The Oil Sands Weekly

The Oil Sands Weekly

  • Spending big dollars on a small upgrader
  • Alberta navigates a challenging year
  • Improving safety on Highway 63
  • Moving towards a single energy regulator
  • 2017 M&A activity off to a very strong start
  • Canada remains top destination for US crude
  • Enbridge's long list of options in Michigan
  • CPP managers shopping for US energy assets
  • Trump pivots from "Energy Independence" to "Energy Dominance"
  • US shale has another 3 million bbl/day left in the tank
  • South Korea invests "bigly" in US LNG
  • Niger Delta Avengers give peace a chance.


The year that was: AER releases latest annual report
The Alberta Energy Regular (AER) released its 2016/17 report this week, highlighting several key achievements for the year. The regulator's most notable accomplishments include a 3% reduction (y/y) in pipeline incidents (now down 45% in the past decade), new guidelines around controlling and measuring air quality around Fort MacKay and $1.9 billion in cost savings through "regulatory efficiency improvements."

Navigating a challenging year
Alberta's Finance Minister Joe Ceci released the province's 2016/17 annual report this week. The government ran a deficit of $10.8 billion, $263 million more than expected due to the Wood Buffalo wildfires and $1.1 billion earmarked for the pending closure of the province's coal-fired power plants. Alberta contracted 3.5% last year but Ceci says the labour market is getting better and the province is seeing improvements in drilling activity and manufacturing. Last year's budget assumed US$42/bbl, better than the actual WTI average of US$48. However, this year's budget assumes US$55/bbl, which is unlikely to be reached. The government still thinks it can balance the books by 2023/24. Provincial debt now sits at $33.3 billion.

$9.3 billion to upgrade 50,000 bbl/day of bitumen
According to AltaCorp Capital, the latest price tag for the Sturgeon Refinery is now $9.3 billion, up $800 million from previous estimates. The "refinery" is technicallya bitumen upgrader, producing only diesel and naphtha, but also includes a carbon-capture plant. The Alberta government has ensured 30-years worth of bitumen feedstock, collected in lieu of royalty payments. Sturgeon is a 50/50 JV between privately-held North West Refining and Canadian Natural Resources (CNRL). AltaCorp is also reporting that North West Refining is looking to sell their stake, valued at $500 million. The first phase is expected to come into service before the end of this year.

Reviving skeletons in the closet
Penn West Energy officially became Obsidian Energy this week. The name change comes with a new ticker symbol (TSX:OBE) and a snazzy new website. The company was also hit by a lawsuit filed by the US Securities and Exchange Commission (SEC), where three former executives are being accused of fraudulent accounting practices. Obsidian says it is disappointed by the lawsuit since it already disclosed the financial discrepancies in 2014 and has been working to correct the situation ever since. The executives named in the lawsuit are no longer with the company.

Putting a spotlight on Highway 63
The Wildrose Party is raising awareness on Alberta's most dangerous highways, releasing an interactive map of the province's fatal collision spots. Among the list of worst offenders is the notorious Highway 63, that runs from Edmonton through Fort McMurray, all the way north to the oil sands mining operations. The small stretch of road from Fort McMurray, up to the Bridge to Nowhere turnoff (just before Fort MacKay) saw 18 fatal collisions since 2005, making it the third most dangerous highway in the province. The Wildrose Party would like to see the NDP government create an action plan to improve safety along the high-risk corridors.

Creditor protection extended for Connacher, once again
Alberta's Court of Queen's Bench has approved an extension of creditor protection for Connacher Oil & Gas until the end of January 2018. As a result, the company will defer any loan repayments during that time. Connacher has been under creditor protection since May of last year. However, its Algar SAGD facility continues to operate normally, producing about 12,000 bbl/day in the first quarter of this year. Connacher has been looking to sell some assets to help repay its debt, last estimated at $304 million (both short and long term).

