Crude Observations

One More Week!

Okay, I lied. Can you forgive me? It was too easy. It was spring break, I was relaxing with my family and it was Friday. And I really didn’t want to go inside and write my blog and I refused to leave poolside because I had a freshly cracked Dos Equis XX by my side. So, I thought to myself, “Self, it’s Friday – you got nothing to write and Monday is April Fool’s and to leave that alone is a disservice to pranksters everywhere. So I did what I did. But really, theer is no way I can quit now. It’s too much fun!


That said, I fooled some of you right? And a good, fun time was had by all.


You know what’s not a good fun time to be had by all? The Alberta election.


Seriously. Are we done yet? It’s exhausting for me so I can’t imagine what it’s like for the candidates. I’m pretty sure all the leaders are exhausted – Premiere Notley from hauling all those pots of money around the province and UCP Opposition Leader Jason Kenney fighting fires from so-called bozo eruptions on a daily basis. Meanwhile, the Alberta Liberal Party and constitutional lawyer David Khan want an HST and the Alberta Party (not to be confused with the Liberal Party) and it’s kindly old grandpa leader Stephen Mandel appear to want all the bad parts of Stephen Harper’s Firewall letter and none of the good ones – oh, and extra lanes on the QE2 for autonomous vehicles because, you know, priorities.


At any rate, we are halfway through the campaign and I know I promised an election prediction but you’re just going to have to wait until next week. I think the electorate needs that time to absorb the implications of the leaders’ debate (to the extent they survived the drinking game), hopefully calm down the unhinged rhetoric on some the social issues, take a deep breath and decide which way they want the province to go for likely the balance of my working life, because I give whoever wins this election at least the next three consecutive terms. So it does matter.


And there you have it. Next week. Prediction. Maybe a little platform review. Maybe not. Maybe just the energy side as I don’t want to step in any giant steaming piles of you know what. And there will be no endorsement given. My vote is my business. Not my place to tell others how to vote.


I will touch on one policy item though, because I think it’s important. I am on record as saying that the UCP platform approach to crude by rail – let the private market deal with it – is poorly informed policy and I hope they have it in them to put a little more meat on the bone in the coming week. I love what they are doing with the money they “save” – First Nations ownership of energy infrastructure and companies is going to be a major theme in the next decade and the FN Investment Fund/bank idea is, while inspired might be too strong a word, definitely refreshing. But, we still need rail. Hey, maybe a First Nations rail company would work? Backed by the province if the UCP wins?


So why am I bringing up Crude by Rail yet again? Because as everyone knows, for the ten thousandth time in the last 4 years, the biggest problem facing Alberta is egress. By pipe, by rail, by boat, by truck, by donkey. And if you are going to lead the province (whether your name in Notley or Kenney (sorry other guys)) you need to have an all of the above strategy. And rail is a critical part of that, especially when pipeline projects are in various stages of delay, denial and three-dimensional political chess. The pipeline solution is in front of us but it’s now maybe 6-12 months farther out than people think and CBR expansion is the only thing standing between temporary curtailment being permanent and continuing any type of recovery between now and mid 2020. Even the Alberta Party’s looney tune idea of CBR to Alaska will need years to complete.


Let’s review one more time, because this is actually the fundamental economic issue facing Alberta. Fail to solve egress and the last 4 years are just a predictor of the future. You can speed up the AER approval of wells as much as you want but if a producer can’t ship the product, they won’t drill the well you got approved in record time.


And really, we want people drilling wells. Lots of them. This is why the AER reforms and the elimination of red tape matters. Egress just so happens to matter more.


