The Oil Sands Weekly
Hangingstone gets deferred . . .
Japan Canada Oil Sands Limited (JACOS) announced it will delay the completion of its Hangingstone expansion to mid-2017.
Last August, JACOS announced it was temporarily suspending bitumen production at its existing 6,000 bbl/day demo plant due to unfavourable economics. The demo plant is not connected by pipeline, requiring product to be trucked out of the facility.
The expansion was set to add 20,000 bbl/day of capacity. The company also has signed agreements with Enbridge and Inter Pipeline to provide product and diluent pipeline connections to Hangingstone, improving the facility's overall economics. Capital costs for the expansion have increased by $250 million to $1.5 billion. The company says it will be working towards cost reductions before construction and module fabrication restarts.
Federal Liberals clear the final hurdle for BC pipeline approval . . .
The federal Liberals have committed $1.5 billion over the next 5 years to "make Canada a world-leader in marine safety." Funds from the Oceans Protection Plan will be used to improve spill response and conduct more research into the remediation of oil spills.
Pipeline activists from both sides of the fence see this as a sign the Liberals are set to approve expansion of the Trans Mountain Pipeline later this year. Trudeau did not confirm or deny the speculations.
In 2012, the BC government stated they would only support a "heavy oil" pipeline through their province if 5 conditions were met, which included implementing a "world-leading" marine oil spill response and recovery system, practices for spill prevention, Aboriginal treaty rights and the sharing of economic benefits. Earlier this summer, BC's Energy Minister Bill Bennett said the only outstanding issue was marine spill response, which falls under federal jurisdiction. Presumably, this latest announcement from the federal government meets BC's final condition, clearing the way for new pipeline construction in BC.
The Liberals are also close to finalizing a moratorium on crude oil tankers on the northern coast of BC, as promised during the last federal election campaign. Transport Canada Minister Marc Garneau made the announcement in the northern coastal town of Bella Bella earlier this week, while touring the site of a diesel spill that occurred last month. A tugboat ran aground while pushing an empty fuel barge, spilling an estimated 110,000 litres of fuel in the Seaforth Channel.
The inland channel is already part of the Voluntary Tanker Exclusion Zone, but tugged barges are small enough to cross through the zone. Earlier this week, another barge carrying sand and gravel flipped over on route from Seattle to Alaska. Smaller vessel prefer to travel inland up the BC coast, avoiding the more turbulent open waters offshore.
Garneau assured the community a crude oil tanker ban will be in place by the end of the year. However, the local Heiltsuk First Nation would like to see the ban extended to tugged barges.
Good news and bad news out of Newfoundland this week . . .
The government of Newfoundland and Labrador awarded exploration rights on 6 offshore parcels in the Eastern Newfoundland Region to consortiums that include BP, Hess and Noble Energy for a total of $514 million. Two additional parcels in the Jeanne d’Arc Region were awarded to Husky Energy for a total of $244 million. The winning bids reflect spending commitments for exploration during the first period of a nine-year licence.
North Atlantic Refining (NARL) announced it will be laying off as many as 128 unionized workers and managers at its Come by Chance refinery next spring. The company blamed the layoffs on "economic pressures" and "impending regulatory changes." The cuts represent about one-third of the refinery's current workforce.
The Come by Chance refinery opened in 1973, but filed for bankruptcy just three years later. Ownership has changed several times in the past 3 decades. SilverRange Financial Partners purchased the refinery from Harvest Operations in late 2014 for just under $100 million. The refinery recently expanded its processing capacity to about 130,000 bbl/day.
The media gets it wrong, once again . . .
Despite predictions of a landslide victory for the Democrats, Republicans have won control of the House, Senate and 1600 Pennsylvania Avenue. As in the case of Brexit, votes were quite sharply divided among urban and rural voters.
The sweep opens the door for tax reform, more infrastructure spending and less regulations in both the energy and banking sectors, which should all be stimulative to growth and inflation.
Analysts at Jefferies & Co are speculating that less regulation around fracking and lower corporate taxes will benefit onshore shale recovery the most. Trump's economic advisor Wilbur Ross has assured markets that any changes, such as import tariffs or increases in oil production, will be gradual and not abrupt.
Alberta Premier Rachel Notley says the election changes nothing and her government remains committed to diversifying away from crude oil exports, pipeline access to international markets (ex-US) and combating climate change.
Despite Trump's protectionist stance, what's good for the US is generally good for Canada. The US accounts for 70% of Canadian exports. China is Canada's second largest trading partner, at a very distant 4%.
Oil differentials set to narrow - eventually . . .
Trump has also promised to overturn each of Obama's executive orders on his first day in office, including Obama's veto of the Keystone XL pipeline.