USO gets delisted
Calgary-based US Oil Sands confirmed it has be delisted from the TSX venture exchange now thatit has secured a convertible loan from its largest investor, ACMO. Funds will provide working capital required to complete the start-up of its PR Spring Project in the Utah Uinta Basin.


Moving towards a single energy regulator
The Government of Canada released a discussion paper this week on its ongoing campaign to reform how energy projects are regulated. The Ministry of Natural Resources says it is considering implementing many of the suggestions from the NEB Modernization Panel including establishing a single regulator and starting consultations before the regulatory review process, giving the government veto power without having to go through the entire environmental assessment. The "new" regime would be similar to the US model, but two years longer and with extensively more feedback from the general public.

M&A off to a very strong start in 2017
Mergers and acquisitions activity in Canada totalled US$132 billion for the first half of 2017, the highest since the first half of 2007 and up substantially from a low of just US$50 billion in 2008. Over one-third of that activity was domestically driven and about US$34.5 billion was in the energy patch. JP Morgan was the top financial advisor, followed by TD, Goldman Sachs and RBC.

A warning for service companies
GMP Energy remains optimistic about crude prices going forward, suggesting that the US cannot possibly offset all of OPEC's production cuts. Director Martin King thinks OPEC will likely extend its agreement, which would result in a short-term rally. However, the firm also warned this week that announced spending increases in the Canadian energy patch will likely be dialed back as oil prices are far below expectations. Service companies will likely be the most impacted.

Big gas station retailer gets a lot bigger
Quebec-based Alimentation Couche-Tard (ATD.B) has reached an agreement with the US Federal Trade Commission (FTC) to sell 70 retail gasoline stations in 8 states in order to close on its US$4.4 billion acquisition of CST Brands (NYSE:CST). The divested stations will be sold to privately-held fuel distributor Empire Petroleum Partners. The acquisition adds 1,178 US retail outlets to its empire of over 10,000 convenience stores across North America. Couche-Tard was also cleared by the Canadian Competition Bureau to sell the majority of CST's assets in Quebec, Ontario and Atlantic Canada to Parkland (PKI).


From "Energy Independence" to "Energy Dominance"
President Donald Trump announced six new initiatives this week aimed at achieving world "energy dominance" including reviving and expanding nuclear energy, lifting financing restrictions for foreign coal-fired powered plants (presumably so they can buy more US coal), building three new oil products pipelines to Mexico, exporting more LNG to South Korea, expanding the Lake Charles LNG project in Louisiana and opening up federal lands to drilling and exploration. The US is currently the world's largest produce of oil (including liquids) and natural gas. Trump added "the golden era of American energy is now underway."

South Korea wants more natgas from the US - Part 1
As noted in Trump's speech, a subsidiary of Dallas-based Energy Transfer has signed an MOU (Memorandum of Understanding) with South Korea's KOGAS to study the feasibility of building an LNG export terminal at Lake Charles, Louisiana. Shell is also participating in the study.

South Korea wants more natgas from the US - Part 2
KOGAS also signed an MOU with Sempre Energy and Australia's Woodside Petroleum on the potential development of an LNG export facility in Port Arthur, Texas. The project would include two liquefaction trains, storage tanks, marine berths and ancillary facilities.

South Korea wants more natgas from the US - Part 3
South Korea's SK Group has signed several agreements with GE, ExxonMobil and Energy Transfer to jointly develop US shale gas fields and boost LNG exports. SK Group says it plans to invest US$1.6 billion in the US over the next 5 years.  South Korea is the world's second largest LNG importer, after Japan.

NAFTA's energy factor
Energy Secretary Rick Perry says reworking NAFTA will give the US a chance to develop a "North American energy strategy that will pay great dividends for Canadians, for Mexicans, for Americans, as we go forward." Perry says he has a good working relationship with Minister Jim Carr and Mexican Energy Secretary Pedro Joaquin Coldwell. North American energy is quite tangled and deeply integrated, with the bulk of Canadian crude exports destined for the US while Mexico is the top importer of American natural gas and gasoline.

