Crude Observations

Not a Protest Column

I originally thought this week’s blog would be a sweet and sentimental riff on Valentine’s Day (given that today is of course Valentine’s Day) and I may still include a poem at the end because that’s what I do, but that didn’t seem topical enough.


Then I thought, hey, what if I write something about the current fever swamp of protests against the Coastal Gas Link pipeline by, at last count, dozens of groups earnest and ill-informed protestors across the country and the chaos they are causing for commuter and industrial rail traffic across Canada or the blockading of the coffee stand at the BC legislature or whatever they were doing in Victoria – oh right, assaulting a journalist.


Then I thought, no. I don’t want to step in that steamy pile of … stuff. I do too much by far on pipelines and where does that land me? Ranting about pipelines.


No, this particular issue belongs to John Horgan and the BC NDP and the Trudeau Liberals. They created this mess, they need to figure their own way out of it. Welcome to the world of federally and provincially approved energy infrastructure, the rule of law and the people who don’t give a f— about any of that. Now you can see how it feels what it’s like to be Alberta for a bit. Text me when you’re ready for how to get out of this. Note – it will require a spine.


So, no pipes, no protests… what then? Well, as luck would have it, the New York Times published an article on Wednesday that provided so much fodder that it seemed likely to generate enough fodder for at least 100 blogs.


What was so awesome about the New York Times article is that it managed in just a few short paragraphs to not only paint Alberta as Darth Vader to the ESG movement and a financial pariah, but it also managed to trigger the Canadian Energy Centre (Alberta War Room) into a paroxysm of paranoia and rage, prompting a stream of consciousness tweet storm worthy of Donald Trump and, after some deep breaths, a token apology for the over-reaction.


Now, you would think I would be tempted to take the New York Times to task as well, but that would not be the case here. Instead I am just going to wade into the subject that underpins the article, namely the “divestment” movement, which appears to be gathering steam, regardless of whether it is directed exclusively at the oil sands of Northern Alberta, the coal mines of the Powder River Basin and Eastern Kentucky or fossil fuels in general.


I have written on this subject before, but all subjects are worthy of a revisit and a refresh, if only to see if they stand the test of time.


And before I get started, let me just say that I am all for ESG in investing. I am all for funds and investors exercising their right to invest specifically in non fossil fuel companies and projects – heck, we all specialize. But the whole divestment movement as a political tool and environmental tool is quite frankly a bit of a mystery to me.



The gist of the divestment movement is that fossil fuels are morally bad because they contribute to increased emissions that cause climate change and that since we are virtually hours away from peak oil demand anyway, these companies are inherently more risky investments than, say, bitcoin or cannabis or Wework, because their asset base is in essence stranded. This means that since they will never be able to produce all their reserves, the value of all these companies is pretty much going to be zero. So clearly not investing in the first place or divesting is the right thing to do.


Makes sense right? In a fuzzy and childish kind of way? I mean, if it’s going to zero anyway.


Unfortunately it’s the type of fringy zealotry that gets picked up and overblown by the mainstream media and used for political point-making by all too eager politicians seeking to prove their environmental bonafides. After all, why take any concrete policy action when you can simply sell a few stocks?



Consider for example the situation in New York a year or so ago where Mayor Bill DeBlasio announced that he was going to order the City’s five main pension plans to divest of their fossil fuel investments, to an estimated tune of $5 billion.



Setting aside the wisdom (or not) of selling such a large block of assets can he even do that? Is this how a fiduciary should act? Does the Mayor of a city really have the ability to set investment policy for a public pension plan? Has anybody asked the beneficiaries if this is something they want? The purpose of a pension plan is to manage the retirement assets of its beneficiaries, not to be an ideological tool.



It’s happening with pension plans, college endowments and foundations. What all these fund managers, politicians and divestment activists miss in this whole shlamozzle is pretty simple – it’s NOT THEIR MONEY! Leave it alone.


Look, I’m absolutely onside with an individual wanting to target their investments to green funds, renewables, socially responsible entities and the like. It’s a free world and it’s your money. There are literally thousands of options along those lines. Or you can just make a choice and not buy energy stocks.


