Crude Observations

Hate to Say I Told You So…

But … I told you so. Seriously, like at least 4 times in the past four weeks. I even wagered money on it. And I never gamble. Anyway, in the true spirit of all “I told you so’ers” I fully intend to gloat and bask in my glory. Ahh, that feels great. What did I tell you? That the Federal government would buy Kinder Morgan Canada’s TransMountain Pipeline and related assets in order to get the project moving forward.


Admittedly, I didn’t get all the details bang on. I neglected to account for the Cochin Pipeline System which takes light condensate from the US to Northern Alberta. Truth be told, last week’s blog was running long and it would have detracted from the point by getting into the weeds on that bit. However, I was pretty sure that part wouldn’t be in the deal because it’s a completely separate asset. I think the point was the Fed buy, not the minutiae of which specific assets.


So, the deal is done. Now what? I have to say I have been observing with some enjoyment the hysteria that this announcement has engendered on all sides of the political divide as well as among people who work in the energy industry and those who work in the protest industry.


While I am normally quite shy and reticent about making comments on social media (that’s a joke by the way), I have found myself getting into protracted debates with people on Twitter, Facebook and the locker room at the gym, defending the actions of the Liberal government, the price paid, the logic… so much so that some have accused me of being a, sharp intake of breath, liberal.




Seriously, I love it when people make assumptions about me. It’s often the highlight of my day. Let me state for the record – my political affiliation and ideological leanings are my business and my business alone. I am, by and large, a pragmatist, fiscally conservative, socially liberal, stuck in the middle with you type of guy, a minnow in the great political tides that move our country. And being a pragmatist, I am going to say that government ownership of private business is for the most part a bad thing. But government ownership of private business that private business can’t pursue because of political hijinks is to me probably OK as a last resort and it should be to others.


This is the hand we have been dealt. Deal with it. Carry on. What’s in the past on this file is in the past. I don’t see much sense in revisiting most of what has transpired, if only for the simple reason that it’s too confounding to remember properly anyway.


I guess the question at hand should be, what to think of the Federal Government buying the project?


It’s not a bad thing. It’s not a good thing. It’s a thing. When presented with a rock, a hard place and a small opening, you generally try to squeeze through the opening. I, like everyone else, can think of hundreds of uses for that government money. But even that is disingenuous. The purchase was financed by Export Development Canada. They exist to support, wait for it, exports. So this is entirely within their mandate and allocated funds, so it’s not like the money is being stolen from, god forbid, veterans, as some have self-servingly suggested.


I really don’t have much else to say on it. I’ve spoken with a number of colleagues and business contacts and, practical and pragmatic people that they are, the reaction has generally ranged from a rather muted “they really had no choice – hope they don’t screw it up” to genuine feelings that this is actually, finally, a great outcome for Canada and Alberta. A shot in the arm from the unlikeliest of sources.


I’m of both minds. I agree that moving this forward is great for Alberta and Canada, but I want to make sure my tax dollars are spent properly. I want oversight and accountability and I want the mainline pipeline project managers, contractors, subcontractors and trades already in place to remain in place. We have great experience in Western Canada planning and executing energy mega-projects including highly complex pipeline construction jobs across challenging terrain. How do I know this? It’s our space and these companies are our clients, or our clients’ clients. This is what we do – hopefully the new ownership will let us all do our jobs. It’ll get done. It’ll get done right. And then we’ll get the taxpayer money back.


There, so that’s it right? Well almost. I wasn’t going to let you go that easy. Before I move on, let’s address a few of the most prominent political posture points and some of the realities behind them, because I like to live in what I call “reality land”.


Finding a buyer


People are putting way too much attention on this. If there was a buyer in the short term, the federal government wouldn’t have had to take the action they did. That’s the whole point isn’t it? No private buyer is going to view the political risk any differently than Kinder Morgan. So get over it. The likelihood of someone stepping in before construction is finished and the line is cash flowing is very low. We have a number of high quality, exceptionally competent pipeline companies in Canada who would be natural buyers at the right time – but, it’s not now. As it regards pension funds and private equity funds, they don’t run pipeline companies and they don’t execute complex infrastructure projects. They are money guys, their time is also post-construction, maybe even as a source of capital or partner to an industry acquirer. And don’t count out Kinder Morgan. They could easily return.


It’s not a bailout


Unlike the GM investment of 2008, this is not a bailout. The existing pipeline is a cash cow. The project itself has contracted shippers and a market for its product. It is eminently financeable and has great economics. The sticking point is and always has been the NDP BC obstruction. A bailout implies some type of economic crisis. That’s not the case here.