Washington insider Joe McMonigle (former Department of Energy chief of staff under President Bush) thinks that "Keystone is going to be one of the very first actions that President Trump will take after the inauguration ... It's a very simple approval for him, a quick reversal of an Obama policy and quite easy for him to do. I think it's something he does in the first week, if not the first two or three days."
TransCanada says they remain fully committed to building Keystone XL.” The University of Calgary estimates the 830,000 bbl/day pipeline would shrink the heavy oil discount to US$5-6 per barrel, down substantially from the current US$14-15.
Should the 800,000 bbl/day Trans Mountain Expansion also be approved this year, Alberta's pipeline export capacity would be boosted by 1.6 million bbl/day in less than 5 years.
The US election also squashes any hope of a veto on the Dakota Access Pipeline, which is still awaiting a final federal permit for a section of pipe under a river crossing. Dakota Access will transport Bakken crude from land-locked North Dakota, which should also reduce the differential for tight-oil, which also trades at discount to West Texas. The pipeline is expected to be in service by the spring.
Another earthquake rocks Cushing oil storage hub . . .
The week started off with a bang (literally) in Oklahoma as another earthquake hit less than 2 miles west of Cushing. This is the second "large tremor" in the past 2 months. No damage was reported on any of the pipelines or storage tanks, although the magnitude 5 quake caused minor structural damage to downtown office buildings.
The Oklahoma Corporation Commission (OCC), which regulates oil and gas activity in the state, has issued several restrictions over the past year aimed at reducing the amount of wastewater injected into underground wells. There are 35,000 active wastewater disposal wells in the state, although only a few dozen have been linked to seismic activity. The OCC ordered 37 waste-disposal wells shutdown in September on concerns the injections were causing the quakes. The regulator issued another advisory this week, expanding the shut-in to 58 wells.
ConocoPhillips plans to slim down and focus on US shale . . .
ConocoPhillips announced plans to sell US$5-8 billion worth of assets, mostly from its North American natural gas division. The company wants to position itself to deliver "double-digit shareholder returns across a range of commodity prices. Highlights from its 2017 operating plan:
2017 capital expenditures were reduced to US$5 billion, 4% lower than 2016 and more than 50% percent lower than the 2015 capital budget. Next year's spending will focus primarily on shale development in the Lower 48, with smaller investments planned for Europe, Asia Pacific and Alaska. About US$600 million is being earmarked for exploration.
Full-year 2017 production is expected to be 1.54 to 1.57 million boe/day, 2% higher than full-year 2016. Growth will come from ramp up at the APLNG in Australia, the Surmont 2 oil sands facility in Alberta, Kebabangan in Malaysia and increased output from US shale.
2017 operating costs are expected to drop by another 9% versus 2016.
The company also announced plans to buy back US$3 billion worth of stock. ConocoPhillips is the world’s largest independent energy exploration and production company headquartered in Houston, Texas.
OPEC and the IEA paint a very bleak picture . . .
In their November Oil Market Report, the International Energy Agency (IEA) warned that "2017 could be another year of relentless global supply growth" and demand will likely not increase fast enough to keep up with expanded supply.
Among this month's key highlights:
OPEC crude output rose by 230,000 bbl/day in October to a record 33.83 million bbl/day on higher output from Nigeria, Libya and Iraq. October marks the fifth consecutive monthly increase for the cartel.
Global oil supply rose 800,000 bbl/day in October to 97.8 million bbl/day on expanded output from just about everywhere.
Year-over-year, world oil output is up 800,000 bbl/day. OPEC production has grown by 1.3 million bbl/day over the past 12 months, offsetting a 900,000 bbl/day decline in non-OPEC countries (mostly the US).
Total non-OPEC production is expected to grow by 500,000 bbl/day next year, led by Brazil, Canada, Russia and Kazakstan. Output from Russia (the world's largest crude oil producer) has increased by 230,000 bbl/day in 2016 and should grow by another 200,000 bbl/day next year.
The IEA says the outlook is bleak for oil prices unless OPEC gets serious about production cuts, noting "Whatever the outcome, the Vienna meeting will have a major impact on the eventual - and oft-postponed - rebalancing of the oil market ... If the supply surplus persists in 2017, there must be some risk of prices falling back."
In their November Monthly Oil Market Report, OPEC pegged their October production at 33.64 million bbl/day, up 240,000 bbl/day from the previous month. The cartel is projecting a surplus of 1 million barrels next year if output from OPEC producers stays at the current levels.
The agency is also forecasting a big jump in shale production due to "reduced costs and productivity improvements." US tight oil is expected to reach 1.2 million bbl/day by 2040 but global shale supply is projected to reach 6.7 million bbl/day by 2030 as Argentina and Russia expand shale production.
OPEC increased its medium-term world oil demand forecast to 99.2 million bbl/day by 2021, roughly 1 million bbl/day more than in last year's forecast. However, OPEC reduced its long term oil demand outlook in part due to the Paris Climate Accord, noting that "future tightening of climate change policies will likely lead to reduced energy demand and a further shift in the energy mix towards renewables".
