Crude Observations

A Letter!

I was drawing a little bit of a blank this week as last week’s torrent of wisdom relating to my Fearless ForecastTM  was, shall we say, somewhat draining and we appear to be in the middle of some January blahs right now what with the snow and the government shutdown. It’s so blah not even the upcoming Super Blood Wolf Moon (a real thing) or Donald Trump serving hamberders (another real thing) can seem to shake me out of it.


So accordingly I am going to do something that I should have done a long time ago. I’m going to write a letter. And that letter is going to be addressed to someone who probably gets a lot of letters but I can guarantee has never received one from me. And I expect that, since this will be such a monumental piece of correspondence, this individual will immediately act upon the letter and in due course solve all of our problems. Failing that, I expect that his assistant and consigliore will read the letter, understand its import and encourage his boss to act forthwith. Failing that, it may just hit the recycling bin or email trash.


Ultimately though, I think it’ll just be a disjointed cathartic release of January tensions and pent up feelings that have built up over the last few years as the energy sector has tried to get itself jump started.


Anyway, here goes nothing I guess. Warning, the rant is strong in this one.


An Open Letter to the Prime Minister of Canada, Pierre Justin Trudeau


Dear Justin,


It’s OK if I call you Justin, right? You seem like the kind of guy who likes the familiarity that goes with being on a first name basis, makes us feel like bros, like we could sit down and smoke a now legal J together while wearing stoner costumes, bust open a bag of Hickory Sticks and laugh uproariously about that time David Suzuki called you a bad name.


Anyway Justin, I felt the need to write to you because I’ve got a lot on my mind and I also do a weekly blog and I had a bit of writer’s block and this, so far, is the only idea I have on how to break that.


My blog isn’t about food or puppies (well sometimes), no, my blog is at its root about energy. Specifically the energy industry and where it intersects with politics and the economy. I write a lot about oil, because oil is always topical and fun. I write occasionally about gas. Not the gas that goes in a car (yes, that’s still a thing), rather the natural gas that is going to fill all those nice LNG cargo ships off the coast of British Columbia if the project ever gets built. You know, much like ships that would take oil from the same place if they weren’t banned. I also write about provincial and Federal politics and I like to make fun of politicians. Like everyone does, right? Especially the ones who take themselves too seriously. You know who I’m talking about.


So, aside from that, why am I writing to you today? That is a good question.


I think I am writing because in many ways I feel like you have lost your way when it comes to this province and our energy industry. And I wanted to take the opportunity to help you get back on track.


It’s going to be a bit of a random walk so bear with me.


Just so you know Justin, lots of people think they can run the country better than you. And for some it may be true. But only you run the country right now. You earned that privilege (booby prize) fair and square. You own it now and can make decisions that make things happen. It’s a fabulous thing to have. But given this unfettered power, when it comes to the energy file, it’s critical to get the important information on the table so you can really understand where we (as an industry and people) are coming from. And to make it easier, as I don’t think you are a huge data guy, I’m going to try and present it to you thematically as opposed to inundating you with numbers, although they are unavoidable.


First, energy is the economy. Sounds weird, but it’s true. The availability of cheap and abundant energy is pretty much exclusively responsible for the evolution and maintenance of our global standard of living, wealth and life expectancy. Countries that are self-sufficient producers of cheap energy have a natural competitive advantage. Countries that have the ability to export surplus energy have an even greater competitive advantage.


I just described Canada by the way. Our abundance of energy supports our quality of life and takes two primary forms – cheap hydroelectric power in the East and highly valuable fossil fuel resources in the West, primarily in Alberta, but also BC and Saskatchewan.


These fossil fuels (coal, oil and natural gas) are so valuable and plentiful that everyone in the world wants them and is willing to pay whatever price the market sets to get them (and for years they threw money at us to get access). And the producer and exporter of these resources (i.e. us) stands to reap tremendous economic benefit.


A quick nostalgic aside here – your old man got it, that’s why he tried to take it with the National Energy Program.


Except to seize this opportunity, we need to have a government and regulatory system that recognizes what the prize is, actually wants it and is prepared to facilitate grabbing that prize. (note, I am using the word “prize” deliberately – “The Prize” by Daniel Yergin is the seminal book about the oil industry and required reading if you want to understand the industry – you should really read it)


Sorry, back to the point – it’s this lack of desire for the “prize” where I think you have lost your way.  We have it. They want it. Let’s get it to them. As a country we seem to be lacking a sense of urgency to do this and it’s troubling. 60% of Canadians think we are in the midst of a pipeline crisis. You won the right to govern us polling 39%. Weird comparison, but think about it.