The Feds overpaid and were fleeced by Kinder Morgan


I love this one. How do people know any of this? Were they in the dataroom? Have they seen the cash flows associated with the assets purchased? Do they know the state of the assets? The maintenance record? Do they even know what has been purchased? I saw an article from Joe Oliver in the Post mocking the price – $4.5 billion he said – ha, the market cap for Kinder Morgan Canada was a mere $1.75 billion! Umm, what? That’s only 30% of the shares of the company. 100% is about $6 billion or $1.75/0.3 – my nine year old can solve that math problem – wasn’t he a finance minister at one point?


Here’s how I view it. The price paid was fair. It was negotiated in private and at arm’s length. Could the Feds have paid less? Maybe. Could they have paid more?  Maybe. Is it fair value as a multiple of EBITDA compared to the peer group of Canadian pipeline companies? Yes. Does it compensate Kinder Morgan for the cash they have spent so far? Yes. Does Kinder Morgan lose an asset it once considered a crown jewel? Yes. My take? Fair price.


A special message to all the “reactors” “detractors” and outraged “actors”. Otherwise known as the those with a political bent and axe to grind…


To the outrage machine on the right, this deal is not “Nationalization of the energy industry” nor is it a sure-fire sign of creeping socialism and the creation of Canazuela.  It’s one piece of a national infrastructure delivery system. There are other export pipelines. This is just one and a relatively small one at that. It is a steel tube that delivers fossil fuels from Alberta to British Columbia. It’s not the National Energy Program. Also, the expansion project isn’t going to be immediately staffed with Liberal bagmen and cronies. The existing project team is rolling over with the assets and will presumably have the same incentives – get the pipeline built safely, to an exacting quality and with an eye on cost management. Many of the contracts have already been awarded so the subs and trades are all lined up and ready to go for the summer season. And try to not to get too excited about cost escalation. It’s likely to happen, but not because of new ownership.


To the outrage machine on the left, Canada is not buying a “leaky 65 year old pipeline”. The Feds are buying a pipeline that was originally built some sixty years ago that is Federally regulated and has been owned and professionally managed by a highly experienced transmission pipeline operator since 2005. The National Energy Board sets specific protocols for maintenance and upkeep for these pipelines which are rigourously followed through highly technical integrity programs which are designed to identify anomalies and take corrective action. Without question the Federal government would have done their homework on this aspect of the purchase before committing any dollars. To suggest otherwise is plain dumb.


To the Tzeporah Berman’s, Al Gore’s and Bill McKibben’s of the world. Please stop. Your lies, exagerrations and misinformed opinions add nothing to the conversation.


To all those in the middle, patting each other on the backs for getting this done. Some deserved kudos for sure, but it really didn’t have to come to this so temper the enthusiasm a bit. The hard work, the actual work, starts this weekend.


To all the contractors across Western Canada who have mob’d, demob’d, mob’d and demob’d repeatedly over the course of the last few years, time to get back to work. Like now. Go make some money. Quick before anyone can change their minds – remember the degree of resistance to a project is inversely correlated with its percentage of completion.


Finally, can we please stop talking about Energy East as if it was an approved project that the Liberals sewered? It was a compromise project that had barely started hearings. Sure the rules changed making the decision easier for TransCanada, but the real catalyst for ditching it was Keystone XL getting green lighted by Donald Trump.


Anyway, enough of that right? Time to move on to more meaningful pursuits.


And, as luck would have it, since I am now proved as a prognosticator sans pareil (without equal), I am going to allow you to see my current top 10 predictions without the usual surcharge.


  1. The NDP is elected in Ontario. This one is a little out there and against accepted wisdom, but it is really hard to put the genie back in the bottle once it escapes. We have seem over and over how the NDP is able to come up the middle in many of these elections and gather surprising strength to close the deal. This, combined with the epic collapse of the Wynne Liberals and the inexplicably extraordinary talent the Ontario PCs have of snatching defeat from virtually guaranteed victory, lead me to believe the next NDP government will be in Ontario. So the carbon tax is safe, but I am not sure we can say the same for the Ontario economy. On the other hand, let’s face it, any of these parties would be equally disastrous, but Doug Ford? That’s whole new level of train wreck.


  1. The Price of Oil will resume its upward climb. The current wobble in oil prices is based on speculation about how much Saudi Arabia and Russia might increase their production after the next OPEC meeting at the end of June. Plus, holding these prices down allows the price of gas to come down in the United States at a super-convenient time for a president facing a potential blue wave in November mid term elections. But let’s be crystal clear – all the moaning and groaning about high gas prices from various countries like the US and India are all well and good, but if they aren’t prepared to offer relief by lowering their tax take on fuel, why should OPEC subsidize their consumers? WTI – $80. Plan on it. It’s a great price to IPO at.


  1. LNG Canada is going to receive an FID. And it will be a go. And it will come sooner than anyone expects. Evidence continues to accumulate that the green light will come soon. I was of the view that the Federal Government might have to provide some tax inducement, or buy the project (someone get Jason Kenney a defibrillator!), but now I’m not so sure it’s necessary.