In their 2016 World Oil Outlook also released this week, OPEC estimates US$10 trillion in oil-related investments are required to meet the world's oil demand through to 2040.
This week's other energy news . . .
Former InterOil CEO Phil Mulacek won an appeal blocking ExxonMobil's purchase of InterOil. The Supreme Court of Yukon initially approved the transaction, but the ruling was overturned by the Yukon Court of Appeal. The takeover would have given Exxon control of InterOil's Elk-Antelope asset in Papua New Guinea, one of the world's most attractive gas reserves. Mulacek maintains Exxon seriously undervalued the company and has not been fully transparent with shareholders. Exxon says they remain fully committed to the US$2.2 billion deal. InterOil is exploring its options, including filing an appeal. InterOil is incorporated in the Yukon and headquartered in Singapore.
ExxonMobil and Sunoco Logistics Partners announced a new joint venture named Permian Express Partners, combining midstream assets near the Dakota Access pipeline. The assets include Sunoco's Permian Express and Louisiana Access pipelines, as well as Exxon's Pegasus pipelines, Hawkings gathering system and a terminal in Patoka, Illinois. The deal will give Sunoco better access to the West Texas Permian Basin.
The Wall Street Journal is reporting that Royal Dutch Shell plans to double Brazil's deep-water output by early 2020. The company says it plans to invest an additional US$10 billion in the South American country over the next 5 years, on top of the US$30 billion already deployed. Brazil’s congress recently voted to ease restrictions on foreign investments on offshore oil fields. The country's deep-water output last year was about 450,000 bbl/day.
Shell has also shut down its Escravos crude oil flow station in Nigeria after villagers staged a protest, cutting off power, water and oil production. The villagers are demanding better roads, water and electricity. Shell claims it has provided temporary diesel generators while a more permanent power supply is established. Reuters is also reporting that the Niger Delta Avengers have damaged Shell's Forcados crude export line, reducing output by as much as 200,000 bbl/day. Prior to the attacks, the Nigerian government claimed production had been almost fully restored to its January level of 2.2 million bbl/day.
Still in Nigeria, the government announced plans to reform state-owned NNPC (Nigerian National Petroleum Corporation) and eventually IPO the company. The government says it wants to reduce reliance on oil exports and shift to a "gas-based industrial economy." Unless new reserves are discovered and brought online, Nigeria oil production will begin to decline after 2020.
-76k ▼ 2.3%
BBL/D CDN EXPORTS TO US
+170k ▲ 2.0%
BBL/D US PROD'N
+2.43M ▲ 0.5%
BBL US INVENTORIES
+2 ▲ 0.4%
US RIG COUNT
US oil production jumped sharply last week, gaining another 170,000 bbl/day, mostly in the Lower 48. Total US oil production is up about 265,000 bbl/day since the lows of early June, now averaging 8.69 million bbl/day. In this month's Short-Term Energy Outlook, the US Energy Information Agency (EIA) boosted its 2017 production forecast to 8.7 million bbl/day, up 100,000 bbl/day from its previous forecast.
US natural gas inventories reached 4,017 billion cubic feet (bcf) last week, surpassing the previous record high of 4,009 bcf reached last year. Natural gas prices have sunk more than 20% from the highs of October.
Contrary to all predictions, the Trump victory sent bond yields soaring to their highest levels since last December's US rate hike. The US dollar peaked over 99 this week, the highest level since early February. A stronger greenback and lower oil prices dragged the Canadian dollar to a 9 month low.
Credit-ratings agency TransUnion reported a 2.5% increase in Canadian non-mortgage (consumer) debt, rising to $21,686 by the end of the third quarter. Ontario (+2.6%) and Quebec (+3.6%) led most of the gains. Non-mortgage debt rose only 0.46% in Alberta but delinquencies spiked to 3.13% (versus the national average of 2.7%). Alberta still has the highest consumer debt at $27,663 per person. Delinquency rates (defined as debt payments that are more than 90 days overdue) are the highest in Saskatchewan, at 3.46%. TransUnion estimates that 700,000 Canadians would struggle with a 0.25% increase in interest rates and up to 1 million borrowers may not be able to make their payment if interest rates rise by 1%.
Production at Athabasca Oil (TSX:ATH) averaged 11,848 boe/day in the third quarter, an increase of 63% from the same time last year. Production at its Hangingstone SAGD facility averaged 8,830 bbl/day in Q3, after having fully recovered from the wildfire shutdowns in May. The company expects Hangingstone will reach its design capacity of 12,000 bbl/day sometime in 2018. Q3 net losses narrowed to $33.0 million, down from $38.2 million in Q3/2015.
