Crude Observations

Back to Basics

As I sat ruminating on what exactly this week’s blog was going to be about I did a little soul-searching about the last few months, which have, admittedly and of necessity, been consumed by all things politic all the time, culminating in a post election free for all and Halloween jaunt. But it’s over now, I think. The interesting thing about elections and politics is that you can write endless articles about them and all the attendant issues and then after the election you find yourself writing even more about the results of the election and interpreting some very small outcome in the context a particular region and projecting that to somewhere else.


Ultimately, before you know it, you have transmografied into some bizarro political commentator and have lost touch with the whole purpose of the blog, which is to make pithy commentary about the energy industry, both at home and abroad. To make “Crude Observations” if you will. I guess that is why political journalism is the only growth story in media these days.


At any rate, back to basics is what this week is going to be about, some (very) Crude Observations on the oil industry as we enter the home stretch of 2019. Oh, and a quick public service announcement about politics (in case you were concerned), in less than one year it is likely we will have a different leader south of the border. I don’t know how it will play out or how we will get there but rest assured I will be there with you for the ride and will have lots to say, but right now it’s time to get on with industry, mainly because I am so very tired of politics.


So, without introduction and in no particular order, some Crude Observations.


Encana leaves Canada


Wow, this one was a bit of a kick in the teeth wasn’t it? In case you a living under a rock, last week Canadian energy stalwart Encana announced some weird name change (what is it again? Involtini? Otrivin? Intuniv? Insensitive? Invitro? Insane?) and that it was moving its “corporate domicile” to the United States. The supposed purpose for this is some gimmick to access more capital from US index funds which apparently are incapable of buying shares of Canadian domiciled energy companies even though pretty much all of them are cross-listed on the New York Exchange. As I said, gimmicky. Really they are moving their head office so the CEO can be closer to his family. Canadians (at least those in the energy industry or located West of Thunder Bay) were rightly offended by this unfolding debacle that many feel is the sign of further hollowing out of our energy industry even though the company insists no Canadian jobs are at risk (yeah, right). I understand it. It’s frustrating. It’s even more frustrating that the Federal government didn’t strong arm some random department to stop the move. But the reality is that Encana was really not much of a Canadian company anymore. More than 75% of its assets are in the United States and 80% of its capital spend is there. It has been a Canadian-based energy company operating primarily in the US since it bought Athlon years ago and then Newfield more recently. It’s a double-whammy for the patch because Encana was formed out of the merger of Alberta Energy Company and PanCanadian – it’s one of the grand-daddy’s of the patch and now its gone. It sucks but on the bright side, we are running out of energy companies to leave so things can’t get any worse, right?


Anyway, I hope they enjoy Denver. Great young city with a can-do attitude, free LRT in the downtown and multiple sports franchises. The football team is currently in a rebuild but has a history of excellence. The hockey team has one of the bright young stars of the league. Taxes are higher, but at least they are closer to the mountains and world class skiing. Oh wait. Well there is the whole legalized pot angle. Hmm. Thriving cattle industry? Ah. Financial centre for oil and gas. Umm… Remind me again why they are moving? Actually, the bigger story in this is the crazy name change. And it isn’t the “cana” that they are dumping, it’s the “En”. Their rebrand is a sign of the times with energy companies running as fast as they can from words like “oil”, “gas” and “energy”. Enjoy your new, higher cost Calgary clone home.


And best of luck to you, Mr. Suttles, in Denver, the Business Council of Alberta awaits your resignation letter – you have nothing more of value to add to our province.


Brazil Auction is a complete flop


This one was a real shocker. Or was it. Brazil has for years been touted as one the main areas where oil production growth was going to happen – except it never does. Production growth is always going to be at least 500,000 boepd but it always disappoints. This time Brazil was auctioning exploration rights for its billions of barrels of oil trapped below layers of salt on the sea floor. The nextr big thing in offshore. It was expected that these rights would sell for billions and kick start an exploration boom. Needless to say, in this new-found era of capital discipline, the usual cast of characters who the Brazilians expected to step up most assuredly did not. The only buyers that showed up were Chinese Petroleum companies and Petrobras – the state-owned NOC. So a big auction and they sold to themselves. The implications here are clear – if oil demand does not slow down as some are expecting, a source of growth in supply is now years behind which will most definitely affect prices. On the other hand, it’s another non-confidence vote for high-priced multi-year oil mega-projects. The majors are voting with their dollars and are electing to pursue short cycle investments and quick returns over long term supply security. What could go wrong.


