The Oil Sands Weekly
Heavy rains to blame for Husky oil spill . . .
Ground movement was apparently to blame for Husky Energy's pipeline rupture that occurred in late July, spilling about 1,400 barrels of heavy oil and diluent into the North Saskatchewan River.
A geotechnical report prepared by Stantec blamed heavy rains, poor drainage and a weak clay foundation for ground movement that caused the pipe to buckle. A metallurgical survey of the pipeline ruled out corrosion or material defects as a possible cause. The rupture was approximately 15 inches in length.
Husky called the failure “a sudden, one-time event" and has already spent about $90 million cleaning up the shorelines, recovering an estimated 1,200 barrels. The company says its cleanup operations on the North Saskatchewan River are complete but monitoring activities will continue through the winter and into 2017. The province of Saskatchewan has yet to decide whether it will charge Husky for the spill.
On a more positive note, the city of Prince Albert, which had to shutdown its water intake structures after the incident, won second place at the the American Water Works Association “Best of the Best” water taste test competition held in Calgary last month.
Federal government drops another hint . . .
Federal Natural Resources Minister Jim Carr told reporters this week it's important for the country's oil exports to reach Asia, hinting yet again the Liberals plan to approve Kinder Morgan's Trans Mountain expansion by the end of this year. Carr added the government does not want to be overly reliant on the US market, which currently accounts for 99% of Canada's energy exports.
The expansion will run parallel to the existing 300,000 bbl/day Trans Mountain line which has been in operation since 1953. If built, the expansion would add 590,000 bbl/day of export capacity from the Edmonton area to the state of Washington and an export terminal in Burnaby, BC. The line carries both crude oil and refined products.
On a related topic, senior executives at Kinder Morgan revealed there have been internal discussions to IPO the company's Canadian subsidiary (Kinder Morgan Canada) in order to raise funds. The company later backtracked on the comments (made at an investor event in Miami), saying it was way too early to discuss the spin off, considering that the project has yet to be approved.
Suncor expects higher production and lower costs next year . . .
- Capital spending is expected to be between $4.8 and $5.2 billion, about $1 billion lower than 2016.
- The company expects to produce 680,000 to 720,000 boe/day next year, 13% higher than the current year.
- Operating costs at Suncor's base oil sands operations are expected to average $24 to 27 per barrel next year, revised upwards by $1 due to higher natural gas prices. The 2016 average costs are expected to be $25.50 to $27.50/bbl.
- Syncrude's operating costs are expected to average $32-$35/bbl in 2017. Operating costs for the current year are expected to fall between $37 and $39.
Both Hebron and Fort Hills are scheduled to wrap-up construction by the end of next year.
TransCanada abandons open-season for natural gas line to Ontario . . .
TransCanada has halted its open season for a fixed-price toll on its natural gas pipeline from BC/Alberta to southern Ontario. The company says the bids it received did not make the project viable.
TransCanada was asking shippers to sign up for a 10 year contract, paying between $0.75 and $0.82 per gigajoule, depending on volumes. The company later gave shippers a chance to exit after 5 years after both CNRL and Encana complained 10 years was way too long.
The cancellation came as a surprise since earlier this month, CNRL president Steve Laut said his company was close to reaching an agreement that would benefit all parties. Birchcliff Energy CEO Jeffery Tonken thinks there's still hope all parties will return to the table. Ontario imports about 60% of their natural gas from the US.
Go/no-go decision on Pacific NW LNG expected in April . . .
BC's Minister of Natural Gas Development Rich Coleman says he expects a decision by Petronas on the Pacific Northwest LNG Project by April 2017. Coleman says Petronas and its partners are reviewing the project and working to reducing capital costs. Petronas says the project must be cost competitive with similar projects around the world. The company denied rumours it has put its stake in the LNG export facility up for sale.
Without LNG, all of Canada's natural gas production is basically stranded and strangled by exploding gas production in the US. Natural gas drilling in BC has fallen to a 23 year low due to significant oversupply in North American.
Pacific Northwest LNG has an estimated price tag of $36 billion and was recently granted conditional approval by the federal government. If approved, this would be the first greenfield LNG project approved since December 2013. Most LNG projects are brownfield (typically import terminals converted to export terminals) building on existing infrastructure to reduce capital costs. Several aboriginal and anti-LNG groups have already filed lawsuits seeking to overturn the federal government's approval.
This week's Canadian economic news . .
The Conference Board of Canada (CBoC) estimates $5.3 billion will be spent over the next 3 years to rebuild Fort McMurray. The May wildfires damaged or completely destroyed 1,935 homes, 23 commercial properties and 12,000 vehicles. The CBoC estimates $3.6 billion will come from insurance companies. About 45,000 claims were processed at an average payout of $80,000. The Conference Board estimates 2,500 homes will be built over the next 3 years, adding 0.4% to the province's GDP in 2017 and bringing 5,100 jobs to the Wood Buffalo area.