Canada's pension managers join the hunt for quality US oil & gas assets
The Canada Pension Plan Investment Board (CPPIB) and Houston-based Encino Energy have teamed up to find investment opportunities in the US oil & gas sector, specifically "high-quality assets with an established base of production in mature basins across the lower 48 states." CPPIB has committed up to US$1.0 billion while Encino will pitch in US$25 million. The assets will be owned and operated by a new partnership, Encino Acquisition Partners. CPPIB has approximately $317 billion in assets under its management, about 40% invested in THE US and only 16.5% in Canada.

Enbridge's options in Michigan
Michigan's attorney general has released an independent report on a 4.5km section of Enbridge's Line 5 that crosses the Straits of Mackinac. The two 20" pipes were installed in 1953 about 250 feet below the water level. Line 5 is part of Enbridge's 2.6 million bbl/day Lakehead system, delivering propane and crude feedstock to two large refineries in the region. The consultants looked at a wide variety of alternatives including leaving the system as-is, rerouting the lines, replacing the pipe and building a tunnel crossing, eliminating the crossing and move the petroleum by rail or truck, and finally, decommission the line entirely and let the refineries find new feedstock. The public is invited to submit their comments over the next 30 days.

Business activity robust but slowing
In their latest Q2 Energy Survey, the Federal Reserve Bank of Dallas says business activity increased in the second quarter, but at a slower pace. Business confidence was particularly good among oil field service firms, who reported hiring more workers. Oil and gas production increased for the third quarter in a row, but that growth appears to be slowing.

Lima's makeover
Husky's Lima refinery refinery in Ohio will undergo an upgrade later this year, as part of the company's plans to process more Canadian heavy crude through its refineries. The work is expected to run from September through November, although Husky did not confirm impact on throughput.

Buy high, sell low?
BHP Billiton's Chairman Jac Nasser contradicted the CEO this week, saying he thinks investing US$20 billion in the US shale boom back in 2011 was a mistake. Nasser says "if you had to turn the clock back, and if we knew what we knew today, we wouldn't do it ... we bought exactly what we thought we were buying, but the timing was way off." Oil prices have since collapsed considerably, prompting BHP's major shareholders to call for divestment of the US energy division. Nasser will be retiring from BHP's board in September.

Asking someone else to cut output while you increase production
Speaking at this week's JP Morgan energy investment conference, Pioneer Natural Resources CEO Tim Dove says the current oil price is "not sustainable" and he expects Saudi Arabia will have no choice but to implement further production cuts. However, the CEO says he has no plans to scale back drilling, noting his company can "still be profitable even in a $45 environment." Pioneer is one of the largest oil producers in the Permian Basin.

Trimming the hedges
According to Bloomberg, only 15% of first quarter 2018 production (in the US) is hedged at an average of US$51.50/bbl. That's down substantially from this year, particularly in the Permain shale. E&P producers will therefore need to reduce expectations for cash flow going into next year, or pray for a recovery in oil prices. Second quarter earnings season begins at the end of July.

Cheap gas this long week-end, in select locations
According to Gas Buddy, retail US gasoline prices over the upcoming Independence Day long weekend will be the lowest since 2005. Americans will pay an average of US$2.21/gallon (76¢/L), well below the 10 year average of US$3.14. The lowest gas prices can be found in the Midwest (around US$2/gallon) while California has the most expensive fuel at well over US$3/gallon. In contrast, the average gas price in Canada over the Canada Day weekend is expected to be 104.4¢/L, the lowest since 2010. The cheapest gas can be found in Winnipeg (less than 90¢/L) and the highest in Vancouver, at almost 130¢/L.


The US Energy Information Administration (EIA) says Canada remains the top destination for the country's crude, despite a lifting of the crude export ban at the end of 2015. Canada's imported 301,000 bbl/day of crude from the US in 2016, down from 427,000 bbl/day in 2015. Total US crude exports hit a record 1.1 million bbl/day in February of this year. Mexico remains the top destination for gasoline exports, reaching almost 400,000 bbl/day in 2016.