Aramco IPO


Oil and gas investors should take note of Brazil getting waxed as Saudi Aramco continues its slow march toward an Initial Public Offering. The world’s most profitable company is looking for a valuation of $1.5 trillion, down from an initial target of $2 trillion. The kingdom is strong-arming its ruling class into investing in the IPO and the shares will be listed only on the Saudi stock exchange. I am unsure what the actual endgame here is, but as a general rule, when your IPO isn’t getting a lot of interest and the fundamental underpinnings of your business model are in a state of flux it may be time rethink the path you are on. Unless the Saudi finances are that much of a shambles that they really need to monetize this asset. However, if that were the case, they could easily produce more oil, unless they can’t? Again, what could go wrong?


US Slowdown


Okay, I’m going to go out on a limb for a minute and run against the grain. 2019 is going to be the last year for double-digit production growth in US light tight oil. It may be the beginning of the end of the shale story. Why do I say that? Do I have a crystal ball? No. I do not. But it isn’t hard to put the pieces together. Capital spending for land-based drilling in the United States next year is forecast to be $20 billion less than this year. For context, that’s equal to one Canada. Companies are running out of Tier 1 acreage to drill, child wells are becoming a major problem and well productivity per foot drilled has plateaued. Against this backdrop, drilling activity is being cut back, completions are slowing and the DUC inventory is steadily declining. All the best people are saying the same thing. Mark Papa, the godfather of light tight oil says the party is over and I’m inclined to believe him. His prediction is for growth of maybe 400,000 barrels per day next year if not less and declining after that. This is supported by another LTO CEO – Scott Sheffield of Pioneer Resources, who is predicting similar outcomes for 2020 and 2021. We could even see a year where new production is below decline rates, that’s how rapidly capital is being scaled back.


It’s a simple equation that we know all too well in Canada – closed capital markets, global demand for your product not growing and prices too low equals reduced drilling activity. We figured it out two years ago – it’s nice to see the American energy producers finally taking note that they should live within their means. Well except for Chevron, and Exxon. But the majors are typically the last to the party anyway.


Note that this by no means should be taken as an indication that the US market is shutting down. Far from it – activity levels have to likely be kept at near current rates just to offset the decline rate, but absent a sustained pop in oil prices above the $75 mark, the go-go days of runaway production growth are over.


I have made the call.


Crude Quality Matters


This is a popular hashtag on Twitter. Why? Because it’s true. It can get a bit tiring listening to the anti-oilsands, anti-energy crowd constantly harping on how Western Canadian heavy oil is dirty and no one wants it, when nothing could be further from the truth. Heavier oil is amongst the most versatile crudes as it produces a high variety of products. Refineries around the world are configured to process heavier crudes to meet domestic demands for diesel, kerosene, heating oil, other liquids and tar. These refineries are located on the Gulf Coast, the West Coast of the USA, in Illinois, in China and in India. What they don’t need is more light tight oil – the world is awash in LTO. So, as Canadians, it is important to have this conversation. The growth in demand for oil is on the heavy side and that is what we primarily produce. Say it again. The growth in demand for oil is on the heavy side and that is what we primarily produce. Do we need to say it a third time? Didn’t think so. When we finally get a pipeline to the coast we will see how much in demand it is. In the meantime, we will just have to get our market signals from the US Gulf Coast where shipments of Canadian crude to China continue to rise.


A Canadian bankruptcy (to go with all the American ones)


So earlier this week it came out that ironically named Alberta based Houston Oil and Gas had gone into receivership and that there was a potential orphan well liability of about $80 million if all the company’s 1400 some-odd wells were to be abandoned. More on the abandonment side later, but let’s be clear – this isn’t the sudden bankruptcy of some prime Canadian company, it’s the disappearance of a marginal producer with 85% of its wells producing dry gas, which, as we all know, no one wants. It’s not a canary in the coal mine for the Canadian industry. What is of note is that there aren’t that many Canadian bankruptcies, or, more to the point, that there are so many American ones. What? I thought they were booming! Not really. 33 insolvencies and counting so far this year with 27 since May. Bankruptcies in the US are at levels not seen since 2016, the peak of the downturn. This is a big deal. Names like Chesapeake are raising concerns they won’t survive, lenders are tightening the screws on producers – tightening their debt covenants from 4-5 x EBITDA to 2.5 to 3 x EBITDA – levels that equivalent Canadian firms would consider recklessly over-leveraged. As alluded to earlier, Canadian firms already learned their lesson and are in much better financial shape than their US counterparts – one need only look at the tsunami of profits that we saw in Canada in Q3. There are outliers – like Houston and Pengrowth (who could likely have muddled through) – but in general we are OK. Let me say it again – Canadian companies are doing pretty good.


So back to abandonments. There is a big orphan well and abandonment liability in the Western Canadian oilpatch. Everyone knows it. Maybe if young Justin wants to try some good old-fashioned reconciliation with the Kenney-Moe crowd and put some #wexiters back to work (so that at least they will pipe down already) he should revisit the idea of the Federal government funding (in concert with industry and the provinces) an aggressive abandonment program. Not only will it create jobs, but it will have the added benefit of being good for the environment.


OPEC+ Meeting


There is an OPEC+ meeting coming up. It’s likely to be more of the same. But I will write about it closer in.


Venezuela is still a mess


Still. Venezuela is still a mess. Production is less than 750,000 barrels of oil per day. The government is being tenuously kept afloat by the Russians but at some point even they will lose patience. As a reminder. The second largest reserves in the world in a failed state. Can we keep an eye on this?


Keystone Kops


Just once, it would be nice if we could go through a pipeline construction appeal cycle without a spill. The Keystone pipeline system is massive and carries a lot of oil across vast distances under super high pressure. Some form of release is to be expected, but this is the second spill of consequence in the last two years and means that the Keystone pipeline is well past its projected lifetime spill metrics. TC Energy – take a lesson from TransMountain – if you are looking to get a pipeline expansion approved, it’s probably best if the existing one is in tiptop shape. Do better.


Crude by Rail – Guys, what’s happening?


When the Kenney government got elected, one of its campaign promises was that it was going to get out of the NDP’s plan to establish additional crude by rail capacity – an eection promise that I disagreed with at the time and, to be honest, still do. To that end, they determined that they were going to sell the “money losing” contracts “recklessly” entered into by the NDP and have booked an attendant $1.5 billion loss in their recently delivered budget. I am not privy to the actual numbers (they’ve never been shared properly) so I can’t speak to their accuracy, but you know what we could really use right now in Alberta? Additional crude by rail capacity.


And how is the sale process going anyway? I hear the rumours on the street and they aren’t flattering. Maybe, just maybe, the government might have been better served by actually implementing the NDP plan (especially upon learning  of the Line 3 delay) and then run a process to sell what would then be an operating business instead of a bunch of contracts it wants to get out of. Crazy talk I know. Should probably just leave that whole “selling a business” thing to the real professionals. Look, it’s a bit tongue in cheek, but the fact this is taking so long tells me it’s a hard sell. What happens if the process fails? Do we implement the CBR then? Six to seven months after the fact? This whole file seems mishandled from the get go.


Curtailment – enough already


Anyone else done with curtailment? I know I am. That said, with pipeline delays (and shutdowns) and the aforementioned needed crude by rail capacity not arising, it looks like we are going to be stuck with curtailment for quite a while.


This the new reality in Alberta, especially for oil sands, which is why I was very pleased to see this morning that the government is going to lift curtailment for new conventional oil wells drilled and brought into production as of today. The devil will of course be in the detail (for example, how do you define conventional?) but this should encourage at least some levels of capex for growth where previously drilling plans were more focused on maintaining production levels. It is ironic to see this announcement come the day after this very suggestion was made by the CEO of CNRL, almost like it had been discussed with industry beforehand (hmm, CBR anyone?). At any rate, it remains to be seen how this affects plans going forward given the egress challenges, but anything to encourage activity is appreciated.


Quebec – you have a pipeline problem.


During the election campaign we were subjected over and over again to commentary from Quebec that there is no social license for a pipeline in Quebec and that Energy East was never going to happen and that Andrew Scheer’s idea of an energy corridor was equally never going to happen in Quebec. Of course, anyone in the energy industry, particularly the oil industry, knows how incredibly hypocritical this is given that two of the largest refineries in Canada are located in Montreal and Levis, Quebec and that oil tankers plie the mighty Saint Lawrence River daily, carrying crude and refined product from the United States and other countries. Oh, and about 50% of the oil feeding the refineries in Quebec comes from Alberta by way pipeline, rail and/or barge.


