Crude Observations

Shovel in the Ground?

Can you hear that sound? It’s the sound of a giant sigh of relief. It’s also the sound of a ceremonial shovel in the ground courtesy of the Federal government as opposed to the knife in the back that we seem to repeatedly get here in oilpatchland.


Yes, after more than a billion years of litigation, delays, cancellations, purchases, sales, false starts, protests, threats, deadlines, judges, lawyers, mobilizations, demobilizations, stays, rallies, the TransMountain Pipeline Expansion, otherwise known as the Pierre Elliott Trudeau SNC Memorial Pipeline is under way and has received the green light from various regulatory bodies to start construction and they aren’t wasting any time.


I confess to being more than a little excited about this.


A Canadian project moving forward, using Canadian labour and Canadian capital. Who’d have thunk it?


And yes, I know, the pipeline only matters if there is oil flowing through it and it’s going to take considerable political will and fortitude to see it to completion once the protests start in earnest.


But for the time being, let us all bask in the glory that is progress.


Isn’t it grand? Wait. What? More foreign money leaving? Aw come on…


OK then. It is not lost on me that a mere week ago it was announced that Koch Industries had sold its land assets in the oilsands to Cavalier Energy, a subsidiary of Paramount and abandoned a bunch of leases in what was billed as the latest sign that Canada was exit stage left.


And then a mere two days before the grand announcement on TMX starting up, Calgary-based Pembina Pipelines announced that it was going to buy Kinder Morgan Canada and the US portion of the Cochin Pipeline System. Or, as the media chose to spin it – Kinder Morgan Canada pulled the plug on its final Canadian investment and has decided to run for the hills, or more precisely, West Texas.


More “bad news” for Canada’s energy sector. Why I even read an article on Bloomberg that said we were in terminal decline, notwithstanding that, well, we’re not.


It is interesting that we still choose to treat everything as a net negative for Canada. Is no one reading my blogs? Does no one look at a transaction and say, sure we’ll miss you, but great for the buyer? Are there not, as they say, two sides to every transaction? In the case of the Koch assets, they were never going to develop their land holdings, ever. Better that they are in the hands of someone who will.


But that’s not the deal I want to focus on. No, I want to look at the Pembina deal before everyone gets too carried away with the whole “this is another example of how the international markets are running away from Canada and how Trudeau is killing the energy sector”. Just for a bit. It’s all I ask. Because in this instance, I think that people are reading this incorrectly.


The Transaction


Pembina Pipelines is buying the shares of Kinder Morgan Canada, including the 70% owned by Kinder Morgan the parent and is also buying the US portion of the Cochin Pipeline System owned by Kinder Morgan for a total transaction value of about $4.35 billion. The shares are being purchased via a share exchange and the US portion of the pipeline is being purchased for cash of US$1.546 billion.


The Kinder Morgan Canada asset base after selling off the TransMountain project and pipeline to the federal government consists of the Cochin Pipeline System in Canada, numerous terminals and storage facilities (approximately 10 million barrels of above ground storage) and the Vancouver Wharves assets which are a premiere bulk commodity export/import terminal (if you’ve ever been to Vancouver and crossed the Lion’s Gate bridge, it’s the giant pile of sulphur on the North shore to the east of the bridge).


The Cochin pipeline system is a fully-contracted take or pay cross-border pipeline that ships 110,000 barrels per day of condensate from Illinois to Edmonton and thence on to Fort MacMurray where it is used as diluent for exporting oilsands crude.


Why Would Kinder Morgan sell these assets?


On the TransMountain sale happened it was always a matter of time until these assets were going to be bought give their mixed bag nature. Kinder Morgan the parent did a strategic review of the Canadian assets and decided that they wanted to prioritize their capital in regions where other projects were happening. And rather than this being a big surprise, it should be noted that these assets have been on the block since this time last year.


Why Would Pembina Buy Them?


Pembina is, like many of these Canadian companies that are buying up assets from international and American companies, an Alberta-based success story.


In business for more than 65 years, they operate a network of pipelines, terminals and storage facilities across Western Canada and are one of the largest midstream and pipeline operators in the country. In the past few years, they have invested significantly in pipeline capacity within Alberta and the rest of Canada through new build and acquisition. Up until now, the most significant acquisitions they have done are the acquisition of the Provident Energy in 2012 and the 2017 acquisition of Veresen for $9.6 billion which gave them ownership of a pile of strategic midstream and transportation assets including the Nova Chem Pipeline System which supplies feedstock to the Joffre Petrochemical plant, which may just be the largest of its kind in North America (ahem) as well as the Jordan Cove LNG Project and other related assets as well as the many interconnected assets and projects that each company had in the Montney, Depp Basin areas and joint interest in the Alliance export pipeline system.


They aren’t shy and this latest acquisition is just part of their strategy to build out their capacity in terminals, the delivery and storage of condensate.


So pardon me if I choose not to look at this as just another American company heading for the hills on some kind of Bill C69 terror. This is a strong Canadian company going out and executing what is clearly a multi-year strategy to build itself into one of the premiere midstream and transportation companies in North America.


And for the 100th time, can we please stop dumping all over Canada’s energy sector. Yes, many international players have left. We have repeatedly talked about this. Is it bad, yah, kinda. Is it a death knell? Far from it.


