Crude Observations

Enough Windmill Tilting

So here I sit reading all the blather about Canada’s escalating dispute with Saudi Arabia, which actually is more like Saudi Arabia’s dispute with itself or Saudi Arabia acting like a spoiled and petulant child because someone called them on being stuck in the middle-ages, mean-spirited and disrespectful of human rights.


I’m all for civility in international relations, it’s important. And in many ways I think we are mostly better off when we turn our minds to our own business. But, in all seriousness, in reading the tweet sent by the Foreign Affairs office can anyone conceivably argue that it should have resulted in the expulsion of an ambassador, the severing of economic relations, the removal of students and medical travellers (there were a lot BTW – does this open up beds and student spots for regular folk?), the cancellation of direct flights and the selling off “at any cost” of Canadian assets? It all seems a bit much to me. Bizarre is a word that comes to mind. I hear there was an Arab language tweet that went out from the Embassy – I guess that’s a misstep, but surely one that could be corrected.


Anyway, this too shall pass. It’s really a tempest in a teapot. Nothing that Sweden or Germany hasn’t seen from Saudi Arabia in the last year. Canada is not economically beholden to Saudi Arabia nor are they to us. This is a show for a different audience and Canada just happened to say the wrong thing at the wrong time. Although… kudos for standing up for human and civil rights. It’s not like Saudi Arabia has the most exemplary track record here and the one activist in question has been recognized internationally for her efforts and, correct me if I’m wrong, was recently made a Canadian citizen, so in reality Ms Freeland was just standing up for one of us.


Anyway, I’m not here to pontificate on foreign policy and the rightness or wrongness of diplomacy by tweet (although for the record, can we just stop that whole stupidity?). And I acknowledge that there could be some very specific economic ramifications to Canadian businesses that are involved in the $4 billion or so in bilateral trade between Canada and Saudi Arabia. But…


****Warning!!!! Unpopular and contrary opinion about to be ranted!!!!!!!****


… What I am more interested in discussing is the eye-rolling and virtually immediate descent into energy nationalism and piling onto the “this is now the best and most obvious time revive Energy East” bandwagon.


Can we stop this please? It’s not going to happen. Energy East is the dead parrot from the Monty Python skit. It has gone to meet its maker. It is a deceased project. Using it as a political cudgel or for fund-raising purposes is all well and good, but, please excuse the pun, it’s a pipe dream.


What do I mean? I mean, for the record, this is not the opportune time to revive the Energy East project. There will be no conceivable time when this will or should happen. Can we all just move on? Why do I say this? Well, among my reasons, consider the following:


  • Energy East was a private pipeline project proposed by TransCanada Pipelines in reaction to regulatory uncertainty relating to its very much preferred Keystone XL pipeline project. When KXL was in doubt, the company advanced Energy East and tried to fast track its approval by wrapping it in a Canadian flag. Once Keystone XL was back on the table, Energy East was unnecessary. And the flag was put away. Well by TransCanada anyway.
  • Energy East was never going to do what all the boosters seem to think it’s going to do. Energy East was first and foremost an export pipeline. A way to get some product to refineries along the route, but the ultimate terminus of the project, the Irving-owned refinery and port in Saint John, New Brunswick never made any sense as a destination for anything other than shipping the oil out of country. Don’t buy it? Then think about this – if the goal was to supplant exports that are coming into Eastern Canada, wouldn’t it be easier to just expand the refining capacity in, say, Sarnia and then ship finished product out of there? That’s the right business decision, relatively easily supplied from Western Canada. But maybe the Irving’s don’t like that, given their refinery and all that jazz. Seriously, where in the handbook of super smart business rationale is it written that the most efficient way to deliver refined product to Central Canada is to build a $16 billion, 4,500 km pipeline to take oil from Western Canada, ship it all the way to the farthest reaches in the east, refine it there and ship it back to Montreal, Toronto and points in between. Yeah, that’s what I thought too.
  • Eastern Canadian refineries aren’t actually configured to process heavier Canadian oil – those refineries are on the Gulf Coast of the United States and the US Midwest as well as Sarnia to a certain extent. Why? Because when these refineries were built, the heavy oil industry didn’t really exist as an export business. At any rate, the refineries that want the heavy oil are all easily supplied by the existing infrastructure. What do the East Coast refineries want? Light oil like that coming out of Texas, or Saudi oil or Nigerian oil. What they don’t want is to have to undertake an expensive retrofit of their well-established processes. Who knew, right? Seemingly everyone except the guys spouting off. As I said above, Energy East was an export pipeline.
  • The opposition to the Energy East pipeline isn’t going to change. Sure there is a new mayor in Montreal and Denis Coderre is no longer whipping up the masses. But the new mayor sits solidly to the left of Mr. Coderre, so no go on new pipelines. Seriously, the government in Quebec just passed a law banning fracking. They don’t want to develop their own resources let alone have some sludgy, dirty Alberta oil pumping through a pipe under, around or beside their beloved, raw sewage filled Saint Lawrence River. It was never going to happen. The opposition was too high. There were too many levels of government to work through. Never mind the dozens of First Nations. You think the BC First Nations know how to protest? I grew up in Quebec, the First Nations there and in Ontario are militant. It won’t be pretty. TransCanada figured it out. Why can’t the media or the opposition politicians.
  • While Saudi Arabia has said that oil is outside of politics and the imports are safe, many in the chattering class are saying we should ban Saudi imports and “become energy independent”. Word to the masses, we already are – we just choose to be a net exporter. Anyway, replacing Saudi imports does not require a 7 year application, environmental review, permit seeking, chest rending, falsely patriotic arm-twisting $16 billion 1.1 mm bpd pipeline. Saudi Arabia represents, on average, about 10% of Canadian imports. Not consumption. Imports. That works out to between 75,000 and 100,000 bpd and can probably vary up and down by 50,000 barrels. Those barrels can be easily sourced elsewhere. Like maybe the United States, which is currently our largest source of imported oil anyway and, not sure if anyone has noticed this, is the largest buyer of Canadian oil and we are currently battling them in a mini trade war. Want to solidify economic relations with the US and Donald Trump? Maybe buy more of their oil.
  • Assuming the application process was restarted, the offtake capacity offered by Energy East is not needed for Western Canada even under the most optimistic growth scenarios. With the TransMountain Expansion, the Line 3 replacement and a likely FID for Keystone XL, export capacity out of Western Canada will increase by almost 2 million bpd which will alleviate bottlenecks and reduce the Western Canada Select price differential.
  • Energy East was a bad project in the first place and never made much sense to me. It was never going to solve the differential concerns. Touting it as a replacement for foreign imports was a bit of a mug’s game. By the time the oil got to the Maritimes it wasn’t going to be much cheaper than what was being brought in anyway and the quality was wrong.
  • The nation building argument is so tiring. It’s a pipeline, not a railroad. It’s not some federally sponsored and financed project to connect a remote province to the industrial centre. It’s a tube that moves a black sludgy liquid from one processing facility to another and then onto a boat. It doesn’t move families, dreams and ideals. This is why the whole pseudo-patriotic nonsense has never moved the needle. It was never aspirational – all it was is another artery in the most complex and interconnected continental energy market in the world. Yes it makes no sense that we can’t ship oil to the coast for export. But does it make sense to choose the farthest coast that is farthest away from our target markets? Isn’t it smarter to get to the closest coast, like TransMoutain is doing, to ship to China (and the US) or to ship via a Keystone XL to the Gulf Coast so that large volumes of in demand heavy oil can go to expanding markets in India? Just a thought.
  • The time that would be required to restart the application, the hearings, the reviews, the court cases, the protests, the build (even if it happened) is likely to stretch well past my retirement date by which point we will all be riding electric hover skaetboards or have been incinerated by global warming. Why bother?
  • Final point. The Liberals did not “kill off” the Energy East project. They most assuredly did not help it, but it died of its own volition as soon as the KXL was back on the table. The upstream/downstream assessment criteria are offensive, but were probably not going to be any more challenging than any other aspects of the approval. And the new rules? The Environmental Assessment Act? That came after the proponent cancelled the project.


Look, I’m not trying to rain on anyone’s parade and I’m all for open warfare in the blood-sport that is national and provincial politics, but please, enough is enough. Energy East isn’t happening. It was a bad project that was dropped like a hot potato by its proponent the moment the better alternative came back to life. Question – has anyone thought to ask TransCanada whether they want to revive the project? Didn’t think so. You know why? Because the answer is “no, we’ve moved on, please stop”.


