Crude Observations

A Canadian Welcome Mat

The doomers and gloomers were hard at work this week after yet another international oil company announced plans to stop investing in the Canadian energy sector. It’s getting so a Canucklehead can’t shoot a puck without hitting some Euro/Asian/American energy company in the butt as they skeedaddle out of the country.


Yup, that’s right. As many predicted, French oil company Total has informed Suncor they have no desire to pay increased costs and otherwise inject additional capital into the Fort Hills expansion project. I mean really, they can’t anyway, now that their Trudeau-lite government has committed the country to a fossil fuel free future in short order. And why throw good money after bad – what would they say in Versailles?


This is of course a continuation of the long drawn out international exit from the oil sands, proceeding as expected as global players elect to pursue short cycle investing in areas like the Permian and a sign of the times with oil prices continuing to languish below levels where oil sands mega-projects make sense. However, as has been posited on this blog several times, not necessarily all a bad thing with major Canadian players willing to step up and expand their presence in this natural resource until such time as flavour of the month majors return.


Given that… Wait, what? The other thing? WHat are you talking about. Oh right, THAT thing. That little project that Malaysia-based Petronas was thinking of doing? Completely slipped my mind. What was it again – something to do with natural gas and fracking. Oh wait, I’ve got it – you mean the single largest privately-funded mega-project in the history of British Columbia and the opening gambit to a new industry and one of the keys to its financial prosperity for years to come?


That’s the one right? Yeah – it’s done. Finished. Finito. Sayonara suckers. Gonzo. Expired. This project is no more! It has ceased to be! It’s expired and gone to meet its maker! It’s a stiff! Bereft of life, it rests in peace! It’s pushing up the daisies! Its metabolic processes are now history! It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir invisible!! THIS IS AN EX-PROJECT!!


And just like that, $25 billion of investment on top of the $11 billion already spent goes up into thin air, much like the royalties on the natural gas to feed the project.


Sad right? But at least the Great Spirit Bear Rainforest of Plenty with a White Stag souvenir shop and fish hatchery will be preserved, if it ever really existed in the first place – if we’re going to be honest about it. Until there is no more money left to fund it that is. Because that is where we are heading. I know that some may disagree with me and you are free to do so, but this exodus is an unmitigated disaster, and quite honestly, it’s of our own making.


This blow to the not yet in existence LNG industry is nothing like the majors leaving the oil sands. It’s not Conoco or Shell or Chevron and the like selling assets to emerging and soon to be dominant Canadian energy companies. It’s much, much worse. It’s a slap in the face to a nascent industry and well-placed kick to the solar plexus of provincial and federal governments. Sadly, for many in the energy industry, it was not even a surprise.


And it exposes what is now a fundamental truth about Canada as an investment destination – as a country we have lost the ability to “get ‘er done”.


Sure we have things happening, we have emerging industries all across Canada, bootstrapping technology innovators and food and energy companies that are highly successful, a disciplined financial sector that is the envy of many nations, but when it comes to new large-scale mega-projects to develop our wealth creating and social compact supporting resources, we cannot seem to get out of our own way. Whether it’s the so-called Ring of Fire in Northern Ontario or critically needed, prosperity-enhancing pipeline infrastructure or massive privately-funded investment in LNG export infrastructure, Canada has clearly lost its mojo.


In last week’s column  I lamented the fact that Canada’s national embarrassment, the TransCanada highway, is not yet twinned all the way from Banff to Vancouver (a project that has been touted on signs since I first made that drive in 1993). This week we are possibly delivering the last rites to an entire industry that coulda, woulda, shoulda been.


Canada and British Columbia and Alberta needed this. Petronas and the project partners wanted it too, but had options. Why in the world did we spend so much time strutting around and acting like were doing them a favour by “allowing” them to invest $36 billion in our economy when we should have been doing so much more to actively court them? Why are we afraid of our shadows when it comes to game changing resource projects but so ready to bask in the fake, reflected sunshine of a flattering profile of our Prime Minister in Rolling Stone magazine?


We sit in our kitchens and offices and boardrooms and legislative chambers, pushing opinions and spurious facts and extrapolations around, dither for years about environmental reviews, change regulations and assessments on the fly, give every single proponent, intervenor, special interest, gadfly and person who accidentally got off on the wrong floor at the NEB equal status and importance in our regulatory reviews and then wonder why, after 5 years of bafflegab, big talk and zero substantive indication of interest, most of these project proponents walk if not sprint for the exit.


British Columbia and Alberta are blessed with some of the most prolific and economic to extract natural gas assets on the planet (not to mention oilsands) and we can’t get out of our own way long to let significant players who actually want to build projects that will increase the national wealth close the deal on these same projects.


It’s like winning the lottery but letting the ticket expire because you’re embarrassed to have so much money and are worried what the neighbours will think.


I know what the neighbours think. I talk to them regularly about deals and opportunities in Canada. They think we’re suckers. And they are laughing all the way to the bank, all the while buying all of our assets and production at discounted prices and when we dare to complain, they slap us with a tariff.


And then someone new shows up and says – hey, we’re going to invest this money in your country and instead of saying great, we stand there with our hand out, and tell them to wait. And wait. And wait. Then the government changes and instead of a hand out, we’re back this time with a money sack. And a longer wait.


Look, I’m not advocating skipping the dialogue and the reviews and the environmental assessments. Nor am I suggesting that an appropriate fiscal regime isn’t required to ensure the owners of the resource (us!) extract a competitive amount of economic rent from the production, processing and shipping of fossil fuels.


What I am suggesting is that sometimes, to get something done, it helps to have a predictable and timely schedule from idea to application to approval and that when the fiscal reality changes, there is some ability to be flexible and encouraging to make sure a project can get done. It also helps that when we finally determine something to be in the “national interest” we act like that thing is in the “national interest”. Is it really that hard to tell someone we want them here?


The window for LNG opened about a decade ago. BC was seen as a desirable location as evidenced by the twenty or so projects announced since that time. But to date, not a single one has been built and only one, the relatively small Woodfibre project ($1.6 billion) has passed the dreaded FID (final investment decision) phase and begun development. In the meantime, Qatar (a Middle East nation with less natural gas reserves than the Montney) has become the world’s leader in LNG exports and is planning to expand capacity by 30%, multiple projects have been built in Australia and the US has one project up, running and expanding and four others are under construction – most of which were announced and approved during an Obama administration that is ideologically aligned with our current Liberal one. All these countries saw an opportunity and got it done. Meanwhile we dither. And debate. And punt. And then, finally, announce our approval subject to another couple of hundred conditions which further raises costs and adds delays. Then of course we are shocked by the withdrawal. What are we thinking? Are we so deluded by our sense of moral and environmental superiority that we find it acceptable to let competitor countries run circles around us and deprive our economy of its potential?


Sure, I get the official party line that the decision was economic since the price differential for gas has narrowed and rising costs are what killed the project, but that doesn’t seem to stop the American projects, so I am only half buying that. The rest of the story is that after five years, Petronas had finally seen enough. The cherry on top of course being the change in government in BC that has been rightly assessed by the project proponent as giving rise to more delay, more stakeholder consultation, more uncertainty in the fiscal regime and ultimately higher costs. So they pulled the pin. Simple as that. I don’t fault the BC NDP, it was after all their platform. As for Petronas, any developer of a mega-project understands the inherent business and commodity price risk of what they are doing. They are willing to live that pain because they understand it. What they don’t understand and can’t live with is regulatory uncertainty, change and confusion. The political risk and  opportunity cost got too high – expect others to follow their lead.


So now what?


