Crude Observations

On Fire

It’s funny how things go in this new COVID world, one week you are bored out of your tree, the next week there is so much going on that it’s hard to focus on any one thing. This week of course has been no different, particularly in the energy sector as a number of announcements and developments that started in early May started to gain momentum and finally burst into prominence over the last seven to ten days.


Coupled with this are the recent movements in the price of oil, which we can safely say have been positive, if not on fire! Which is a great analogy for oil and gas by the way, given that energy from fossil fuels and carbon require a fair amount of burning.


Of course in the context of the energy market, not all fires are positive, some are definitely negative and/or destructive and resemble more the criminal tossing a match on the gas soaked car as he leaves the scene of the crime opposed to the fat cat lighting a cigar with a rolled-up Benjamin (which of course can also be construed as criminal).


So fire, as an analogy, can be a good thing or a bad thing. Let’s see if we can’t have some fun with matches this week… I’ll light the match, offer an opinion and, where appropriate, duck.


First up on the docket is the recently reported and theorized arson at a TransMountain Expansion job site in Merritt, British Columbia where a piece of equipment was the subject of vandalism one day and was lit on fire the next in what is clearly arson. While the RCMP investigates the incident and no blame has yet been assigned, it is hard not to think that this may be a harbinger of what this suddenly very important project is likely to face in the coming months and years especially as it enters into British Columbia. While I remain hopeful that this is just an opportunistic act of vandalism, the thought that such acts can be performed by anyone, never mind lawful (and unlawful) protestors, should give any contractor pause and concern the Federal government as owner. The piece of equipment, a cable-puller, was valued at around $1 million and will be replaced by insurance, but it’s a setback for the contractor supplying the equipment and affects the livelihood of its operators. I would assume if firebugs are going to be targeting yellow iron, there will be a stepped-up security presence at work sites. This type of civil disobedience needs to be nipped early lest it spiral out of control like train blockades.


Speaking of arson and pipelines, we now have what I think many will characterize as a Keystone XL dumpster fire. Mere weeks ago TC Energy announced that it was going to proceed with construction of the pipeline from Alberta to Nebraska with the full-throated support of the Alberta provincial government through both preferred equity and loan guarantees. Then last weekend we heard from an official campaign spokesperson that if Joe Biden is elected, he intends to rescind the Presidential Permit granted by Donald Trump that allowed the pipeline to cross the international border. While this is way more complicated than people are making it out to be, it is a major political blow to TC Energy’s plans and the prospects of more egress capacity out of Western Canada. While it remains to be seen how this particular policy plank evolves over time and in the background, we now face the very real prospect that in what currently appears to be an imminent Joe Biden led Democrat presidency, this signature pipeline project for Alberta is destined to be sidelined. There is no denying that the Democrats are much greener than red at this point and that Biden wants to curry favour from the left wing of his party in the lead up to the election. To that end, he appears to be stacking the deck that way, however he risks losing a much more important electoral cohort by going too far – the independents who are looking at the economic devastation from the COVID pandemic and are wondering why the presumptive President would walk away from what is a shovel-ready jobs and taxes generating project whose actual environmental impact is a tiny fraction of the importance it has been afforded. One can only hope that the more pragmatic wing of the Democrat party reminds Uncle Joe of the Clinton election strategy – it’s the economy stupid.


As anyone who has ever been to a Greek restaurant will know, one of the great shows during service is when you order Saganaki as an appetizer. This is the cheese appetizer that is served flambed at table side. This type of “flash in the pan” is, according to Peter Tertzakian, one of the smartest energy minds out there, a potential scenario for what the COVID pandemic has delivered to the much-touted American energy independence movement. In his view, the demand destruction we have seen and the concurrent cratering of production via shut-ins and slashing of capex has the very real potential of undoing the past 10 years of production growth in the United States and Canada pushing out the low cost prolific volumes that historically have come from the Middle East, Russia and OPEC nations. The implication of course is that the energy sector and the North American economies are suddenly much more vulnerable to the price manipulating shenanigans of state actors and National Oil Companies that do not have the interests of western democracies top of mind. What comes out of this for oil production in the continent remains to be seen, but denying critical infrastructure like Keystone XL or taking inexplicable and self-defeating domestic stands against fracking seems like a sure-fire way of surrendering the hard-fought energy independence won over the past decade that has allowed so much investment in renewables to contemporaneously occur. I am taking his comments several steps further of course, but in a world where energy costs are unpredictable and supply is variable, capital to address that is going to be challenged.