In a presentation made to the EIA Energy Conference, Wood Mackenzie says it expects Lower 48 onshore production to grow from the current 9 million bbl/day to 12 million bbl/day by 2025, then flatline for the next decade. Growth through the next 7 years will be driven by the Wolfcamp shale deposit within the Permian Basin, the largest deposit in the US. Since US refineries have a limited capacity to process light oil, most of that extra production will need to be exported, ideally to Europe.

US production dipped slightly las week due to outages in the Gulf Coast brought on by Tropical Storm Cindy. US oil drillers also took a pause this weeks, as rig counts dipped by 2, the first decline since January. In contrast, Canada added 14 oil rigs to a total of 112.



JUNE 28, 2017



World's largest floating LNG
Royal Dutch Shell’s Prelude floating LNG facility has left the shipyard in South Korea and is now headed to North West Australia. The facility will have the capacity to produce 5.3 million tonnes/year of liquids and is expected to start-up sometime next year. The US$12.6 billion project was sanctioned back in 2011 and will be the world’s largest floating offshore facility. Shell says floating LNG technology allows them to economically develop offshore gas fields. The world's first floating LNG facility was put into service last December by Petronas off the coast of Malaysia.

Challenging the Dutch government
Shell and ExxonMobil have decided to appeal the Dutch government's plans to reduce output from the Groningen natural gas field by another 10%. Earthquakes have prompted the government to cut production at Groningen from 53.9 billion cubic meters/year in 2013 to just 21.6 billion by October of this year. The oil majors disagree with the government's conclusion that seismic activity cannot be accurately correlated to gas production, lamenting that "models based on independent research have been shoved aside."

Carbon emissions versus air pollution
Germany's transport and environment ministries announced plans to tackle the problem of diesel emissions from its vehicle fleet. European governments have long pushed diesel engines since they burn less fuel and produce less carbon dioxide, lowering GHG emissions. However, burning diesel releases more nitrogen oxides, which deteriorates the air quality. Some cities, including Munich and Stuttgart, are already considering banning diesel cars within their municipalities.

BP continues its shift
UK-major BP says it "continues to make progress in shifting its exploration portfolio toward natural gas and advantaged oil." The company says it looks to exit less competitive regions and continues to make "disciplined choices" and only chase opportunities that will "deliver clear value" for BP shareholders.

LNG at risk in Tanzania
In a bid to increase transparency and tax revenues, the Tanzanian government is considering scrapping and renegotiating all existing energy and mining contracts. The move could put a wrinkle in plans to build a US$30 billion LNG export terminal in conjunction with Shell, ExxonMobil, Statoil and Orphir Energy.

Nigeria gives peace a chance
Nigeria's Niger Delta Avengers have withdrawn their threats to launch fresh attacks on oil facilities, effective the end of June. A group calling themselves the "New Delta Avengers" have vowed to continue fighting for a greater share of crude oil revenues but later withdrew its statement. The group now says they have "decided to give peace a chance." The government also says it will start to shift focus towards natural gas production as it expects to run out of oil in about three decades. Shell also announced it was lifting force majeure on its Bonny Light exports after the line was sabotaged in early June.

Production in Libya on track for 1 million bbl/day
Production in Libya dipped to 935,000 bbl/day this week, down from as much as 950,000 bbl/day the previous week. The country expects to hit the 1 million mark "very soon," which would be a first since 2013.



  • Canadian markets closed for Canada Day


  • US markets closed for Independence Day


  • API Weekly Statistical Bulletin released @ 4:30pm ET (holiday schedule)



  • June Labour Force Survey released by StatsCan @ 8:30am ET
  • Calgary Stampede Parade kicks off at 9:00am MT
  • Baker Hughes Rig Count released @ 1:00pm ET
  • G20 kicks-off in Hamburg, Germany

Next edition of the Oil Sands Weekly: Friday July 7, 2017 @ 1pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly