Crude Observations

Even if TMX takes forever, at least there’s rail…

Finally. At long last. Phew. A week where I can sit back, take a deep breath and then unload on a variety of different topics. It’s taken a while and as always, a number of them have been festering beneath the surface, like acid reflux, or natural gas under pressure, just needing one little ghost in the machine to let everything blow out in a torrent of rage, or words as the case may be.


Okay so maybe that’s a little melodramatic and probably raises expectations too high on the actual rantiness of what I am about to say, but, without giving anything away on the subjects of the day, I do have some thoughts. And I am thinking that I will just get on with it, because I should. I did consider briefly the possibility of using a theme, like the Academy Awards for the energy sector, but there are some meaty matters I wanted to put out there so the usual tongue-in-cheek approach wasn’t going to cut it.


So this week it’s more like vignettes that could one day grow up to be blogs. Or something like that. And politicians playing politics. Which I hate.


Crude By Rail. Ugh. Jason Kenney. I’m sorry, I don’t get your position and I’m kinda mad.


So here I was, trying my best to avoid direct comment on Alberta politics, mainly because I’m a little bored by that right now, but also because the election hasn’t even started yet. Even though it’s been going on for months. To be completely honest, I’ve had other things to think about.



When it comes to Alberta politics, what I was really hoping for was the opportunity to weigh in with my typical gravitas once the writ was dropped. At that time I would share some of my deep and insightful wisdom on the issues of the day, and hopefully put it all in an energy perspective, since that is at the end of the day what I care about and am hoping for as an outcome. Actions and policies specifically intended to address the issues facing the energy sector.


But then a funny thing happened. Rachel Notley started running around the province announcing project after project. An upgrader here, a methane facility there. A solar plant in this place. Giant pieces of equipment travelling the highways. Modifications to the curtailment plan, announcements about crude by rail. You know what I’m talking about.


While the NDP deserves kudos for all of these accomplishments on the energy file, the cynic in me (yes there is one) can clearly see through all this as blatant electioneering before the writ drops, using the privilege of office to announce projects that may or may not move forward to, in essence, buy votes. Hey, I get it. It happens.


The UCP, as the official opposition, of course has to point this out every time it happens and indicate, as any presumptive government in waiting should that if they are ever elected, they will have to review all of these to make sure they weren’t handouts, weren’t riddled with subsidies, aren’t pandering to a voting base and are in fact to the benefit of Albertans.


All good right? One announces, the other reviews. Back and forth we go. Let’s call this damn vote already and get on with it.


Except there I was on Wednesday reading the news of the day about the NDP plan to lease rail cars and ship Alberta oil to places that want it when I saw the following go by on Twitter.


“Kenney says a UCP government will cancel the NDP crude by rail plan. … He says he will let CN and CP know today.”


Wait. What?


Then I see a barrage of memes and tweets from the UCP decrying the NDP plan, quotes media and criticisms of Rachel Notley’s ill-advised comments during her announcement about the plan. Rage, outrage and double outrage.


And then on Thursday I see copies of the letters sent to CN and CP. And articles saying the plan is flawed and giving money to the rail companies and reckless. Won’t make money, is a boondoggle. Costs twice as much as what typical rail costs. All of this on a plan that was just announced a few days ago for which pretty much no detail has been released. Looking at all the memes that made it out there, it seemed pretty clear that this response had been planned well in advance.


And then I read the letters to CN and CP and I thought to myself, Jason, what are you thinking? I had to read the letters a few times, but one thing stands out – either Jason Kenney doesn’t understand the plan as it is proposed or he is being disingenuous in his attacks on it and is deliberately misunderstanding it.


Regardless, I cannot escape the feeling that Jason is getting some really bad advice about the one piece of energy policy that was announced by the NDP government that actually makes economic and political sense.


I’ve discussed this blanket condemnation of the crude by rail plan with a number of individuals and gone down the rabbit hole of “government shouldn’t be in private business” and “distortion of markets”. But I just don’t buy it. I mean with curtailment, sure. That is blatant government interference. Picking up tanker cars to ship oil that is stranded in storage? Not so much.


