made "substantial progress" in recent years.
Shell moves on from the oil sands . . .
Shell Canada has shrunk its capital spending budget from $2 billion to about $1.5 billion this year, a savings of $500 million due to its recent divestment of the Athabasca Oil Sands Project (AOSP). Shell still owns 10% of AOSP, now majority-owned (70%) by Canadian Natural Resources.
President Michael Crothers says his company will now focus on its shale oil and gas properties in the Duvernay, its chemicals and refining operations near Edmonton and its proposed LNG Canada project in Kitimat, BC.
Shell is also working on various renewable energy projects in Alberta. The company built and continues to operate Alberta's only large-scale carbon capture and storage facility (CSS), located next to the Scotford Upgrader. The $1.35 billion Quest CSS project was mostly funded by Canadian taxpayers through various clean energy programs.
Crothers also says he isn't phased by BC's unstable government but says Shell is in no hurry to make an investment decision on the West Coast LNG export terminal. Four engineering companies are pulling together cost estimates for the facility, which should be completed by the end of this year. Shell has not provided a timeline for a final investment decision.
Canadian government "open" to Chinese investment . . .
Federal Minister of Natural Resources Jim Carr spent the week in China trying to sell investors on Alberta's energy sector. Carr says the government "would welcome investment from any nation that's interested in the oil sands."
The minister acknowledged many oil-majors have recently divested their oil sands assets to "spread out their resources" but says there are plenty of opportunities for Chinese investors. That sentiment is in complete contrast to Harper's Conservative government that was less than thrilled with Chinese ownership of Canada's natural resources.
During Harper's first few years in office, Canada's largest mining companies were sold to foreign entities, including Falconbridge, Inco and Alcan.
Attention later shifted to the energy sector as Harvest Energy, Progress Energy, Nexen and a portion of Syncrude were acquired by various Asian national oil companies. Harper implemented new rules in 2012 around corporate governance, ownership limits, taxes and royalties, essentially shutting the door to foreign state ownership of Canadian assets.
Repsol's takeover of Talisman Energy in 2014 was one of the last major foreign takeovers in the energy sector.
Other Canadian energy news . .
A contractor was injured at the Syncrude site this week while doing routine maintenance at the Mildred Lake Upgrader. The worker was taken to the Fort McMurry Northern Lights Regional Health Centre and later transferred to an Edmonton hospital. The exact cause of the incident or extent of the injuries was not disclosed. OH&S is currently investigating the incident.
Reuters is also reported that Syncrude once again reduced its forecast for June crude shipments, now planned at about 5.8 million barrels this month. Mildred Lake has the capacity to produce close to 11 million barrels a month.
An investigation into the 2016 Fort McMurray wildfires accuses the provincial and municipal governments of being unprepared and disorganized. The inquiry found that the Regional Municipality of Wood Buffalo was getting information through social media outlets, and not from its provincial counterparts. One report was prepared by accounting firm KPMG was leaked to the media before officially being released to the public. A second report was prepared by consultants for MNP and wildfire experts from BC and Ontario.
Kinder Morgan Canada is considering issuing bonds sometime next year to fund its $7.4 billion Trans Mountain Expansion. VP David Michels says proceeds from any bond sales would replace the company's $4 billion construction credit facility. The company has a BBB credit rating.
The National Energy Board (NEB) has launched yet another round of consultations with Indigenous peoples on upcoming hearings for TransCanada's Energy East and Eastern Mainline projects. The NEB has appointed four Board Members (independent from the Hearing Panel) to figure out the best way to collect "oral traditional evidence" from about 200 indigenous groups. The NEB says aboriginal communities, particularly elders, have an oral tradition of sharing knowledge, which is not always adequately captured in writing.
UK-based Centrica has sold various assets in the Alberta Foothills and Peace River Arch areas to a consortium that includes Hong Kong based MIE Holdings, Can-China Global Resource Fund and global commodities trader Mercuria for £413 million ($722 million). The assets produce about 60,000 boe/day and were jointly owned with Qatar Petroleum. Centrica says the sales will now allow it to focus solely on its European properties.
The federal government has approved a 40 year export licence for the Woodfibre LNG project in Squamish, BC. Woodfibre was initially granted a 25-year export licence for 2.1 million tonnes of LNG annually. The company asked for an extension in 2015 to accommodate anticipated additional demand. The NEB approved the extension back in April.