Further to the preceding, it is amazing to watch developments in the two most important light tight oil basins in the United States – the Permian and the Bakken and not think of them as raging wildfires. Since Friday March 13, 2020 – the official start of my work from home protocol, the number of active rigs drilling in the Permian has dropped from 418 to 162 (61%) and in the Bakken from 52 to 14 (73%). At the same time, frac spreads operating in the United States have declined from more than 400 to less than 50. As discussed previously, the implications of this are critical. US light tight oil production comes from a just in time model that involves thousands of wells with initial production rates of 700 to 1000 bpd and decline rates of 50% to 65% in the first year alone. If you are not drilling and you are not completing and you are shutting in existing production, you are not only ratcheting back production in the short term, you are impairing your ability to maintain those production levels going forward. Toss in capital markets that are for all intents and purposes closed except for the occasional loan deferral, bailout or kicking the bankruptcy can down the road and what you have is an industry stopped dead in its tracks and essentially pushed into a position from which it may be impossible to recover. Layer in the green agenda of one Joe Biden, an uncertain timeline for the recovery in energy demand and it gets pretty grim, pretty fast.


Far from immune to the vagaries of the market, the Canadian upstream world faces much the same challenge and the rig counts reflect that except, as posited here previously, maybe not so much for the oilsands. For that reason, the oilsands in my mind resembles much more in my mind one of those slow burning peat moss fires that just simmers along as a controlled burn with everyone hoping it doesn’t get out of control too soon or too fast. Canada’s production juggernaut suffers neither from the high decline rate profile of its LTO counterpart, finding costs are negligible and the infrastructure was paid for years ago so there is no treadmill of capex required. In any reasonable price and demand recovery scenario, the oil sands stand to benefit tremendously – if only we can keep the cash flow fire/burn under control.


Of course the oil sands have troubles of their own in terms of finding investment and capital support and nowhere is this being felt more acutely than in the lack of love shown to oilsands industry titans by the Norway Investment Fund that announced that they had sold off their oilsands positions because of emissions concerns. That’s fine of course, it’s their money, their policies and their prerogative to invest it where they will and their Canada exposure is otherwise still overweight, but it still hurts. As fires go this is more akin to accidentally burning your hand on a Viking funeral pyre but let’s hope that the “Norwegian burn” doesn’t precipitate a new round of unnecessary oilsands bashing.


Remember in the olden days when photographs were taken by cameras on a tripod and the light for the picture was obtained by tossing a piece of flash paper into a tray? That’s what we witnessed last week with the news that the Saudi Arabian Investment Fund had increased its stake in a number of oilsands companies, triggering a whole bunch of breathless commentary and introspection about ethical oil and despots and evil money and hypocrisy. Ultimately, this flash in the pan just left a whole bunch of people blinking and wondering what had happened. Here is my view of what happened, a fund manager bought stock, because they saw a great value play in North America (that they helped cause – don’t get me wrong!) and they aren’t going to invest in shale.


After two years of delay and $9.7 billion in capital costs, the Sturgeon Refinery is finally up and running, processing up to 80,000 barrels per day of bitumen provided by CNRL and the Alberta Petroleum Marketing Commission. As part of the funding arrangement, the province is responsible for a portion of the funding costs of the refinery (75%) which was problematic when it wasn’t able to make any margin off contributed feedstock, these payments began in 2018 so it has been a long time coming for some production to come out of what is likely the last refinery to be built in Alberta. At least from now forward (fingers crossed) the Alberta government will no longer be burning piles of cash it doesn’t have to support a long delayed project.