Canada Mortgage and Housing Corporation (CMHC) thinks a 2% increase in borrowing costs could drop home prices by 30%, and even result in the failure of a Canadian financial institution. In contrast, a return to US$20 oil would only take home prices down an average of 8%. Both RBC and TD have raised mortgage rates in Canada due to the sharp rise in long bond rates that occurred post-US election.
The Bank of Canada says a rise in US interest rates will not necessarily translate into a rate hike in Canada. Deputy Governor Timothy Lane says a lower loonie would boost the competitiveness of Canadian exports, which would be a net positive for the country.
Statistics Canada reported that food prices actually fell 0.7% y/y in October, the first decline since 2000. However, the cost of transportation and shelter is up, boosting the Consumer Price Index (CPI) higher by 1.5% y/y. The biggest contributors to the upside were gasoline (+2.5%), passenger vehicles (+4.4%) and shelter (+1.9%). In contrast, natural gas prices declined 3.4%. The Bank of Canada's core index now sits at 1.7%, down slightly from the previous month.
Other Canadian energy news . . .
Aecon Group announced it was recently awarded two major contracts - one for Spectra Energy and another for an undisclosed oil sands miner in Alberta. The Spectra deal is a 5-year contract relating to shutdown services on its natural gas processing facilities in BC. The oil sands contract involves overburden removal, mine support, reclamation and civil work through the end of 2020. Aecon's CEO Terrance McKibbon also resigned this week after reporting disappointing third quarter results, causing shares to plummet over 20% in less than a week.
ARC Resources announced the sale of its oil batteries and gathering pipelines in southeastern Saskatchewan to Spartan Energy for $700 million. The purchase will make Spartan one of the largest oil producers in Saskatchewan, boosting output to about 20,800 boe/day. Spartan will be issuing $505 million in new shares to pay for the acquisition. ARC plans to use proceeds from the sale to advance development of its core Montney assets in northwestern Alberta and northeastern BC.
Newfoundland and Labrador (NL) Premier Premier Dwight Ball says he is continuing to work towards diversifying his province away from offshore oil revenues. The province relies heavily in "old-school" sectors such as mining, oil production, fishing and agriculture. NL was hit especially hard in the past few years by falling oil prices and collapse of the iron-ore market, forcing the premier to dramatically raise taxes and cut spending. The province banked almost $2 billion in the past few years selling offshore exploration licenses. However, the premier says his province is investing heavily in renewables such as hydroelectricity and wind farms.
Quebec Premier Philippe Couillard signalled once again there will be no gas development under his watch, squashing a suggestion from his natural resources minister that fracking might happen someday in the distant future if the technology improves. Speaking at the UN Climate Change Conference in Marrakech this week, the premier says he sees no path to "social acceptability for this project in this densely populated area of Quebec," adding that gas development would be at odds with the government's plans to combat climate change.
US energy news this week . . .
Still in Marrakech, French PM François Hollande reminded US President-elect Donald Trump that the Paris Accord is “irreversible from a legal point of view.” Secretary of State John Kerry added that “no one should doubt that the majority of Americans are determined to keep the commitments we have made.” During his election campaign, Trump has promised to rip-up the Paris Accord and end the witch hunt on coal. However, US carbon emissions are already declining steadily thanks to the growing use of natural gas for power generation.
President Obama has moved to block the sale of new oil and gas drilling rights in the Beaufort and Chukchi seas, north of the Arctic Circle. The proposal also limits petroleum development in the Cook Inlet off south-central Alaska. The deal would be subject to a 60 day congressional review. Representatives from Alaska are not thrilled with the move, since the state is looking for new ways to fill the Trans-Alaska Pipeline, which faces declining volumes. The move would be largely symbolic since it will likely be reversed by the next president. Shell has already abandoned plans for exploration in the same area after it spent US$7 billion and came up dry. The United States Geological Service (USGS) estimates that 27 billion barrels of oil lie underneath the US Arctic.
Tesoro Corp. announced plans to buy Western Refining for US$6.4 billion, including US$1.7 billion in debt. Western Refining shareholders will get 0.435 Tesoro shares for each share they own, roughly a 22% percent premium to the pre-announcement share price. The deal gives Tesoro additional refining capacity in Texas, New Mexico and Minnesota, bringing their total refining capacity to over 1.1 million bbl/day. Western Refining has agreed to pay a US$120 million break-up fee is the deal falls through.
ConocoPhillips has put its Kenai LNG export terminal in Alaska up for sale. The terminal has been in operation since 1969 and was the only LNG export terminal in service in North America until earlier this year. The facility has an export capacity of 0.2 billion cubic feet (bcf) per day, mostly sold to Japan. However, the facility has not exported any gas this year due to economic conditions. ConocoPhillips says it wants to focusing its effort on gas development from Alaska's North Slope.