Crude-by-rail, not dead yet . . .
Tesoro and partner Savage Services are into the final stretch of getting approvals in place for their controversial Vancouver Energy project, located in Washington State.
The companies want to triple capacity at their crude-by-rail loading terminal, which would bring about 360,000 bbl/day of crude from Bakken oil fields to the Port of Vancouver (WA) for shipment to refineries in California, Oregon and Alaska. The company says the project will reduce reliance on foreign oil, which remains elevated on the West Coast due to declining production from Alaska. The partners also claim "high-quality" light crude from the Bakken formation is 30% less carbon intensive than the average crude processed in Washington State (much of which comes from the Alberta oil sands).
Project approvals are now in the hands of Governor Jay Inslee.
This week's notable US energy news . . .
Encana has agreed to sell its Piceance natural gas assets in northwestern Colorado to privately held Caerus Oil & Gas for US$735 million. The assets include 550,000 acres of land and 3,100 wells which produce 240 MMcf/day of natural gas and about 2,178 bbl/day of liquids.
ExxonMobil issued a rather emotional press-release this week, blasting New York Attorney General Eric Schneiderman for making “inflammatory, reckless and false allegations” on the company's climate change policies. Schneiderman accuses Exxon of downplaying the risks of climate change and having a secretive internal policy, which is different than the company's public stance. Exxon has released 2.8 million pages of paperwork, which have yet to turn up a smoking gun. The company's lawyers called the proceedings a "witch hunt" and would like to see the case dropped.
Self-described climate change activist Kenneth Ward was convicted of burglary in a Skagit County Superior Court (near Mount Vernon, WA), which carries a maximum sentence of 10 years. The 60-year cofounder of Climate Disobedience Center and his team of cohorts cut through padlocks and chains in four different states to close emergency shut-off valves on several large crude pipelines. The jury was deadlocked on a second charge of sabotage. Ward will appeal the ruling on the grounds that his actions were required to save the planet.
Crisis continues in Venezuela . . .
Russia has chopped US$1 billion off its revenues for this year on expectations Venezuela will not make its debt payments. Venezuela has borrowed heavily from both China and Russia but has struggled to repay its loans. The cash-strapped government is also having trouble paying its US bondholders.
Goldman Sachs recently came under fire for purchasing high-risk/high-yield Venezuelan bonds for just 31 cents on the dollar. The bank is being accused of funding the current dictatorship, which is grappling with widespread shortages of food and basic goods across the country.
The Venezuelan government has allegedly offered Nelson Martinez the job of PDVSA president. Martinez currently serves as Venezuela's Oil Minister and is the former head of US-based Citgo Petroleum Corp.
Gulf Nations divided . . .
Oil prices initially rose then declined on news that Saudi Arabia, Egypt, the UAE and Bahrain have severed ties with Qatar, accusing the country of supporting terrorism. The move has disrupted cargo shipments in and out of the Gulf Nation but impacts on petroleum exports are still unclear.
Oil markets are somewhat concerned Qatar will not live up to its commitment to cut production under OPEC's production quotas. Last November, Qatar agreed to cap output at less than 620,000 bbl/day, about 30,000 bbl/day below its production capacity. Qatar is one of the world's largest LNG exporters but shipments do not appear to be affected so far.
Around the world this week . . .
ExxonMobil has purchased additional exploration licences for a deepwater block located 60 km west of Malabo in Equatorial Guinea. The company also signed a production sharing agreement with the government. Exxon has an 80% interest in the project and will be the operator of the facility.
Exxon also dodged a US$74 billion fine imposed by the Chad government for unpaid tax obligations. The company was found guilty of avoiding US$819 million in royalties but it is unclear how the courts came up with the US$74 billion figure. Exact terms of the agreement were not disclosed but the company will get to keep its exploration rights.
Mexico has conducted its first open season for the country's natural gas grid. Mexico's National Center for Natural Gas Control manages over 10,000 km of gas pipelines with a total transportation capacity of 6.3 Bcf/day. The US Energy Information Administration (EIA) says there has been great interest in the auctions of Mexico's natural gas market in general. Mexico is a major importer of natural gas from the US.