Look, I’m all for free markets and letting the private sector solve the intractable problems of our time, but I’m also a pragmatist and a realist and try to avoid getting caught up in ideology too much as it makes you too rigid.


While I may agree with Jason Kenney on a number of things, on this he’s in the wrong lane. Let me explain why.


First off, well documented fact. Alberta oil producers are facing a market access crisis. The way to address this crisis is not to artificially hold back production to raise prices. The solution is to put in place the infrastructure required to move more product. Because when we ship MORE, we produce MORE. Which requires more money to employ more people. See where I’m going with this?


Everyone acknowledges that the long term solution to this issue is to build pipelines, preferably to markets that want the product in question, such as Asia and the US Gulf Coast. But we don’t have those pipelines yet and if the last few years have shown anyone anything, it’s that you can’t count on these projects having success. Even if both TransMountain and Keystone XL broke ground tomorrow they wouldn’t be complete for years, which means that the “crisis” is still there. And Line 3 is now facing fresh challenges in Minnesota. So that promised expansion may get delayed.


So in this INTERIM period, we want our industry to continue to grow and employ people. We want companies to develop their resources, drill and complete wells and not cut and run, like Devon just did. And in order for that to happen, other egress solutions need to be put in place. RIGHT AWAY.


And where is that solution going to come from? Rail! It’s the only alternative. To deny the crucial role that rail can play in the market access discussion is foolish.


This is why the market (remember the market?) reacted so positively to the Alberta government crude by rail announcement back in December. Has anything changed? Not really. Prices have rallied, maybe too much and rail volumes that were rising are now down again, which means we haven’t really solved anything because there isn’t enough reliable secondary stable rail capacity, instead it’s dominated by a few large players.


Since that time, the government has studied the issue about how to get their incremental rail capacity in place and, after being given the cold shoulder by Justin Trudeau, ultimately settled on the model they announced the other day that the UCP is intending to scrap.


In a nutshell, the NDP government announced their intent to lease 4400 rail cars for 3 years in order to purchase, ship and sell up to 120,000 barrels per day of oil to destinations where it is in demand.


The admittedly poorly communicated economics are as follows: $3.7 billion in costs, revenues expected to be $5.9 billion, $2.2 billion in profit. Easy peasy, lemon squeezy, right?


Not for the UCP or some in the media apparently. It would appear from what I have seen that rather than review the few details of the plan that were announced, the plan has been interpreted to mean $3.7 billion in cash to CN and CP, taxpayers on the hook for the whole shebang, smoke and mirrors, world coming to an end.


But wait. That’s not it at all. And this is where I have the biggest problem because if you were actually read what the government is intending to do and engage in some basic math, it all makes sense.


First off, the tankers. We aren’t leasing tankers for $3.7 billion or handing that much money over to CN and CP – happy as they would be to take it. No, the proposal is to lease 4400 rail tankers for 36 months – presumably from the market, maybe some from CN and CP. I read somewhere that these rent at about $1500 per month so for the life of the deal that works out to $250 million. That’s a cost.


Now, how does the government get the oil? Well they buy it from producers. It’s right there in the plan. Assuming a gradual ramp up to 120,000 barrels per day, let’s figure the government can average 90,000 over the three years. Assume that volume and pick a WCS price of say $30-$35 a barrel (fair in the current market) and that works out to around $3.45 billion spent purchasing the oil. So now we are at the $3.7 billion in expenditures. See how easy that was?


Next step is to sell the oil, right? Well 120,000 barrels per day is chicken feed in the global scheme of things, but there are ready markets – the US Gulf Coast, China, India that are falling over themselves to get heavy oil. I don’t know if anyone is paying attention, but heavy crude is pretty hot right now. To get to the $5.9 billion in revenue the government projects you need to sell the oil at a realized price of $55, but even at $50, you are still making over a billion dollars, plus all the royalties and taxes on the oil you are purchasing.


And I haven’t even bothered to do this in Canadian dollars.