In a cruel twist of fate, TC Energy suffered a second setback this week after it learned that a Governor in Council approval/ruling for it’s proposed Nova Gas Transmission Line expansion and rebuild has now been delayed by 150 days due to COVID related delays. While the excuse is reasonable, it is extremely disappointing for TC Energy and the contractors who would have appreciated the jobs that come with a $2.7 billion expansion project that would have improved market access for Canadian natural gas producers. While it isn’t unreasonable to expect delays, this does bring to mind the image of Nero fiddling while Rome burns.


It has recently been announced that the Alberta Energy Regulator has suspended indefinitely environmental review and oversight across a wide range of oil and gas industry activities. This is on top of a similar announcement last month relating only to oilsands mining operations. The suspended monitoring activities include air, water and wildlife and the justification given was that operators were finding it just too dangerous to meet their requirements in light of the COVID pandemic. I don’t know which specific companies are making noise about this or where the impetus came from, but to apply a sweeping suspension across pretty much all companies operating in the province seems problematic to me. If the energy industry is deemed an essential service, the regulation and oversight of that industry should be as well – no one gets a free pass. And if you can’t operate safely in a COVID environment and protect the air or avoid disturbing the habitat of a burrowing owl then maybe you need to shut down until the danger passes. As an industry participant and a person who in general supports the government’s position relative to the oil and gas industry, I have to say I find this very disappointing, particularly where the government is simultaneously bragging about how wonderful and well-regulated we are and calling the Norway fund hypocritical for selling off its oilsands investments. Never mind that it is rolling out its Phase I relaunch plan and shamelessly pitching Gary Bettman to have NHL Hockey play in Edmonton. I am hopeful that when Jason Kenney realizes got a lit firecracker in his hand he decides to toss it away, because this one may hurt when it blows. Don’t even get me started about camp sites and coal mines.


As we all know, Joe Biden has come out aggressively against the Keystone XL pipeline and is busy greening himself up. To further that end, he has announced an advisory committee on all things including energy that includes noted energy expert Alexandra Ocasio Cortez or AOC – the infamous Democrat firebrand who espouses the unplanned, uncosted, economy destroying Green New Deal. What could go wrong! As mentioned above, in an ill-advised attempt to curry favour with people who are going to vote for him anyway, Joe Biden may have inadvertently lit the fire that will lead to the immolation of his campaign, as the 75% of Americans who have no interest in the radical transformation of the US economy proposed by the Green New Deal cohort will start to lose interest in a campaign that doesn’t need to pander. And rest assured, if Biden loses, that is the end of the Green New Deal movement because Donald Trump will burn it all down and collect the insurance proceeds.


Over the weekend a shallow water well offshore Nigeria operated by a local oil and gas explorer finally managed to blow up after attempts to bring the well under control after its blow-out preventer failed around mid-April were unsuccessful. No real lesson here, except to underline that the oil and gas industry is a dangerous business and that accidents can happen anytime when regulators fail or undercapitalized companies cut corners. And who needs a fire analogy when you can post a picture.

News emerged recently that Venezuela is importing oil from Iran to meet its needs. Think about that for just a second. Venezuela, the holder of the second largest oil reserves in the world, is being forced to import oil to meet its domestic needs. This isn’t a “Canada imports oil to the east coast because there aren’t any pipelines”, it’s an “oh crap, we’ve totally wrecked this haven’t we” admission of gross incompetence. The only type of fire that comes to mind from this is Spontaneous Self-Combustion.


The week before last Ritchie Bros, the Canadian headquartered auction and asset sale specialist held their Edmonton auction. It was a five-day affair and, while it wasn’t the largest ever, it was close to it and did have the highest number of bidders ever. Of the assets sold, we understand that more than 80% stayed in Canada and 40% stayed in Alberta, which is remarkable. Asset values for yellow iron held steady while specialized oilfield service equipment generally disappointed. The Ritchie Bros Edmonton sale is generally held to be a leading indicator for the energy services sector and if the volume of equipment, the overall sales prices and the names of signature Canadian companies that sold their entire fleets are any indication, we are in for a rough ride over the next few quarters, much akin to a five alarm fire – alert the authorities.