Norway's Statoil has taken over two exploration permits covering four fields in the Great Australian Bight that were being operated by BP. BP was less-than successful in their efforts to find oil but Statoil suggests they have may a better understanding of the block geology. Wood Mackenzie estimates the Great Australian Bight may contain 1.9 billion barrels of oil equivalent but the field is located in an environmentally sensitive region, home to various whale breeding grounds.
About 150 unionized workers in Norway's offshore oil platforms are threatening strike action this week, which may curb production out the North Sea. The five affected field belong to Shell, Eni and Statoil, producing about 326,000 boe/day.
Libya's largest oil field was temporarily shutdown again this week after workers began protesting the death of a coworker who died in a swimming pool accident. The Sharara oil field produces about 270,000 bbl/day, roughly one-third of the country's total output. State-owned NOC has ordered a review of the agency's ambulance and medical services provided for its employees. Libya would like to increase output to 1.25 million bbl/day by year end, still short of its pre-war level of 1.6 million bbl/day.
Despite expectations for a strong summer driving season, US petroleum stockpiles rose across the board, including 3.3 million barrels of crude, 3.3 million barrels of gasoline and 4.4 million barrels of distillates products.
The number of oil rigs in service in Canada jumped by 23 to 74 this week. In the US, the number of oil rigs in service rose for the 21st consecutive week in a row, adding 8 to a total of 741.
The EIA is now projecting US production will reach a record 10 million bbl/day in 2018, up from an expected average of 9.3 million this year. Last week, Rystad predicted the US will reach the 10 million mark before the end of this year.
Both S&P Global Platts and Bloomberg estimate OPEC produced 32.12 million bbl/day in May. Production increased in Iraq, Nigeria and Libya but declined in Saudi Arabia and Angola:
- Nigeria's production rose to 1.73 million bbl/day, up 80,000 bbl/day from the previous month thanks to the restart of the Forcados terminal, now that Shell has lifted force majeure. All of the country's exports terminals are fully operational for the first time in 16 months. Production is expected to increase again in June.
- Iraq continues to pump more than its quota, estimated at 4.43 million bbl/day in May.
- Iran's production also rose to 3.78 million bbl/day last month.
- Saudi Arabia's output declined to 9.93 million bbl/day, slightly less than its quota of 10.06 million bbl/day. Energy minister Khalid al-Falih hinted the cartel will need to look at deeper cuts in July, when OPEC and non-OPEC members meet in Russia.
The EIA also sees an average OPEC production of 32.3 million bbl/day this year, rising to 32.8 million bbl/day next year. OPEC's current ceiling is 32.5 million bbl/day. Global petroleum inventories are expected to decline about 40 million barrels in the fourth quarter of this year.
The Euro and Pound declined this week due to an unexpected hung Parliament in the UK. ECB President Mario Draghi pledged to keep interest rates near zero well beyond the end of Quantitative Easing, which was set to expire in December. Draghi says the EU may need indefinite monetary stimulus due to weak underlying inflation.
This week's notable Canadian economic news . . .
The OECD delivered a rather optimistic forecast for Canada this year, projecting a revival of business investment, including the resource sector. The agency sees decent wage growth and 2% inflation next year, as well as rising interest rates, a less-hot housing market and return to full employment.
Credit ratings agency TransUnion says life is good outside oil producing provinces, as debt levels rise but delinquency rates fall. The average non-mortgage consumer debt rose 2% nationally to $21,696 while delinquencies declined 1.5%. However, delinquency rates are up 5.3% in Alberta and 3.4% in Saskatchewan. Calgarians still have the highest non-mortgage debt in Canada, topping $28,000 in Q1.
After a dismal April, Statistics Canada released a much better than expected May jobs report, causing the StatsCan website to crash - again. The agency says 77,000 full-time jobs were created last month, with gains seen in the 15-to-24 age group, which has been hard-hit in the recent downturn. The national unemployment rate edged up from 6.5% to 6.6% as more people entered the workforce.
Alberta added 19,000 full-time jobs, offsetting 17,000 part-time job losses. However, Alberta's labour pool continues to shrink, bringing the unemployment rate down from 7.9% to 7.8%
Canada's industrial capacity utilization improved from 81.8% in Q4 to 83.3% in Q1.