So where are we really at when it comes to egress? Well, a lot has changed since I last wrote about this topic (checks the website), umm three weeks ago…


Line 3 expansion. The Line 3 expansion is the basically an upgrade and slight realignment of an existing pipeline that runs from Alberta into the United States through Minnesota to Wisconsin. This pipeline is rated for 800,000 bpd but has been operating under capacity because it is so old and can’t handle the pressure anymore. When finished it is expected to add about 310,000 bpd of export capacity to Western Canada. Currently approved all along the line, the project was expected to be in service by the end of 2019. The Canadian portion of this line is in essence complete, but… a funny thing happened on the way to Minnesota where the outgoing and newly elected governor was/is determined to use every tool in the toolbox to frustrate the completion of this project and the state is slow-footing permitting for the pipeline such that its in service date will now be no earlier than Q3 2020. Sound familiar?


Line 5 section replacement. This is a project that no one really talks about because it’s nowhere near as interesting as the others. Line 5 is an oil and natural gas liquids pipeline that runs from Western Canada into the United States and then back into Canada supplying a few US refineries along the way as well as Canada’s refinery centre in Sarnia and facilities as far east as Montreal. Like Line 3, Line 5 is very old and requires a lot of maintenance and upgrading. One spot for this is a place called the Straits of Mackinak (where Lake Huron and Lake Michigan connect) where the pipeline currently runs along the bottom of the lake for some 5 miles or so and is exposed to anchor strikes, corrosion and other hazards. Enbridge, the operator, wants to replace this old and potentially dangerous section of pipe with a concrete tunnel encased pipeline bored under the lake bed. The approval process for this has been going on for years and the company recently secured permission to do the project. Unfortunately, Michigan has a newly elected Democrat governor who is determined to stymie the project and has asked for a review and is “exploring options”, because, well, the rusty pipe on the lake floor is a better option than the best technology going. Should this process shut down the pipeline for any length of time, 540,000 bpd will need to find new paths to market.


TransMountain Expansion. We all know this one. Also known as the Pierre Elliot Trudeau Memorial pipeline, the TMX expansion involves the twinning of an existing pipeline that runs from basically Edmonton to Burnaby and will double the capacity of the existing line from some 400,000 bpd to 870,000 bpd. Originally proposed by Kinder Morgan in 2013, as everyone know this football has been kicked so many times the logos have rubbed off, which is good because the Feds now own it and can put their own stamp on it. Denied by the courts, obstructed by the province and observed with curiosity by Southern Resident Killer Whales, this conduit has been reapproved by the NEB and is expected to be reapproved by the Federal Cabinet just as soon as SNC Lavalin gives them permission. If it started tomorrow (it won’t), the TMX pipeline could be in service by 2022.


Keystone XL. This one is the biggie. I have always called it the most important one. It’s the pipeline that connects Alberta’s oil sands directly to Cushing and in turn to the United States Gulf Coast. You know, that place where demand for heavy oil is actually growing and where, as luck would have it, there is currently a shortage as Venezuela implodes and Mexico production continues to decline. This pipeline will carry 890,000 bpd of crude. It’s important. Late last year, an appeals court judge in Montana ordered TransCanada to stop work on the pipeline so that the US government could go back and redo its analysis of the need for the pipeline, much like the TransMountain experience. TransCanada has appealed on a number of occasions to be allowed to continue its preparatory work to avoid losing a year and a billion dollars, but the judge said no. While awaiting the new State Department study, the pipeline isn’t sitting in limbo, they continue to work on landowner issues in Nebraska and just a few days ago, the Canadian energy industry’s only friend, Donald Trump, reissued his certificate of approval for the KXL pipeline. Which is great, but still we wait. Assuming construction starts in 2020, this project will take until 2023.


Coastal Gas Link. Unlike all the oil pipelines, Coastal Gas Link is a natural gas pipeline destined (as its name suggests) for the coast. Primarily, linking the natural gas bounty of the Montney formation in NE BC and NW Alberta with the FID approved LNG Canada. Unlike the oil pipelines, this sucker is entirely self-contained in British Columbia so it requires neither NEB approval or Federal government meddling. Great for them right? Royalties, taxes and riches to the BC coffers. Hope they can solve their First Nations issues.


And that’s it folks. That’s where the industry infrastructure investment plans tap out.