What are we being left with? A Canadian energy sector increasingly owned by Canadian companies. I am more than happy to see Kinder Morgan and their competitors continue to blow their brains out building pipelines in Texas to move high API light tight oil out of the US, because it opens the market up more for good old Western Canada Select, which is very much in demand to make its way through the myriad of pipelines to the Gulf Coast, now blended with condensate brought into Canada on a pipeline owned by a Canadian company. That’s a good thing, isn’t it? Oh, and that pipeline and its 110,000 bpd capacity? It used to carry propane the other way. And could be converted to an oil pipeline if condensate capacity was to increase in, say, the Montney or the Duvernay. And who is ideally placed to develop and operate the pipelines that would get that condensate to Fort Mac? See, now you’re learning.


What’s Next?


Lots of chatter that Pembina is now a natural buyer for the TransMountain Expansion. That’s a little harder to wrap my head around. If those assets were such a natural fit all together, then wouldn’t they have been part of the original purchase by the Federal government? No, these particular assets were 100% strategic for Pembina. And while a completed TMX line fits into their longer term plans, it’s probably not the top priority. My guess is that ultimate buyer of the Trans Mountain expansion is going to be some mix of First Nations and one of TransCanada or Enbridge.


I’ll tell what should be next, the celebration of another growing Canadian company, unafraid to take risk and make bold investments in the face of all the negative energy focused on the oil patch. But I won’t hold my breath.


Speaking of transactions, we recently closed a very successful deal for a client. At the request of the buyer and the seller, we must keep this anonymous (private businesses), but we recently assisted in the sale of a leading multi-location industrial supply business to a large strategic buyer based in Eastern Canada. The buyer was sophisticated and presented an extremely compelling deal to our client and, for the record, wasn’t fazed at all about the fact that there was exposure to the energy sector – in fact they welcomed it.


It obviously wasn’t the scale of the above Pembina/Kinder Morgan Canada deal, but for the private mid-market service sector, it was significant and, based on the enquiries we continue to receive and the new clients we continue to sign up, there is going to be significant activity on the M&A front in the service sector heading into 2020.


A side note on curtailment


Yes, it was extended. Both the NDP and the UCP were in favour of curtailment when it was first implemented. The original plan was twofold – reduce curtailment when Line 3 becomes operational and invest in crude by rail to increase egress in the short term. Then Line 3 got delayed by a year and the UCP scrapped the crude by rail plan. Fortunately, private crude by rail volumes are up, and with storage  at its lowest level in almost 4 years, both the NDP and the now governing UCP have been able to reduce and tinker with curtailment structure to try and lessen the burden on smaller producers.


So the “plan” such as it was is working. Sure, some capex is taking it on the chin, but if you are in government, the royalty and tax revenue you are getting on total production is the more important and larger number. But the biggest thing is that with the Line 3 delay, curtailment needed to be expanded to meet that new deadline. Period. End of story. For the NDP to malign the UCP for extending curtailment is hypocritical hypocrisy. It was their plan and presented with the same set of circumstances they would have done the exact same thing. We do not need to politicize everything.



Prices as at August 23, 2019

  • Oil prices – Again, WTF?
    • Storage posted a decrease week over week
    • Production was flat
    • The rig count in the US was down and Canada was down
    • Prices rallied then fell then rallied. Then cratered on China tariffs. The rallied. Then fell. Then rallied. Makes perfect sense.
    • Natural gas storage was up and remains higher than this point last year
  • WTI Crude: $53.88 ($54.88)
  • Western Canada Select: $41.02 ($41.63)
  • AECO Spot : $1.109 ($1.193)
  • NYMEX Gas: $2.160 ($2.205)
  • US/Canadian Dollar: $0.7522 ($0.7510)



  • As at August 16, 2019, US crude oil supplies were at 437.8 million barrels, a decrease of 2.7 million barrels from the previous week and 29.4 million barrels above last year.
    • The number of days oil supply in storage is 25.1 compared to 23.0 last year at this time.
    • Production was flat for the week at 12.300 million barrels per day. Production last year at the same time was 11.000 million barrels per day.
    • Imports fell to 7.218 million barrels from 7.714 million barrels per day compared to 7.518 million barrels per day last year.
    • Exports from the US rose to 2.803 million barrels per day from 2.683 million barrels per day last week compared to 1.155 million barrels per day a year ago
    • Canadian exports to the US were 3.630 million barrels a day
    • Refinery inputs rose during the during the week to 17.702 million barrels per day
  • As at August 16, 2019, US natural gas in storage was 2.797 billion cubic feet (Bcf), which is about 4% lower than the 5-year average and about 15% higher than last year’s level, following an implied net injection of 59 Bcf during the report week
    • Overall U.S. natural gas consumption rose by 0% during the report week.
    • Production for the week was flat week over week. Imports from Canada were up 9% from the week before. Exports to Mexico were up 1%
    • LNG exports totaled 32 Bcf
  • As of August 23, 2019, the Canadian rig count was down 3 at 139 (AB – 94; BC – 7; SK – 32; MB – 3; Other – 3). Rig count for the same period last year was 207.
  • US Onshore Oil rig count at August 23, 2019 is at 754, down 16 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was down 3 at 161.
    • 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 1 to 26.
    • 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 67%/33%


Trump Watch: Greenland? Seriously? Recession. Much more seriously.

Kenney Watch (new!): Expert panel me this!

Trudeau Watch (for balance): SNC watch…

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