Well, the immediate window for LNG has closed. So I guess it’s back to the drawing board. And maybe a little of the blame game. And everyone in this mess shares the blame and everyone is a loser. Except ironically Petronas and LNG projects in the United States. Why? Because this is what is going to happen: Petronas bought Progress Energy for $6 billion to prove out the reserves in the Montney and Horn River, which they did. Now all that proven production will be sold at a discounted basis into the US to make it onto their LNG export facilities to be sold overseas at whatever the prevailing market price is.


Once again, our unique ability to shoot ourselves in the foot and create an almost complete dependence on one customer who will only accept our crappy Canadian carbon atoms at a discount shows its ugly head. I wouldn’t be surprised at all to see Petronas take an equity position in one of the new US facilities under construction.


Take that Canada. Take that BC. Take that worker guy trying to support your family.


I guess someone, somewhere must be happy about this. But I suspect they must be in a very small minority and they for sure don’t have your, Canada’s or my economic interests at the top of their priorities list.


It is time for our elected leaders in this country – federal and provincial – to step up, admit complicity in this mess and do something to fix it. It’s no longer enough to coast by on platitudes of environmental stewardship married to economic growth and the mythical expansion of the middle class while running up massive deficits and turning a blind eye to the very obvious message the rest of the world is sending us when it comes to investing in the growth of a sector of the economy that accounts for about 15% all-in of GDP.


Do something! Fix it.


Here’s a hint, it starts with the welcome mat.


Prices as at July 28, 2017 (July 21, 2017)

  • The price of oil rallied almost 10% during the week on solid US inventory draws and positive comments from Saudi Arabia.
    • Storage posted a large decrease
    • Production was down marginally
    • The rig count in the US appears to have plateaued
  • Natural gas was relatively flat on the week as we sit in summer doldrums. Injections feel small this year, especially with the incremental rig count. Gas looks like a fairly constructive play into the fall and winter
  • WTI Crude: $49.71 ($45.60)
  • Nymex Gas: $2.941 ($2.960)
  • US/Canadian Dollar: $0.8050 ($ 0.7982)


  • As at July 21, 2017, US crude oil supplies were at 483.4 million barrels, a decrease of 7.2 million barrels from the previous week and 7.1 million barrels below last year.
    • The number of days oil supply in storage was 28.1, behind last year’s 31.3.
    • Production was down for the week by 19,000 barrels a day at 9.410 million barrels per day. Production last year at the same time was 8.515 million barrels per day. The change in production this week came from a decrease in Alaska deliveries and higher Lower 48 production.
    • Imports rose from 7.996 million barrels a day to 8.044, compared to 8.437 million barrels per day last year.
    • Refinery inputs were down slightly during the week but still strong at 17.285 million barrels a day
  • As at July 21, 2017, US natural gas in storage was 2.990 billion cubic feet (Bcf), which is 4% above the 5-year average and about 9% less than last year’s level, following an implied net injection of 17 Bcf during the report week.
    • Overall U.S. natural gas consumption was up 2% during the week – with increases in power and industrial demand offsetting declines in retail and commercial demand
    • Production for the week was flat and imports from Canada were down 2% compared to the week before. Exports to Mexico were flat.
    • LNG exports totalled 11.3 Bcf.
  • As of July 24, the Canadian rig count was 200 (32% utilization), 127 Alberta (29%), 24 BC (34%), 43 Saskatchewan (37%), 6 Manitoba (40%)). Utilization for the same period last year was just above 15%.
  • US Onshore Oil rig count at July 28 was at 766, up 2 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 6 at 192.
    • 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 23
    • Offshore 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%


  • Going on vacation next week and not taking my laptop. There is a high likelihood there will be no blog next Friday. I know you are all disappointed.
  • Wildfires continue to rage in British Columbia. Please consider a Red Cross donation if you can. It’s simple, easy and it helps.
  • Earnings season is on – I will do a summary next issue
  • Trump Watch: Healthcare is still hard. Transgender military folks are under the bus. And somehow we are back on Hilary. Dude – let it go, you won.
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