  1. Golden State will win. The current NBA champions will win again in a gentleman’s sweep (4-1). It won’t actually be close. And LeBron James will have played his last game in Cleveland.


  1. This trade thing with the United States is going to get worse before it gets better. It may require a new administration for it to improve. Donald Trump’s inner circle is populated by a contingent of anti-trade gasbags. Their views self-reinforce his own stance. It’s not going to change. Tit for tat tariffs, no real commitment or interest in resetting NAFTA. It is going to get ugly, then uglier.


  1. Inflation – it’s the next big thing! Consumer and producer prices are going up in the United States as a result of decent economic growth, stimulative tax cuts and massive spending as well as the aforementioned increase in fuel costs and the totality of the Trump tariff nonsense. To counter this, the Fed will need to remove some vodka from the punch bowl and raise interest rates. My fear is that the job market has peaked, setting the stage for a big reversal, which could bring the party to a stop very quickly and sow the seeds for fairly sharp recession. I doubt that this is the outcome Trump is seeking, I suspect that is what he is going to get.


  1. Jason Kenney will be elected in Alberta. This is a tight one, but it shows just how strange politics is. Fresh off her victory in the great pipeline skirmish of 2018 Rachel Notley will be rewarded with… seats on the other side of the aisle. While typically good deeds get rewarded, it doesn’t always work that way in politics. There is a core of support for the UCP in Alberta that is massive and no longer split which will propel the Kenney victory, aided no doubt by the NDP victory in Ontario.


  1. Turbulence ahead for BC NDP. After the purchase of TransMountain and the positive FID for LNG Canada, Green Party leader Andrew Weaver’s patience with the John Horgan NDP will finally evaporate and he will trigger a confidence vote which the NDP will lose. This will lead to a BC election and the return to power by the Liberals who will drop the Supreme Court reference case in exchange for another $500 million into the Ocean Protection Plan.


  1. Justin Trudeau will be re-elected. It’s going to be close. The Lower Mainland will be lost and his vote totals across the country will drop as the earnest Justin-enviro cult stays away or votes NDP costing him some tight seats in Ontario and Quebec. The Maritimes will turn against him a bit, particularly in New Brunswick, where the Energy East snub is quite fresh. Fortress Alberta, all of 2 seats, will be quite safe. Such is the outcome of pipeline politics.


  1. That pipeline? It will be be built.


That’s it. Anyone willing to wager?


Prices as at June 1, 2018 (May 25, 2018)

  • The price of oil held fell early in the week then rallied on storage numbers, then lost ground. A bit of a roller coaster.
    • Storage posted an decrease
    • Production was up marginally
    • The rig count in the US was mixed
  • After a larger than expected injection, natural gas gave up some ground then rallied thru the end of the week…


  • WTI Crude: $65.70 ($67.88)
  • Nymex Gas: $2.972 ($2.939)
  • US/Canadian Dollar: $0.7713 ($ 0.7709)


  • As at May 25, 2018, US crude oil supplies were at 434.5 million barrels, a decrease of 3.6 million barrels from the previous week and 75.4 million barrels below last year.
    • The number of days oil supply in storage was 26.0 behind last year’s 29.7.
    • Production was up for the week by 44,000 barrels a day at 10.769 million barrels per day. Production last year at the same time was 9.342 million barrels per day. The change in production this week came from a rise in Alaska deliveries and a increase in Lower 48 production.
    • Imports fell from 8.159 million barrels a day to 7.631 compared to 7.985 million barrels per day last year.
    • Exports from the US rose to 2.179 million barrels a day from 1.758 last week and 1.303 a year ago
    • Canadian exports to the US were 3.418 million barrels a day, down from 3.493
    • Refinery inputs were up during the week at 17.155 million barrels a day
  • As at May 25, 2018, US natural gas in storage was 1.725 billion cubic feet (Bcf), which is 22% lower than the 5-year average and about 31% less than last year’s level, following an implied net injection of 96 Bcf during the report week
    • Overall U.S. natural gas consumption was flat during the report week
    • Production for the week was up 1%. Imports from Canada were up 2% compared to the week before. Exports to Mexico were up 3%.
    • LNG exports totalled 14.4 Bcf.
  • Can you say “recovery from a bad break up is hard”? As of May 28 the Canadian rig count was 103 – 69 Alberta, 2 BC, 30 Saskatchewan, 1 Manitoba and 1 elsewhere. Rig count for the same period last year was actually higher.
  • US Onshore Oil rig count at June 1, 2018 was at 861, 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 down 1 at 197.
    • 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 18
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 70%/30%



  • Tariffs
  • Petronas confirmed the purchase of 25% of the LNG Canada project.
  • Trump Watch: North Korea!
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