So what’s at risk? The markets and demand are there. The rail capacity is there. The incremental barrels are immaterial to the market at large but critical to the province. The jobs and investment on the line are critical. There is no real congestion issue on the lines or conflict with grain even as the predominant destination for shipments is south, not east and west, although an argument could be made that shipping to Vancouver would have great irony.


So if it’s so easy, why not let the private sector find the solution? Well we already do. We have some great companies that are doing great work expanding crude by rail in Canada, but it’s not enough and it’s not happening fast enough.


And, we’ve created an environment where there is too much uncertainty. Adding some extra capacity here and there doesn’t move the needle. To make this work – for Alberta – it has to be big. Small producers can’t afford to invest in the infrastructure and the larger companies really don’t care because they have either fully booked their pipeline space or have their own rail arrangements for their own production.


So it falls to government to take that big first step, because to make it work you need to be able to buy the production to fill the rail cars. You are creating a crude by rail logistics company that has the capacity to source and market production. It makes sense. Trust me.


And the plan makes money. Lots of it. You can run it for a few years and then sell it. Once it’s up and running, someone will buy it. Even if all the pipelines are in place, you’ll still want that extra capacity. And if demand starts to slow, you are only leasing the cars – you’ve made your money and you can walk away then.


So tell me again Jason. What were you thinking? Why are you saying you will cancel out of hand one of the few good ideas the NDP government has put in place that will actually help the sector, maintain or create jobs and make money. I can accept you will want to review any and all commitments the government makes in the election period, but you can’t unilaterally say you are cutting this one. Someone is giving you bad advice. I am happy to chat about this if you want.


So, this SNC Lavalin Thing, I have some thoughts. Especially on the apologists.


At first I was going to call this “Justin Trudeau what were you thinking”. But I think that’s too easy. Especially since I know what he was thinking – it goes something like this:


“Re-election. Quebec. Why does Alberta hate me. Quebec. Re-election. Buttsy needs to shave. I love women and First Nations people. Re-election. Quebec. Squirrel. Quebec Inc. Re-election. Donations. Re-election. Papa. Quebec.”


Or something like that. Why did Justin Trudeau perhaps allegedly maybe try to influence the Attorney General to change the prosecution of a Quebec EPCM giant from criminal fraud charges to a newly passed and yet to be used remediation penalty? Well we know the answer. It’s because they are based in Quebec, are almost as sacrosanct as Bombardier (although way shadier apparently) as a Liberal party supporting Quebec institution and in the upcoming Federal election, if Justin Trudeau doesn’t carry Quebec, he’s done. So, saving the bacon of a company that is as central to Quebec’s business community as the Habs are to its social fabric is a must-do. End of story. Can’t fault a politician for being self-serving, it quite often goes with the job. If the production of oil and gas was an important industry in Quebec, we would have 10 pipelines under construction as you read (and crude by rail!).


And kudos to Jody Wilson Raybold for staying firm. But enough of that – let the partisan pillow fight go on and end where it will. I’m not wanting to talk about that.


What I want to talk about are the apologists. Not the ones in government, they are predictable. No I’m talking about the stooges I keep reading that say it only made sense to follow the remediation path because of jobs. And that Trudeau may have been in the right to try and get his buddies off with a glorified fine, because, well, jobs and corporate survival.  I call BS. Nonsense. Poppycock and balderdash! Where were all these people calling for government interference when pipeline approvals were getting stymied and more than a hundred thousand people in Alberta lost their jobs and continue to be underemployed?


And these commenters are popping up from the left and the right. Are you kidding me?


SNC Lavalin engaged in bribery to win projects in Libya. Bribes are illegal. Right? They got caught. Then they tried to cover it up and when that didn’t work they dusted their senior executive management team and engaged in a very well thought out and deliberate lobbying campaign to have this remediation clause enacted by the Liberal government so that on the back side they could ensure their corporate survival. These are the actions of our fine upstanding corporate citizens. Vraiment.


I read an entire article by Conrad Black supporting the remediation process and waxing on about SNC Lavalin in such a way that I had to check and see if he was maybe on their board or payroll. He spent an entire paragraph describing “necessary payments to secure critical contracts from legitimate government agents with the ability to allocate such work” Holy crap, it’s called a bribe Connie. Say it with me. Bribe. It’s considered a bad thing, not a necessary business expanse in that part of the world. Sheesh.