But a politician telling a pension plan manager/fiduciary to sell energy stocks because a loud crowd says they must do it is just plain wrong.


And don’t even get me started on the hypocrisy of the mayor of a massive energy consuming city lecturing the rest of us on the need to sell stocks in the very energy companies they are enriching by buying their product. Sheesh.


The other side to this is the insurance companies refusing to insure oilsands projects and banks, largely global European ones, that need to play to an ESG obsessed media, electing to not lend to companies operating in the oilsands that they weren’t lending to anyway. Hypocrisy aside (since they continue to do business with other international oil companies), that is their right, but let’s not fool ourselves into thinking they are doing this for altruistic climate-focused reasons – this is in a lot of way the policy of the moment, a feel good gesture to mollify activist groups that may or may not actually be shareholders. And the oilsands are an easy target. As I said to someone the other day – there is plenty of capital in the world, it’s just now going to come from sources with less rules and go into companies with less rigid regulatory requirements. Don’t believe me? Who do you think HSBC is lending money to if not oilsands companies? Sinopec, CNOOC, Rosneft, Aramco, pretty much anyone operating in Africa.


Here in Canada the divestment movement is targeting the major provincial pension plans and the Canada Pension Plan Investment Board. If you think New York had a large exposure to the energy sector, you ain’t seen nothing yet.


From indirect public market investments to private equity investments to direct investments in producing properties, the Canadian exposure is huge and appropriately reflective of the importance of the energy sector to the overall economy. Any unwinding of it would be impractical, ill-advised and detrimental to both the retirement plans of millions of Canadians and the overall economy.


But hey, at least it’s a pyrrhic victory.


And where do you draw the line anyway? Is it just the fossil fuel companies themselves or do you need to target the entire value chain? The service companies, the engineering companies, the construction companies, the transportation and distribution companies. Where does it end? How do you decide what an appropriate level of exposure is?


What about energy consumers? Aren’t they as much a part of the problem as anyone else? Surely car companies and airplane manufacturers are responsible for their share of emissions too. And banks – don’t forget about them. What about the ones that lend money to fossil fuel companies? Gotta dust those guys too.


At the end of the day all you are left with, if you are really true to your ideals, is government bonds (oops, can’t have those, they get royalties and taxes from fossil fuels), a handful of cannabis stocks and some used bitcoins. But even that is problematic. Government bonds are supported in part by the taxes and royalties paid by fossil fuel companies, the cannabis growers require energy and bitcoin is a widely acknowledged energy sink.


Look, I’m clearly exaggerating for effect, but if you follow this divestment movement to its logical conclusion you see how ultimately limiting and ill-advised it is.


And as a social policy tool or behavioral modifier, it’s blunt and ineffective.


One well-intentioned pension plan taking direct orders from a politician to screw over its beneficiaries for a quick feel-good photo-op isn’t going to stop the flow of capital into the energy sector one bit. It’s just going to come from some other source and more than likely end up in a morally and regulatorily questionable locations.


Capital finds a way and given that demand for oil is projected to grow by at least another 10 million barrels per day over the next 20 some-odd years trillions of dollars of reinvested and fresh capital will be required under any climate action scenario. The market cap for the energy sector exceeds $5 trillion and upstream capex this year is projected to exceed $500 billion. That’s a lot of zeros. Do we really want to let Russia, Saudi Arabia and China fund and control all that? Are we willing to surrender what is in essence our control over energy costs in that way?


A lot of people point to Norway and their intent to sell down the energy and fossil fuel holdings in their massive sovereign wealth fund and for the record, this I get and agree with. Norway’s entire economy is highly leveraged into the oil and gas sector, so it makes sense that its massive sovereign wealth fund should be invested outside of oil and gas because its actual sovereign wealth comes from oil and gas. In fact, I would argue that is prudent portfolio management for that particular situation. Are they milking it for a few environmental brownie points? Sure, who wouldn’t. But at the same time, I just read an article that the sovereign wealth fund was warning about being too aggressive in divestment for precisely some of the reasons I cited above – keeping control.