That’s on the oil side. But what about gas? Earlier this week, a reader sent me an article about the province of Quebec’s aspirations to be an LNG export hub via the Energie Saguenay project. For those not aware, the Energie Saguenay project is a $14 billion LNG plant and pipeline project that is expected on completion to be able to export 11 million tonnes per year of Liquified Natural Gas (1.6 Bcf/day) to overseas markets. Now as we know, Quebec has no gas of consequence (since they won’t frack) so where is this gas to come from you may ask yourself. Well let me tell you. It will come from Alberta (on the now not repurposed for Energy East TC mainline) and through Quebec to Saguenay via a new 800 km pipeline running through an energy corridor. Wow, a new pipeline. Cool eh? So spare me the sanctimonious “social license” nonsense.


Interestingly, this pipeline and plant will be the first test for Bill C69. Bonne chance Quebec! If anyone can effect change to a federal law that may not favour them, it’s you guys. Alberta is counting on you.


No, you can’t ban fracking.


This is where I am going to close. Elizabeth Warren is saying she is going to “ban fracking” if she wins the Democratic nomination. This tells me two things. One, Elizabeth Warren doesn’t know what fracking is. Two, like all true Democrat candidates for president, Ms Warren is looking like she is going to be not very good at this whole “campaigning to win” thing. Outlandish promises may play well to her progressive base but nationally, against the Republicans and (maybe) Trump this is a loser of strategy.


Never mind that she wouldn’t actually have the authority to ban fracking (code for shutting down the oil and gas industry), a quick look at the electoral map shows how electorally suicidal that statement is. This pledge, along with her wealth tax and mega trillion dollar health care for all plan are all the Trump 2020 campaign needs to have a shot at re-election. Maybe cooler heads will prevail, but I don’t hold out much hope.


That said, as a Canadian, banning fracking in the US would be extremely bullish for Canada and sweet, sweet revenge on the newly decamped Invista, Insidious, Indira, Invictus, Indigent, Inelegant, Infectant, Inhuman, Intubated, Intestine, Insincere, Inexcusable… whatever it is they’re called.


Prices as at November 8, 2019

  • Oil prices are up for the week again.
    • Storage posted an increase week over week once again
    • Production was flat
    • Rig Counts: Alberta down 3; US down week over week
    • Natural gas storage above 5-year avg
  • WTI Crude: $57.40 ($56.06)
  • Western Canada Select: $35.28 ($36.06)
  • AECO Spot: $2.42 ($2.75)
  • NYMEX Gas: $2.694 ($2.572)
  • US/Canadian Dollar: $75.59 ($0.7598)



  • As at November 1, 2019, US crude oil supplies were at 446.8 million barrels, an increase of 7.9 million barrels from the previous week and an increase of 15.0 million barrels above last year.
    • The number of days oil supply in storage is 28.3 compared to 26.4 last year at this time.
    • Production was flat for the week at 12.600 million barrels per day. Production last year at the same time was 11.150 million barrels per day.
    • Imports decreased to 6.232 million barrels from 6.697 million barrels per day compared to 7.544 million barrels per day last year.
    • Crude exports from the US fell to 2.371 million barrels per day from 3.327 million barrels per day last week compared to 2.405 million barrels per day a year ago
    • Canadian exports to the US were 3.516 million barrels a day
    • Refinery inputs rose during the during the week to 15.765 million barrels per day
  • As at November 1, 2019, US natural gas in storage was 3,729 billion cubic feet (Bcf), which is 1% above the 5-year average and about 17% higher than last year’s level, following an implied net injection of 34 Bcf during the report week
    • Overall U.S. natural gas consumption rose 8% during the report week.
    • Production was flat for the week. Imports from Canada rose by 3% from the week before. Exports to Mexico decreased 1% for the week
    • LNG exports totaled 43 Bcf
  • As of November 8, 2019, the Canadian rig count was down 2 at 140 (AB – 96; BC – 8; SK – 31; MB – 3; Other – 2). Rig count for the same period last year was 196.
  • US Onshore Oil rig count at November 8, 2019 is at 684, down 7 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States held flat at 130.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was up 1 at 23.
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 84%/16%, in Canada the split is 69%/31%


Trump Watch: Tax returns – show em

Kenney Watch (new!)Defending the budget

Trudeau Watch (for balance): Surfs Up!

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