But what about those jobs? If SNC gets criminally prosecuted and, important point alert, loses (there is still a trial folks) they won’t be able to bid on government contracts for 10 years! It will mean the end of the company! All those jobs will be gone! Maybe the company will relocate! Will it? Doubt it.


And as far as jobs, outside of the Canadian oilpatch, there is an acute shortage of engineers around the world. And outside of SNC Lavalin, there are many fine EPCMs across Canada that don’t engage in systematic bribing of foreign officials and relentless lobbying of public officials. They also do fine work and bid on government contracts. They also stay out of the news.


Never mind that the work the company does won’t go away so those jobs will still be staffed. And the bids will still be awarded and people can go work on those projects. On top of that, there will be opportunities for new firms to be spun out of the company, the assets and talent can be sold and rolled into other Canadian success stories. This is far from a death sentence. No jobs will be lost on a net basis. The only thing that will die is a brand that is so toxic right now you would think everyone would be happy to see it go.


Here’s a thought, can we please stop enabling corporate activities and influence purchasing that do nothing but lessen our collective trust in the private and public institutions that shape and run our lives? Just for a bit? And stop pandering to a perceived elite just because of where they are located?


A bribe is a bribe. A crime unpunished is an invitation for others to do the same. A culture of rule-breaking and corruption is anathema to the rule of law. Political interference is just that. Stop it.


Oh yeah, TransMountain…


The ruling is in. The NEB has spoken. It’s in the National Interest. 16 new conditions including subsidized daycare for Orcas. The 90 day clock starts now. We are waiting Justin. Stop slow-footing your First Nations consultation so that Jason Kenney gets in office to act as your election foil. Cabinet could approve this thing tomorrow if you wanted them to.


Prices as at February 22, 2019 (February 15, 2019)

  • The price of oil was flat early then rose during the week on OPEC cuts and trade optimism
    • Storage posted an increase
    • Production was up
    • The rig count in the US was down marginally
  • Withdrawals from storage were much higher than anticipated for natural gas. The market was unmoved
  • WTI Crude: $57.17 ($55.75)
  • Western Canada Select: $44.37 ($41.25)
  • AECO Spot *: $3.28 ($2.80)
  • NYMEX Gas: $2.710 ($2.658)
  • US/Canadian Dollar: $0.7561 ($0.7522)



  • As at February 15, 2019, US crude oil supplies were at 454.5 million barrels, an increase of 3.7 million barrels from the previous week and 34.0 million barrels above last year.
    • The number of days oil supply in storage is 28.2 compared to 26.0 last year at this time.
    • Production was flat for the week at 12.000 million barrels per day. Production last year at the same time was 10.178 million barrels per day.
    • Imports rose to 7.522 million barrels from 6.210 million barrels per day compared to 7.808 million barrels per day last year.
    • Exports from the US rose to 3.607 million barrels per day from 2.364 million barrels per day last week compared to 2.024 million barrels per day a year ago
    • Canadian exports to the US were 3.288 million barrels a day, up from 3.101
    • Refinery inputs fell during the during the week to 15.711 million barrels per day
  • As at February 20, 2019, US natural gas in storage was 1.705 billion cubic feet (Bcf), which is about 17% lower than the 5-year average and about 4% less than last year’s level, following an implied net withdrawal of 177 Bcf during the report week
    • Overall U.S. natural gas consumption fell 2% during the report week
    • Production for the week was up 1%. Imports from Canada increased 2% from the week before. Exports to Mexico decreased 3%
    • LNG exports totaled 32l8 Bcf
  • As of February 22, 2019, the Canadian rig count was down 12 at 212 (AB – 144; BC – 12; SK – 53; MB – 2; Other – 1. Rig count for the same period last year was 303.
  • US Onshore Oil rig count at February 22, 2019 is at 853, down 4 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States were flat at 194.
    • 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 decreased 1 to 19
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 68%/32%

Trump Watch: The Mueller probe may be coming! Off to meet Kim Jung Un!


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