How about this, instead of harping on old news, can we get moving on more forward looking initiatives that will actually make a difference, if only because they have an actual likelihood of happening? Not sure what these are? Well here’s a refresher to think about instead of dwelling on the fantasy that is Energy East:


  • TransMountain Expansion. Remember that one? It’s a work in progress. And it’s ours – figuratively and financially.
  • Line 3 replacement. Approved everywhere, underway in Manitoba.
  • Keystone XL. Revived by an orange man in a white house. Also approved everywhere. Waiting on an FID. Can we get going please?
  • As stated here many times, this is a big deal.


Lots of projects right? And what about LNG while we are on the topic? What is happening with all these West Coast projects? There’s one major project on the razor’s edge of approval. Where is the comparable groundswell of nationalistic support for LNG Canada and the pitchfork-waving pressure on the Federal and provincial BC governments to make sure this single largest energy infrastructure project in Canada’s history actually happens? It would be nice to see some politicians get behind this in a bigger way, because it is a game changing economic opportunity for the Western Canadian Sedimentary Basin, and the last time I checked that’s BC, Alberta and Saskatchewan. Some of it’s direct, some of it is spillover. All of it is real.


I personally believe the project is a go, even if no FID has happened yet. If you follow any news from the project proponent, it is hard to miss the regular and social media campaign touting its benefits and TransCanada (remember them? They’re the ones who aren’t building Energy East) is hard at work announcing construction schedules for the North Montney Loop and the Coastal Gas Link which are two critical pipeline projects to get sufficient volumes of natural gas to the coast for processing. But where is the non-stop noise in support of this? Is oil really that much sexier than natural gas or are the cheap political points too easy to pass on – dumb question.


Anyway, want to revive the moribund natural gas industry in British Columbia and Alberta? Light a fire under construction and drilling activity? Build an LNG export facility. It’s really that simple. But do it now. While the economics still make sense. While Trump and China are involved in a tariff war that is sweeping up US LNG exports. Strike while the iron is hot.


The Federal government should be all over this and the media and the opposition should be all over the federal government. Yet we harp about things that won’t happen.


Stop tilting at windmills.


Imported oil on the East Coast is a permanent fixture of our energy industry. And it will probably always include Saudi oil as long as the price is right. Energy East is a fantasy that wasn’t going to change that anyway. It’s really time to move on.


Oh, and before I forget – Happy Birthday Mom!


Prices as at August 10th, 2018 (Aug 3, 2018)

  • The price of oil was volatile during the week on supply and trade concerns
    • Storage posted a small decrease
    • Production was flat
    • The rig count in the US was up
  • After a smaller than expected injection, natural gas rallied marginally thru the end of the week…


  • WTI Crude: $67.63 ($68.49)
  • Nymex Gas: $2.944 ($2.853)
  • US/Canadian Dollar: $0.76220 ($ 0.76590)



  • As at Aug 3, 2018, US crude oil supplies were at 407.4 million barrels, a decrease of 1.3 million barrels from the previous week and 68.0 million barrels below last year.
    • The number of days oil supply in storage was 23.4 behind last year’s 27.4.
    • Production decreased for the week by 100,000 barrels per day to 10.800 million barrels per day. Production last year at the same time was 9.423 million barrels per day. The decreased production this week came from increased production in Alaska and decreased production in the Lower 48.
    • Imports rose from 7.749 million barrels a day to 7.931 compared to 7.762 million barrels per day last year.
    • Exports from the US rose to 1.850 million barrels a day from 1.310 last week and 0.702 a year ago
    • Canadian exports to the US were 3.432 million barrels a day, up from 3.351.
    • Refinery inputs were up during the week at 17.598 million barrels a day
  • As at August 3, 2018, US natural gas in storage was 2.354 billion cubic feet (Bcf), which is 20% lower than the 5-year average and about 22% less than last year’s level, following an implied net injection of 46 Bcf during the report week
    • Overall U.S. natural gas consumption was up 2% during the report week
    • Production for the week was up 0.4%. Imports from Canada were constant from the week before. Exports to Mexico were up 4% from the week before.
    • LNG exports totalled 23.1 Bcf.
  • As of August 10th the Canadian rig count was 209. Rig count for the same period last year was slightly higher.
  • US Onshore Oil rig count at August 3, 2018 was at 869, up 10 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 3 at 186.
    • 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 up 3 at 20.
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 62%/38%



  • The Q2 results keep on coming. Life is good for Canadian based producers. Not so much for the service providers. Something’s gotta give.
  • TrumpWatch: Pretty quiet on the orange line this week. Dude is golfing. Resting up for the mid term tweet frenzy that is sure to come.
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