Look, I get that you are doing some things to try and help the industry. But it’s not enough.


You bought the TransMountain pipeline and its expansion project but have been held up by the courts.


You piggybacked on the LNG Canada FID with great fanfare but without a pipeline to get the gas to the Coast, it’s just another boondoggle for Kitimat. And that pipeline has been duly approved after 5 years of assessment and consultation with stakeholders but still risks being held up five (5!) hereditary chiefs and nuisance lawsuits filed by gadfly environmentalists whose sole purpose is to obstruct any infrastructure. You say you want to build bridges, but all these people want to do is block them.


Keystone XL is held up by a federal judge in Montana. The US government is filing an appeal but no one from the Canadian government is there to help support the economic case for this critical heavy oil pipeline that will get product to the US Gulf Coast. This is the file you choose to rely on the Donald Trump administration to have your back on?


The Alberta government asks, practically begs, you for assistance in a short to medium term fix by supporting their rail car purchase and the federal response is “nah, we’re good”.


The situation was so bad last year that the government took the drastic step of mandating a production curtailment. It fixed the price differential, but what are the other consequences?


Meanwhile, capex in the Canadian oilpatch is expected to be flat or decline yet again in 2019. In 2014 the energy sector spent $80 billion. This year they will spend about $40 billion. The amount of capital that hasn’t been spent in the last four years is equal to 10 times the annual GDP contribution of the entire auto sector but you make more noise about a plant closure in Oshawa than 4 plus years of economic chaos in Alberta. And you wonder why people are frustrated and holding truck rallies (and if you think that’s bad, wait until the pipeliners show up in Ottawa with all their underutilized yellow iron!).


Alright, enough of this. Let’s look at some cherry-picked numbers.


In 2008 the United States produced about 5 million barrels of oil per day. That same year Canada was producing about 3.5 million. Nice balance, right? Fast forward to 2018 and the US is producing 11.7 million and Canada is producing 4.5 million. Canada grew by 30% and the US by 130%.


Also in those 10 years, the US added the equivalent of 10 Keystone XLs in terms of mileage and is now exporting on average 2 million barrels of oil per day to markets that include Europe, China and Canada. Canada in the meantime has gone from exporting 2.5 million barrels per day to around 3.3 on average. To the United States. And nowhere else. We could do more. But we can’t. Because no significant pipeline capacity has been added in the last 10 years. Oh, and there’s a tanker ban anyway.


What does this mean?


Well it means that aside from falling behind, Canada is missing out. Missing out on exports, a growing economy, jobs, investment, confidence, expanding government programs – the list is endless.


The implications of a 100% growth rate versus our much more pedantic one are enormous but let’s look at a close to home specific example.


I am in the M&A business, we buy and sell for our clients and we see deals and value trends every day.


Since the 2014 downturn and recovery, energy services businesses in the United States have doubled and tripled in size and sell at cash flow multiples that range from 6 to 10 times. Comparable companies in Canada during this time were smaller to begin with and are lucky to be even from 2015 to 2018 size wise and sell at multiple of 3 to 5 times. That’s a 50% discount. How does this happen? Uncertainty. A shifting regulatory environment and policy inertia. There is no fundamental difference between a wireline company in Canada and one in the United States except the regulatory environment they work in. Why can one deal close and another not? Risk. People perceive Canada as a risky place to invest because we can’t get our sh** together.


What has this meant the last few years for us and our clients? Deals are harder to close, they take longer, there’s less cash available and they are smaller. This affects everything from owner-manager retirement plans to employment opportunities for younger generations and capital gains taxes to the various levels of government. It’s a tough environment and it shouldn’t be. Remember what I said earlier – we have the abundance of cheap energy, people want it. But we can’t get it to them.


So what happens? Well, money follows growth – in this case, south. Service companies take assets they can’t use here and move them to Texas where they are 100% utilized in months. Engineers move to Houston and double their pay. Innovators take their tech to places that want it. Companies like ours start to eye the United States as a target rich environment for our services. And the hollowing out of our industry and province continues.