Anadarko Petroleum announced the sale of its Carthage upstream and midstream assets in East Texas to Connecticut-based commodities trader Castleton Commodities International for over US$1 billion. East Texas is home to the Haynesville formation, one of the largest US shale gas plays, producing roughly 5.9 bcf/day.
BP announced plans to cut up to 80 non-unionized positions at their 413,500 bbl/day Whiting Refinery in Indiana. The refinery currently employs about 1,800 people, including contractors.
Exxon Mobil announced plans to expand production at its Beaumont polyethylene plant by 65%, or about 650,000 tonnes/year. The facility will produce pelletized polyethylene to be used in plastics manufacturing. Two similar polyethylene units are also being added at its Mont Belvieu Plastics Plant, also in Texas. The two expansions will grow Exxon's polyethylene production to almost 2 million tonnes/year by 2019. The company says it has an abundant supply of domestic shale gas and sees growing demand for high-performance plastics. Jacobs Engineering Group was awarded the contract for front end engineering, detailed design and construction management.
Around the world this week . . .
UK's Sunday Times is reporting that Royal Dutch Shell has hired investment firm Rothschild to sell part or all of its Norwegian business unit. The division has an estimated value of US$3 billion, which the company will put towards debt reduction. Shell operates several large oil fields in the Norwegian North Sea.
The Dutch government has received numerous appeals from local governments and anti-fracking groups to reconsider its cap on gas production from its Groningen gas fields. Output from the Groningen field has already been cut in half in the past two years after the Dutch Safety Board ruled that the government had failed to protect its citizens from earthquakes thought to triggered by fracking. The Dutch government instated a preliminary cap of 24 billion cubic meters (bcm), with allowances for additional production in the event of a harsh winter. The Groningen gas field is a joint venture between Royal Dutch Shell and Exxon Mobil, located in the northeastern part of the Netherlands. Groningen is the largest gas field in Europe and once supplied 10% of the EU's total gas consumption.
Due to government budget cuts, Argentina will likely move to eliminate subsidies to the country's oil producers by the end of the year, which could see oil revenues drop by up to 20%. Argentinian oil sells for about US$58 a barrel, over US$10 more than the Brent benchmark. The inflated prices were fixed by the previous government in an effort to promote oil exploration. State-owned YPF will also need to start paying market price for crude feedstock to its refineries. President Mauricio Macri has also cut subsidies to fuel and electricity in a bid to reduce his country's expanding deficit. Argentina has sizeable shale oil and gas reserves, which largely remain untapped due to its "temperamental" government.
Brazil's state-owned PetroBras has sold its LPG distribution business to competitor Ultrapar Participacoes for approximately US$819 million.
The government of Nigeria has agreed to pay US$5.1 billion in unpaid bills to oil majors including Shell and Exxon Mobil. Nigeria's National Petroleum Corporation (NNPC) owed US$6.8 billion to Western oil firms for its share of exploration and oil production bills. Under terms of the deal, payment will be made in the form of crude oil cargoes but only when the country's production exceeds 2.2 million bbl/day, which is Nigeria's total output capacity. The deal gives companies incentive to return oil production to "normal" following a series of militia attacks and mishaps that have crippled the country's output.
Mozambique has moved one step closer to becoming an LNG superpower after Italian oil major Eni finalized plan to develop the country's Coral South offshore gas project. Eni discovered the huge reserve in 2012, one of the largest gas discoveries in the past decade. The field holds an estimated 16 trillion cubic feet (tcf), bringing the country's total gas reserves to about 85 tcf. The Coral South project has an estimated price tag of US$50 billion, which includes six subsea wells and a floating production facility capable of producing more than 3.3 million tonnes of LNG per year. Reuters is reporting Eni will sell part of its stake to Exxon Mobil to help pay for the development. A final investment decision is expected by the end of this year.
Iran has surpassed Saudi Arabia to become the number one oil supplier to India in October. India imported an estimated 789,000 bbl/day from Iran, almost triple the same time last year. Reuters is reporting than Iran has been offering price discounts in order to gain market share.
Libya plans to expand production to about 1.1 million bbl/day next year, almost double its current capacity. Mustafa Sanalla, chairman of state-owned National Oil Corp. says Libya is ”heading toward economic revival” but warned any attacks on oil installations will likely derail the country's plans to increase output. Libya produced 1.6 million bbl/day in 2011 before its leader Moammar Al Qaddafi was ousted. A force majeure was put in place in December 2014 after warring factions fought for control of the country's oil exports. Libya is an OPEC member and holds Africa's largest crude oil reserves.