Oh sure, there’s a lot of midstream gathering and processing planned to move product to new petchem facilities in the province of Alberta, there is going to be plenty of internal infrastructure built. TransCanada also has a pricy plan to improve and debottleneck the NGTL natural gas network in Western Canada.


But as it regards export pipelines to relieve the trapped in Western Canada reality of oil and gas pricing, what we have on the table is about 1.6 million bpd of extra capacity coming on stream sometime between now and 2023 and Coastal Gas Link. This may seem like a lot of room for industry to grow into until you consider that in the time between now and then, oil demand is expected to grow by 7.5 mm bpd, and Canada is actually expected to supply a lot of that.


We hear a lot about all the pipelines that get approved in Texas with a simple phone call – admittedly an exaggeration – but the reality is that there are a half dozen projects in the works to get oil and associated gas from the Permian and elsewhere to the Gulf Coast, half of which will be in service before we complete an approved pipeline and maybe before we get shovels ion the ground on TMX or KXL. This underscores once again that when it comes to infrastructure, Americans GET IT DONE while we dither, delay and fritter away opportunity.


So where are the visionary plans? We have the capacity to increase our exports and sure, there are some. The Eagle Spirit proposal for example, an aboriginal owned pipeline from the oilsands to the coast is one. Energy East was one. Northern Gateway was one. The idea of an Energy and commodity corridor stretching across Northern Canada is another idea. They just aren’t happening. They aren’t jumping off the drawing board for a variety of reasons, but two stand out.


The first reason is that there are currently no major expansion plans for the oilsands that will require additional pipeline capacity. Why is that? Well, price has a major role to play, but so does the regulatory environment which is the second reason or the first reason that causes the second one. All I know is that right now, the proposed new regulatory regime has put a deep-freeze on any proposed new export infrastructure.


What new regulatory regime am I talking about? Well none other than Bills C69 and C48.


Why do they matter? We’ve covered this, but basically Bill C69 is the new Impact Assessment Act, which is so poorly (perfectly?) designed that it is highly likely to discourage any self-respecting pipeline proponent from undertaking any billion dollar proposals for a major export pipeline… ever. The weaknesses have been highlighted ad nauseum, and I encourage you to visit the “Suits and Boots” webpage for some informative information, but in my layman view of things the following major weaknesses give me pause:


  • Bill C69 politicizes infrastructure by giving the Environment Minister a veto. So even after going through all the hoops, a project can still be denied. Who would apply for that?
  • In the old days of the NEB, to get a hearing at the review stage, you had to be relevant, proximal or affected. Now you just need a pulse. Everyone can and will have standing. This will lead to colossal delays in process and open up hundreds of avenues for appeal. Basically making the process impossible to finish.
  • First Nations will be allowed to give secret testimony as part of the assessment. So a multi-billion dollar project can be turned based on evidence given that the proponent will never hear about
  • Projects will need to be assessed on the basis of the intersection of gender, race and hockey team choice. Great. But who cares? Federal law requires this anyway. Why does this have to be enshrined in law to determine whether a tube can go underground to get from A to B.
  • Upstream and downstream emissions are part of the assessment process.
  • Timelines are poorly defined and the process has multiple, discrete stages, any of which can be extended. Processes that never end rarely get started.
  • The list of projects subject to review is unavailable


I could go on, but what’s the point. This is an investment stalling piece of regulation trying to fix what’s not broken interlaced with enough virtue-signalling to wallpaper a social justice warriors safe room.


And, assuming that say, you are a First Nations investment consortium and you want to build a pipeline from Fort Mac to Prince Rupert or Kitimat, shipping oilsands crude to the coast for export and wealth creation all along the value chain, well guess what. Once it gets to that part of the coast, you can’t ship it anyway, because Bill C48 is an oil-tanker ban. Not for the whole of Canada, just that part of the coast. And not for just any oil, no this ban is specifically for oilsands crude and derivations thereof. Nice. And people wonder why everyone in Alberta is so damn mad all the time.