Third quarter revenues at Enerflex (TSX:EFX) declined to $262 million, down from $425 million for the same quarter last year. Bookings are up 57% to $317 million while net earnings declined 45% to $17.6 million. The company says the Canadian and Australian markets have been "challenging" but US and Middle-East markets have seen improvements. Enerflex expects additional restructuring charges in Q4 which will include the closure of its Central Services distribution facility in Leduc and the relocation of a branch in Red Deer.
Midstream player Keyera Corp. (TSX:KEY) reported a 52% decline in net earnings, falling to $52.4 million in the third quarter. The company's liquids infrastructure business had a record quarter, thanks to strong performance from its condensate distribution business. Keyera has three joint-venture projects currently under construction:
the Norlite diluent pipeline (JV with Enbridge), on schedule for completion in mid-2017
the South Grand Rapids diluent pipeline (JV with TransCanada and Brion Energy), on schedule for completion in late 2017
the Base Line Tank Terminal crude oil storage (JV with Kinder Morgan), expected to be put into service in early 2018.
Keyera says it sees continued downward pressures on fees and transport volumes but thinks it is well positioned for growth when the market recovers.
Canadian Energy Services (TSX:CES) posted third quarter revenues of $145.1 million, down from $133.7 million for the same time last year. Funds from operations were cut in half to just $11.7 million resulting in a net loss of $11.4 million. The company says business has improved considerably in Q3 but the drive to lower operating costs has required a headcount reduction in both Canada and the US. CES supplies specialized fluids and chemicals used in fracking. Despite declines across the energy sector this week, CES stock was one on the biggest gainers on the TSX, hitting a fresh 52 week high.
Despite a 19% increase in third quarter revenues, Birchcliff Energy (TSX:BIR) reported a third quarter loss of $2.0 million, versus a gain of $3.8 million for the same period last year. Q3 production rose 42% to a record 38,433 boe/day thanks to its recent Gordondale acquisition. Production is expected to average 62,000-63,000 boe/day in Q4, rising to an average of 70,000-74,000 boe/day next year. Despite the loss, Birchcliff is implementing a quarterly dividend of 2.4¢ per share on the belief that fundamentals will improve for the energy sector as a whole next year. The company also says it plans to "materially reduce indebtedness" in the next five years.
Trilogy Energy (TSX:TET) reported an after-tax loss of $25.5 million in the third quarter, 36% lower than the same time last year. Funds from operations rose 65% to $16.1 million. Q3 production was 21,632 boe/day, 7% higher than the previous quarter as previously shut-in wells were put back into production. Year-to-date operating costs have declined to $8.47/boe versus an average of $9.18 in 2015. The company plans to increase drilling and production from its Duverney and Montney properties in the fourth quarter.
Bellatrix Exploration (TSX:BXE) reported a 5% decline in third quarter revenues, falling to $56.5 million. Funds from operations declined to $10.6 million on lower production volumes, while Q3 losses narrowed to $13.9 million. The company produced 34,409 boe/day in Q3 and has reduced its debt load by 79% since the beginning of the year.
Peyto Exploration (TSX:PEY) reported third quarter revenues of $168 million, roughly unchanged from Q3/2015. Production increased 19% to 96,365 boe/day while Q3 earnings declined 39% to $22.8 million. The company says it remains committed to the natural gas market and expects North America demand to remain strong.
Crescent Point Energy (TSX: CPG) shrank its quarterly loss to $108.5 million (down from a $201 million loss in Q3/2015), helped by lower costs. Average production declined 7% to 160,610 boe/day. The company says it continues to see exceptional performance out of its Uinta Basin and Flat Lake resource plays.
This week's 52 week highs on the TSX include Teck Resources (TCK/B), Canadian Energy Services (CES) and North American Energy Partners (NOA). Chevron Corp. (CVX) also hit a 52 week high on the NYSE.
UPGRADES & DOWNGRADES
Anadarko Petroleum (NYSE:APC): Upgraded from Neutral to Buy at Guggenheim.
ConocoPhillips (NYSE:COP): Upgraded from Hold to Buy at Edward Jones.
Encana (TSX:ECA): Upgraded from Hold to Buy at KLR Group.
Pembina Pipeline (TSX:PPL): Upgraded from Hold to Buy at GMP Securities.
NEXT WEEK'S EVENTS
Parliamentary Budget Officer releases fall fiscal update
Federal government hosts investor summit in Toronto, ON
EIA releases World Energy Outlook 2016
API Weekly Statistics Bulletin released @ 4:30pm ET
December Western Canadian Select contract expiry
EIA Petroleum Status Report released @ 10:30am ET
EIA Natural Gas Report released @ 10:30am ET
October CPI data released by StatsCan @ 8:30am ET
Newfoundland & Labrador premier provides economic outlook in Toronto @ 12:00pm ET.
Baker-Hughes Rig Count released @ 1:00pm ET.