+37k ▲ 1.2%
BBL/D CDN EXPORTS TO US
-11k ▼ 0.1%
BBL/D US PROD'N
+5.27M ▲ 1.1%
BBL US INVENTORIES
+19 ▲ 4.2%
US RIG COUNT
Rig counts jumped on both sides of the border this week, renewing suspicions that oil production will pick up through the end of the year. The number of oil rigs in service rose by 19 in the US, the 19th weekly increase in the past 20 weeks. Canada gained 10 oil rigs (an 11% increase) while the number of gas rigs in service fell by 3 to 84.
BP CEO Bob Dudley says he thinks oil markets are generally in balance but there's still too much inventory overhang. Dudley remains hopeful a deal will be reached between Russia and OPEC producers later this month.
Federal Reserve Chair Janet Yellen signalled once again the American economy is more than ready for higher interest rates, increasing the odds of a December rate hike to over 90%.
The US dollar hit a 14 year high this week, dragging all other currencies lower. The Euro declined for 10 days in a row, falling another 2.5%. The Japanese yen dived 3.7%. The Australian dollar fell 2.7% as commodity prices return to Earth, giving back most of last week's gains.
The heavy oil differential has widened to $15.25 this week, largely blamed on seasonality.
Hedge fund managers have suddenly turned bearish on oil prices, apparently on skepticism that OPEC will reach a deal by the end of the month. Money managers cut their net long position in Brent and WTI by 149 million barrels last week. The reduction was the largest on record. Net short positions rose by 135 million.
TransCanada (TSX:TRP) issued 40 million preferred shares this week priced at $25 for gross proceeds of $1 billion. The Series 15 Preferred Shares will pay an annual dividend of $1.225 per share, or 4.9% until 2022. The company also announced it successfully completed its offering of 60,225,000 common shares (priced at $58.50 a share) announced at the beginning of November.
Enbridge (TSX:ENB) also announced plans to sell 30 million preferred shares at $25/share for gross proceeds of $750 million. The company says it will use the funds to pay down debt and fund its capital spending program. The shares will pay an annual dividend of $1.2875 per share, or 5.15% until 2022.
Calgary-based Whitecap Resources (TSX:WCP) has approved a $300 million capital budget next year to be spent mostly on the drilling of 187 oil wells. The company boosted its production forecast from the current 45,700 boe/day to an average of 57,000 boe/day next year. Whitecap says it plans to maintain "operational flexibility" to reduce its capital spending if oil prices weaken and conversely increase their capital program through the second half of 2017 if there is a "meaningful and sustained improvement in commodity prices."
Warren Buffett's Birkshire Hathaway dumped its entire stake in Suncor Energy (TSX:SU) in the third quarter. The company owned 30 million shares at the beginning of the year. The company's stake in Kinder Morgan (NYSE:KMI) was also cut by almost 25% to 20 million shares
Enerplus (ERF +16.3%) was the best performing energy stock on the TSX this week on better than expected third quarter results. Encana (ECA +13.7%) was a close second. This week's 52 week highs on the TSX include:
- Blackpearl Resources (PXX)
- Canadian Energy Services (CEU)
- Encana (ECA)
- Enerflex (EFX)
- Enerplus (ERF)
- North America Energy Partners (NOA)
- Suncor Energy (SU)
- Teck Resources (TCK.B)
- Trican Well Service (TCW)
Chevron (CVX) also hit a 52 week high on the NYSE this week. US markets continued their post-election euphoria this week, with most nearing all-time highs.
UPGRADES & DOWNGRADES
- BP (NYSE:BP): Downgraded from Buy to Outperform at CLSA.
- ConocoPhillips (NYSE:COP): Downgraded from Outperform to Underperform at CLSA.
- Noble Energy (TSX:NBL): Downgraded from Buy to Neutral at Seaport Global Securities.
- Teck Resources (TSX:TCK.B): Upgraded from Underweight to Overweight at Barclays. The company increased its price target from $22 to $36.
- Valero Energy (TSX:VLO): Upgraded from Hold to Buy at Tudor Pickering.
NEXT WEEK'S EVENTS
- September Wholesale Trade data released by StatsCan @ 8:30am ET
- December contract expiry for West Texas Intermediate
- September Employment Insurance data released by StatsCan @ 8:30am ET
- API Weekly Statistics Bulletin released @ 4:30pm ET
- EIA Monthly Energy Market Review - November edition
- EIA Petroleum Status Report released @ 10:30am ET
- EIA Natural Gas Report released @ 12:00pm ET (released early due to Thursday holiday)
- Baker-Hughes Rig Count released @ 1:00pm ET (released early due to Thursday holiday)
- US Crude Oi & Natural Gas Reserves released by the EIA
- US markets closed for Thanksgiving
- September payroll data released by StatsCan @ 8:30am ET
- NYSE closes early @ 1:00pm ET.