Final point, so we can leave on a relative high note. As far as prices and demand destruction, I think the very worst is behind us. Sectors of the economy are opening up and demand is picking up. It’s going to be a rocky road and there will be many twists, obstacles and financial meltdowns along the way, but the industry has actually done a great job of meeting this unprecedented calamity in the space of little more than 2 months and setting a bottom. So, to the “end of oil” and the bottom of the energy market, safely ensconced on their 747 taking off out of Dulles, I bid a John Mclane inspired yippee ki-yay and light its proverbial trail of jet fuel with my trusty zippo. That is all. Go for a drive. Be kind, Wear a mask. Wash your hands.


Office Cat


While restaurants were not allowed to open in the Calgary region, office cat managed to sneak off in Week 11 for nine holes of socially distanced golf. I of course was not invited, but I do have a standing invite to go to a driving range if they can figure out how to safely get the balls to the golfers. Hint – don’t overthink it, buy sanitizer.


Stormont Capital Crude Coffee


We had the fifth edition of this last Tuesday at 10 AM and it was another great conversation.


Topics included the above referenced Ritchie Bros sale, the TransMountain Expansion project, a digression into air travel and consequences for Calgary as a hub if recovery lags and a number of other topical matters.


This week I promise to track down another interesting guest who isn’t me, although I reserve the right burn the candle on both ends.


Prices as at May 22, 2020

  • Oil
    • Oil storage was… down? (that was unexpected)
    • Production was down
    • OPEC+++++ cuts start biting
  • Natural Gas
    • Storage was up but not as much as expected, historically very high; consumption down; production flat; exports flat.
  • WTI Crude: $33.56 ($29.79)
  • Western Canada Select: $23.96 ($21.54)
  • AECO Spot: $1.863 ($1.878)
  • NYMEX Gas: $1.893 ($1.565)
  • US/Canadian Dollar: $0.7170 ($0.7106)



  • As at May 15, 2020, US crude oil supplies were at 526.5 million barrels, an decrease of 5.0 million barrels from the previous week and a increase of 49.7 million barrels from last year.
    • The number of days oil supply in storage is 41.3 compared to 28.9 last year at this time.
    • Production was down 100k for the week at 11.500 million barrels per day. Production last year at the same time was 12.200 million barrels per day.
    • Imports fell to 5.197 million barrels from 5.391 million barrels per day compared to 6.943 million barrels per day last year.
    • Crude exports from the US fell to 3.239 million barrels per day from 3.525 million barrels per day last week compared to 2.922 million barrels per day a year ago
    • Canadian exports to the US rose to 2.946 million barrels a day from 2.847 million barrels per day last week
    • Refinery inputs decreased during the current week to 12.903 million barrels per day
  • As at May 15, 2020, US natural gas in storage was 2,503 billion cubic feet (Bcf), which is 19% above the 5-year average and about 45% higher than last year’s level, following an implied net injection of 81 Bcf during the report week
    • Overall U.S. natural gas consumption fell by 10.0% during the report week.
    • Production was down 2.1% for the week. Imports from Canada rose 1.0% from the week before. Exports to Mexico were up 2.5%.
    • LNG exports totaled 37 Bcf
  • As of May 22, 2020, the Canadian rig count decreased 2 to 21 (AB – 10; BC – 6; SK – 2; MB – 0; Other – 3). Rig count for the same period last year was 58.
  • US Onshore Oil rig count at May 22, 2020 is at 237, down 21 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States is down 0 at 79
    • 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 down 0 at 12.
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 86%/14%, in Canada the split is 66%/34%


Trump Watch: No mask. Claims to be taking Hydroxychloroquine, but my bet is a placebo

Kenney Watch (new!): Managing to make campers mad.

Trudeau Watch (for balance): He rocks a mask, Why oh why does it have to be black??

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