But no one really wants to move. Canada is a great country with great opportunity. I don’t want to uproot my family and move – we have roots. But we will do it if we have to. US wins at Canada’s expense and it’s self-inflicted.


Final aside – look, we don’t want a handout, we want a hand up. Want to know why your “aid package” to the patch was so poorly received? No one wants it. We don’t need more debt in a volatile market environment. We need pipelines. We need them now. Export Development financing? In light of the above hollowing out statement, why in the world would you facilitate the one thing that is the worst idea?


Canada and Alberta has a well-deserved global reputation for technology development in the oilpatch. We are innovators and inventors. That’s not the help we need.


Look, can we call a spade a spade? Plans like that are stupid – bail outs are for distressed companies, not an entire industry that already know the solution and is ready to go. You are doing all the wrong things and ignoring the right things.


The energy sector is arguably close to 15% of Canada’s GDP. The energy sector’s tax base is a massive contributor to the running of government’s in Canada and the well-being of the country.


You need us as much as we need you.


It’s inarguable.


Ready to solve it now? Good. And the plus is that it maybe isn’t going to be as hard as you believe, as long as you don’t over think it.


First step is to get rid of all the industry killing initiatives that you have implemented to appease whatever constituency you were trying to mollycoddle. Keep the carbon tax by the way – it’s a rounding error and gives you moderate bonafides to tell the chattering class to back off when you do the following:


First – the tanker ban. What is that? It’s stupid. You’re proposing to ban the export of only Canadian crude from deep water ports on the West coast far away from major population centres (while still allowing it from Vancouver – that makes sense). On a coast that sees near constant tanker traffic from Alaska and has not had a major oil spill since the drunk driver Exxon Valdez single hulled mess in the early 1980s.


Second – TransMountain. Look, I get you’re doing the right thing on this with the purchase, the NEB reference and consultation but step on the gas man. Money is leaving. Permanent damage is being done. Anger is rising and Jason Kenney is coming for you. Sell or transfer an equity interest to affected First Nations and get the project going. If it ain’t happening in 2019, it’s never happening. And that is 100% on you. Wear it.


Third – Bill C69 – Ditch it or fix it. It’s probably easier to drop it and simply amend the NEB act, but I get where you’ve spent some money and want to see it through. The problems with Bill C69 are well documented. On the other hand, the current regulatory framework seems to be working OK. Your pretext for reform has been proven wrong given the successful challenges we have all seen. Dragging the process creates uncertainty as much as bad policy does.


Fourth – Crude by rail. Canada is a country that has been built on rail transport. We are good at it. I’ve been told that the potential for crude by rail capacity out of Western Canada can probably hit 1 million barrels per day with some government facilitation. So help the province buy the cars they need. Extend the lives of the safe tankers that you mothballed by regulatory and reactionary fiat to help move volumes out of Western Canada. Were you even aware that your government did that? Encourage the shipment of oil through the port of Vancouver. They are already North America’s largest terminal for coal exports that arrive daily by train, would adding a little bitumen really be that much of a problem?


Last – LNG. This is a really big deal. There are other projects waiting in the wings. Make it happen. Make this pipeline happen. Make the incentives real. Meet the proponents. Get it done before that market leaves us flailing in the wind for the 4th time.


But what about the environment? Excellent question. What about it? Contrary to popular summer camp horror stories in other centres, people in the energy sector care deeply about the environment. Canada has one of the most highly regulated energy industries in the world. We have the strictest rules on operations and the most stringent regulatory approval processes that exist. Be proud of it. Celebrate it. Export it.


We are also extremely myopic and self-absorbed when it comes to emissions. I’ve come to believe that the greatest contribution that Canada can make to addressing global warming and reducing emissions isn’t by punishing ourselves and reducing our share from 1.6% to 1.5% or setting some notional example that no other country pays attention to. Rather it’s by using our resources and resourcefulness to help other, larger, mega-contributors reduce their emissions. China is the number one emitter of CO2 in the world and they get close to 55% of their energy from coal, a volume which is growing daily. So it stands to reason that if they were to burn less carbon intensive natural gas instead of coal, they would emit less CO2 (60% advantage) and have a larger impact on slowing global warming than pretty much any other strategy out there. And that gas can come from Canadian LNG, because after Russia, we are probably the closest source of supply. Isn’t this a better line of attack on climate change than a subsidy for a Toronto investment banker to buy a $120,000 Tesla?