As a parting comment and further to the “control” idea, one thing I believe the divestment movement ignores at its peril is that if the transition is going to happen anyway wouldn’t many of the companies best positioned to execute on that transition are the very firms whose livelihoods are tied to fossil fuels and that if you starve them of capital and concentrate investment in those few NOC’s who don’t really care, aren’t you stifling the innovation needed to transition the sector?


What do I mean by that? Simple. Rather than hectoring investment funds and managers, maybe it’s time to let the “energy” companies run the divestment process themselves. Because if indeed the oil and gas sector is going the way of the dodo bird, don’t you think these massive companies populated by hyper-intelligent business managers that historically had access to limitless amounts of capital can figure out what is happening and maybe as well how to reinvent themselves?


Consider BP which just this week announced its intention to go net-zero by 2050, or Cenovus who did much the same thing. Or Teck? Are we really qualified to sit in judgement of these companies that they won’t do what they said they were going to do? Sure we can say it’s not fast enough or the plans aren’t concrete enough and lack specifics, but what plans do? Are we really expecting government to do better? And if not the energy companies and government, then who exactly? What exactly is the end game?


Shell’s capital program for renewable energy is in excess of $2 billion and has massive investments in solar. Clearly, one of the largest energy companies in the world is actually putting its money to work in the renewables space and rearranging its own portfolio to reflect the realities of a transition. Does this get rewarded by the divestment crowd or are they still fodder for the sale?


Shell, BP and Cenovus in Canada may be leading the charge right now, but this is just the tip of the iceberg for many companies in the energy sector who will become much larger more integrated full-suite energy providers where oil and gas will represent a gradually shrinking piece of their growing energy pie.  This should generate returns to investors, make the zealots feel good and won’t disrupt the economy either. Seems like a win all around, no?



In this context, how does the divestment movement make any sense?



Note that there will be no Crude Observations next week as I will be travelling without access to a web publisher. I look forward to ranting at you all anew on the 28th.


Prices as at February 14, 2020

  • Oil prices rose during the week after the big coronavirus sell-off;
    • Oil storage increased
    • Production fell slightly
  • WTI Crude: $52.17 ($50.42)
  • Western Canada Select: $34.57 ($31.92)
  • AECO Spot: $2.00 ($2.00)
  • NYMEX Gas: $1.852 ($1.856)
  • US/Canadian Dollar: $0.7542 ($0.7518)



  • As at February 7, 2020, US crude oil supplies were at 442.5 million barrels, an increase of 7.5 million barrels from the previous week and a decrease of 8.4 million barrels from last year.
    • The number of days oil supply in storage is 27.3 which is comparable to last year at this time.
    • Production was up marginally for the week at 13.000 million barrels per day. Production last year at the same time was 11.900 million barrels per day.
    • Imports increased to 6.978 million barrels from 6. 615 million barrels per day compared to 6.210 million barrels per day last year.
    • Crude exports from the US decreased to 2.970 million barrels per day from 3.413 million barrels per day last week compared to 2.364 million barrels per day a year ago
    • Canadian exports to the US decreased to 3.685 million barrels a day from 3.825 million barrels per day last week
    • Refinery inputs increased during the week to 16.020 million barrels per day
  • As at February 7, 2020, US natural gas in storage was 2,494 billion cubic feet (Bcf), which is 9% above the the 5-year average and about 32% higher than last year’s level, following an implied net withdrawal of 115 Bcf during the report week
    • Overall U.S. natural gas consumption grew by 5% during the report week.
    • Production was essentially flat for the week. Imports from Canada increased 3% from the week before. Exports to Mexico decreased 2% week over week.
    • LNG exports totaled 55 Bcf
  • As of February 14, 2020, the onshore Canadian rig count decreased 2 to 255 (AB – 160; BC – 18; SK – 72; MB – 3; Other – 2). Rig count for the same period last year was 238.
  • US Onshore Oil rig count at February 14, 2020 is at 678, up 2 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States is down 1 at 110.
    • 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 flat at 23.
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 85%/15%, in Canada the split is 65%/35%


Trump Watch: You’re fired!

Kenney Watch (new!): Sudden green moment. Didn’t last.

Trudeau Watch (for balance): Promising to support Senegal’s oil and gas industry. Calgary is not amused.

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