So, let’s review. Oil can move up and down the coast from Alaska to points south and that’s not a problem. Oil can travel via hotly contested pipeline into the most densely populated city in Canada for export, and that’s not a problem. Almost the entire petroleum needs of Eastern Canada can arrive by tanker from other countries (US, Saudi Arabia, Nigeria) to ports all over the East Coast and up the Saint Lawrence River to Quebec City and Montreal and that’s not a problem. BUT, try to grow the economy by boosting oil sands production and ship that product by impossible to get approved anyway pipeline the shortest distance to the coast, to a remote deep water port the shortest distance from North America to export markets in Asia. And now you have a problem.


It makes no sense. And it’s infuriating. And that’s one of the many reasons people in Alberta are so mad all the time.


But why bring this up now?


Well mainly because we need to keep lobbying the Federal government and the Senate (where these bills currently sit) about how damaging these bills are likely to be to the prosperity of Alberta and by extension Canada. And also to draw attention to the fact that the Senate committee that is reviewing (and has the power to kill) these bills is going to be making stops in Alberta in the coming weeks, starting with Calgary this week.


So we spend a lot of time talking about elections. And they matter. But these bills matter as much or more than the outcome of a once every four years election, because the implications that emanate from them are serious and will last a lifetime.


C48 needs to go, it’s nothing but virtue signalling hypocrisy.


Bill C69 can be salvaged but needs some major revision. Combined, if implemented as is, these bills set the competitiveness of Canada’s resource sector to the back of the global bus and are a fundamental threat to our national prosperity. Don’t believe me? Go check on foreign direct investment.


In the meantime, back to my timing. Pipelines are happening slower than we anticipated notwithstanding good news on several fronts.


So, in the interim, assuming we can make ground on these bills, we still need to encourage investment. For that we need “all of the above” for egress. I am willing to shuttle buckets in the back of my car. But only if I have line of site to something aside from pipelines and airships – something like rail. Come on guys. You can do it. Choo choo!


OK, that’s done.


So. Election forecast next week.


Here’s a preview:





Come on, you knew I wasn’t going to do that…

Prices as at April 5, 2019 

  • The price of oil was up this week on modest production gains and supply concerns.
    • Storage posted an increase
    • Production was up
    • The rig count in the US was up
  • Injections to storage were flat with expectations for gas. The market was unmoved
  • WTI Crude: $63,26
  • Western Canada Select: $55.06
  • AECO Spot *: $0.20
  • NYMEX Gas: $2.664
  • US/Canadian Dollar: $0.74975


  • As at March 29, 2019, US crude oil supplies were at 449.5 million barrels, an increase of 7.2 million barrels from the previous week and 24.2 million barrels above last year.
    • The number of days oil supply in storage is 28.1 compared to 25.4 last year at this time.
    • Production was up for the week at 12.200 million barrels per day. Production last year at the same time was 10.460 million barrels per day.
    • Imports rose from 6.540 million barrels to 6.763 million barrels per day compared to 7.898 million barrels per day last year.
    • Exports from the US fell to 2.723 million barrels per day from 2.886 million barrels per day last week compared to 2.175 million barrels per day a year ago
    • Canadian exports to the US were 3.212 million barrels a day, down from 3.447
    • Refinery inputs rose during the during the week to 15.849 million barrels per day
  • As at April 3, 2019, US natural gas in storage was 1.130 billion cubic feet (Bcf), which is about 31% lower than the 5-year average and about 17% less than last year’s level, following an implied net injection of 23 Bcf during the report week
    • Overall U.S. natural gas consumption fell 4% during the report week
    • Production for the week was flat. Imports from Canada increased 2% from the week before. Exports to Mexico increased 1%
    • LNG exports totaled 25.3 Bcf
  • As of April 5, 2019, the Canadian rig count was down 20 at 68 (AB – 52; BC – 14; SK – 1; MB – 0; Other – 1. Rig count for the same period last year was 109.
  • US Onshore Oil rig count at April 5, 2019 is at 831, up 15 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was down 1 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 was unchanged at 22.
    • 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: Origin. Orange. Potato.

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