The energy sector in Canada has the opportunity to be a massive contributor to the Canadian quality of life that so many benefit from and that so many of the poor and oppressed worldwide aspire to be a part of every day. Alternatively, we can export that enabler of a better quality of life. But right now, as you read this, minority actors and special interest groups seek to undermine this opportunity to advance their own agenda. Do not let yourself get distracted from achieving the greater good.


Look, I think you want to do the right thing. We are more similar than this ranty blog might lead you to believe.


I was born in Montreal. At the Montreal General Hospital. Like a couple of hundred metres from the house you grew up in. I used to see your dad in the elevator at the building I worked in for a few years when he pretended to lawyer after his retirement. We chatted occasionally. At that time in my life, I knew nothing about energy, or pretty much anything except the Habs and where the best happy hour was. Like you I moved west to chart my own path. I ended up in Alberta and it has been great, I hardly ever look back. I love Montreal and Quebec, but Alberta is my home now. And Albertans are among the most entrepreneurial and hard-working people I have encountered in my travels. People are hurting through no fault of their own and the governments they elected to defend their interests are dropping the ball.


We will make it work, we always do – but we need you to make it less hard. We need you to get your head in the game because other actors are doing whatever they can to win. I think we can all say with equal conviction that we are tired of being treated as a bit of a joke internationally. No one is stepping up to invest in Canada because we have made it too hard. Who are the big energy investors and where is their money going? The United States mainly. That’s right – China, Saudi Arabia, you name it, they are all investing in the United States through refineries and LNG and direct drilling in the Permian. We have better, larger and more accessible reserves. And no trade wars. So why don’t they come here?


Assuming you read this, I think you know.


So, at the risk of repeating myself, let me restate for the record.


Energy is the economy. We have it in abundance. People around the world want it. Government is in the way of making this happen. Get your head in the game, get out of the way and let Canada win this for a change.


That’s all I’ve got and thanks for listening.






Prices as at January 18, 2019 (January 11, 2019)

  • The price of oil rose during the week on optimism
    • Storage posted a decrease
    • Production was up marginally
    • The rig count in the US was down
  • Withdrawals from storage were lower than anticipated for natural gas. Price rose…
  • WTI Crude: $53.76 ($51.72)
  • Western Canada Select*: $42.56 ($41.93)
  • AECO Spot *: $1,92 ($1.51)
  • NYMEX Gas: $3.423 ($3.159)
  • US/Canadian Dollar: $0.7550 ($0.7483)

*Due to overwhelming interest, we are now including prices for Canadian commodities, in case you weren’t angry enough.



  • As at January 11, 2019, US crude oil supplies were at 437.1 million barrels, a decrease 0f 2.7 million barrels from the previous week and 24.4 million barrels above last year.
    • The number of days oil supply in storage is 25.0 compared to 23.9 last year at this time.
    • Production grew slightly for the week at 11.900 million barrels per day (200 thousand barrel per day increase). Production last year at the same time was 9.750 million barrels per day.
    • Imports fell from 7.826 million barrels to 7.527 million barrels per day compared to 7.950 million barrels per day last year.
    • Exports from the US shrunk from 2.065 million barrels per day to 2.96 million barrels per day last week compared to 1.249 million barrels per day a year ago
    • Canadian exports to the US were 3.571 million barrels a day, down from 3.760
    • Refinery inputs fell during the during the week to 17.223 million barrels per day
  • As at January 11, 2019, US natural gas in storage was 2.533 billion cubic feet (Bcf), which is about 11% lower than the 5-year average and about 3% less than last year’s level, following an implied net withdrawal of 81 Bcf during the report week
    • Overall U.S. natural gas consumption rose 18% during the report week
    • Production for the week was up 1%. Imports from Canada increased 5% from the week before. Exports to Mexico increased 1%
    • LNG exports totaled 28.4 Bcf
  • As of January 18, 2019, the Canadian rig count was 206 (AB – 138; BC – 15; SK – 50; MB – 3; Other – 3. Rig count for the same period last year was 324.
  • US Onshore Oil rig count at January 18, 2019 is at 852, down 21 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States were down 4 to 198.
    • 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 dropped 2 to 23
    • 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 56%/44%

Trump Watch will return when the shutdown is over.

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