Barclay's lowered their Brent forecast by US$2 to US$53 for 2017, rising to US$57/bbl next year, citing a weak fundamental outlook. WTI is forecasted to average to US$51 this year, rising to US$54/bbl in 2018.
The EIA released an identical forecast for WTI, expecting prices to average US$51/bbl this year, rising to US$54 next year. However, the EIA warns "all oil price forecasts are subject to considerable uncertainty."
Alberta government has assumed a US$55 WTI price in its latest fiscal budget but hinted it could live with prices as low as US$53/bbl.
This week's 52-week lows on the TSX include Altagas (ALA), Athabasca Oil Corp (ATH), Baytex Energy (BTE), Bellatrix Exploration (BXE), Black Diamond Group (BDI), Birchcliff Energy (BIR), Bonterra Energy (BNE), Cenovus Energy (CVE), Crescent Point Energy (CPG), Gran Tierra (GTE), Imperial Oil (IMO), MEG Energy (MEG), Precision Drilling (PD), Surge Energy (SGY) and TORC Oil & Gas (TOG).
S&P Global raised Tesoro Corp's (TSO) credit rating from BB+ to BBB- with a stable outlook. The ratings agency says it expects the company will successfully integrate Western Refining, driving operational improvements and enhancing refining margins. Effective August 1st, Tesoro Corp will change it name to Andeavor and retire its TSO ticker symbol.
Moody's reaffirmed ExxonMobil's AAA rating but changed its outlook to stable. In contrast to a recent downgrade by S&P Global, Moody's thinks the company has sufficient internal cash flow to fund spending and reduce debt through 2019. However, the credit rating agency thinks that reserve replacement will remain a challenge for Exxon and its peers.
This week's 52-week lows on the NYSE include Anadarko Petroleum (APC), Apache Corp (APA), Devon Energy (DVN), Hess (HES), Marathon Oil (MRO), Noble Energy (NBL), Schlumberger (SLB), Transocean (RIG) and Whiting Petroleum (WLL)
Marathon Petroleum (MPC) bucked the trend and hit a 52-week high on the NYSE.
US markets powered to new highs this week while energy stocks continue to sink lower. Despite a nice bounce on Friday, the US energy sector now accounts for less than 5.5% of the S&P 500 by market capitalization, the lowest since 2001.
- Chevron (NYSE:CVX): Upgraded from Hold to Buy at HSBC.
- ExxonMobil (NYSE:XOM): Upgraded from Sector Perform to Outperform at Scotia Howard Weil.
- Husky Energy (TSX:HSE): Downgraded from Top Pick to Buy at Desjardins Securities.
- Precision Drilling (TSX:PD): Downgraded from Outperform to Market Perform at Wolfe Research.
- Suncor Energy (TSX:SU): Downgraded from Outperform to Sector Perform at Scotiabank.
- Tesoro (NYSE:TSO): Upgraded from Hold to Buy at Deutsche Bank. The company has a price target of US$106.
- Speech by Bank of Canada Sr Deputy Governer Carolyn Wilkins: Canadian Economic Update: Strength in Diversity
- EIA Drilling Productivity Report: June 2017
- E&CC Minister Catherine McKenna heads to the G7 Ministerial Meeting on Environment in Bologna, Italy
- API Weekly Statistical Bulletin released @ 4:30pm ET
- Global Petroleum Show kicks off in Calgary, AB
- BP Statistical Review of World Energy 2017
- OPEC Monthly Oil Market Report: June 2017
- EIA Weekly Petroleum Status Report released @ 10:30am ET
- IEA Oil Market Report: June 2017
- FOMC interest rate decision released @ 2:00pm ET
- EIA Weekly Natural Gas Storage Report released @ 10:30am ET
- Conservative Party Leader Andrew Scheer delivers speech in Toronto, on @ 7:30am ET
- Finance Minister Bill Morneau holds town hall at Canada 2020 in Ottawa, ON @ 12:00pm ET
- Bank of England interest rate decision released @ 7:00am ET
- Brian Mulroney delivers keynote speech: The State Of The Canada-US Relationship @ 8:45am ET
- Baker Hughes Rig Count released @ 1:00pm ET