Crude Observations

So,that’s it then?

Well you heard it here first, the Canadian oilpatch is done. That’s what I hear in the media anyway. Shut off the lights and go home folks, nothing to see here. Please move along. Investing in Canada, if it was ever a good thing is now a guaranteed dud. Bre-X after the helicopter thing. An income trust on November 2, 2006. A tech stock after posting record earnings that beat estimates, but not by enough.


Yup, it is indeed hard times here in the oilpatch. Just ask Suncor, Cenovus, Encana, Crescent Point. Literally bleeding cash.


OK, I admit, that last one I was being sarcastic – the big boys, they be fine, worried about the rest but no shortage of cash flow for the beasts of the patch.


But it’s hard to escape what appears to be a litany of bad news as a lack of market access and pipelines leads to massive differentials and ultimately ends up sucking the soul out of every red-blooded energy sector worker.


Layer on top of that all the politicians piling on, grandstanding and whipping up outrage (OUTRAGE!!) at the shameless affronts being perpetrated on the long suffering energy economy and you start to feel the blood boil – ammiright? Never mind that the most vocal rarely have the common decency to actually understand what the problem is – most likely because if they did, they would have to admit that like most problems, the solution is in the reasoned collaboration and not ranting and yelling.


But enough digression. Where was I? Of course, the end of the energy sector. It’s distressing isn’t it. But what if it didn’t have to be?


I have been thinking about this a lot over the last four years and in particular it came home today after I went to an “Oil and Gas Forecast Breakfast” where the mood was palpably morose.


I spent the morning talking to my table about where I thought things were at and one guy told me that I was one of the few people he had met recently that had a positive outlook for the Canadian oilpatch. Really? Am I that much of an outlier? Come on people, cheer up!


This of course got me thinking more. About the things going on around us and what to do about this absurd amount of negative energy. That’s not the Calgary I know. Then I went to the gym and like I always do at the gym, I stream a little Netflix and this time, instead of binge-watching a depressing Ken Burns documentary, I watched the end of the second best (open to debate on this) Monty Python movie ever made and found myself singing along to the classic closing song: “Always look on the bright side of life”.


Which got me thinking in a great big circle back to all the so-called body blows the sector is currently taking and I thought to myself – what if these aren’t existential? What if in each lode of negative news there was a nugget that could be extracted that contained some positive spin? What if we can take the negative and make it positive. Dare I say it – treat the glass as half full instead of half empty or maybe, even… turn that frown upside down?


Think about it – silver linings in everything, a rethink that’ll put a spring in your step, a smile in your backpack.


So if this is it, the bottom, that means there is nowhere to go but up – we just have to learn how to recognize and emphasize the positive. How to always look on the bright side of life.


As the song says –


When you’re chewing on life’s gristle

Don’t grumble, give a whistle

And this’ll help things turn out for the best…


Like with Bill C69. It’s terrible. Okay, it’s not terrible, but it’s fundamentally flawed. We’ve covered this before – it gives politicians too much control of the political process, it appears to impose environmental checks that, quite frankly, us Neanderthals in the energy industry would much rather not see there. But we live them every day anyway – have we forgotten so soon about pipeline construction schedules that depend on the migratory journey of exotic toads? Drilling programs that have to be moved because it’s mating season for some form of butterfly? We in the energy sector live with these things every day and get by just fine. So what if the Federal government thinks we need to consider the impact of gender and first nations on projects or emissions. It’s OK. Because we do it anyway.


And look on the bright side, at least they aren’t proposing to shut down any new development – because it could have gone there, seriously. Fortunately, the federal liberals, like most every party in government, has a thing for revenue – they like it and will never be able to break that addiction and if there’s one thing we know about this government it’s that they know how to read polls. And the polls have turned in favour of revising the most harmful bits of Bill C69. Why? Public pressure. Cooperation between opposition and government in Alberta – who’d have thought that? Grass roots opposition like the Suits and Boots crew who have created an activist campaign to target key Senators to oppose, revise or shelve Bill C69. I don’t agree with all their points, but I love what they stand for – a strong energy sector. They may not win this particular insurrection but they have set the stage for winning the war. They have changed the dialogue.


See how easy this is? Let’s try another one. How about …


If life seems jolly rotten

There’s something you’ve forgotten

And that’s to laugh and smile and dance and sing.


Oil price differential got you down? Yeah, it has me down too. But like I did several weeks ago, once I deconstructed it and understood it a bit better, it didn’t hurt as much.


Now we have prominent oil and gas CEOs (you remember them) calling (in a completely non self-serving way) for lower for longer Canadian oil prices, saying it’s a 9 to 12 month problem if not longer. Remember the last time we had a consensus forecast on the price of oil from energy CEOs? No? Well, I remember. It was in the fall of 2014. Now do you remember? Hell of track record. Anyway, how can that be – lower for longer? Isn’t the big spread partly a function of refinery turnaround season? Aren’t those turnarounds coming to an end? Doesn’t it stand to reason then that those differentials will narrow? Sooner rather than later? Read between the lines. The CEOs are talking about the prices because they want to keep the pressure up on governments to act on pipelines and not let that file fade. They know the cycle. They live the cycle. Heck, they hedge and make money off the cycle.


So the bright side? The differential is going to narrow into 2019 because demand for Canadian heavy oil is going to recover. It’s also going to narrow as more crude by rail capacity comes online. So let’s stop the stupid talk about shutting in production and having the province regulate the amount of oil that leaves the province. It’s crazy. The industry is far too complex to do that. Let’s solve the problem of access rather than introduce a new one with backhanded price controls and letting the government pick favourites. Limiting production by fiat is exactly what the environmental lobby wants – it’s a big win for them, so stop it, right now. Look, if companies want to voluntarily cut back production to support prices for their rivals that don’t, go for it. But it’s dumb – and it’s the argument that everyone uses to slam Canada imposing carbon taxes – it isn’t going to make a difference. We are a major producer and exporter. Major producers don’t give up. Exporters don’t voluntarily give up their market. They figure it out.


And now for something completely different… A few quick hitters


Speaking of carbon taxes, who doesn’t hate the old “job-killing carbon tax” whether it’s an Alberta version, a BC version or the Federal Price on Pollution.


The bright side? It’s out there. A known quantity. Businesses can now plan around it and adapt. A carbon tax lets us beat our chests internationally about how far ahead we are on the environment. Plus large emitters have a whole pile of exemptions. I suspect this is the least of our worries, industry should move on and let the politicians argue about it. But it’s here to stay and ultimately, it isn’t that bad and it hasn’t really killed any jobs.


Trucks delivering Oil


An abomination if I’ve ever seen one, right? Sacrilege! Proof of the short sightedness of governments! A travesty. Emissions! Where are your precious environmental concerns now you green freak! I hope you’re happy in your over-priced leaky condo in Kitsilano you Suzuki-supporting, tree-hugging, latte sipping enviro-weenie! We are now going to send a convoy of trucks right into Stanley Park and show you pipeline opposing bozos what’s what!


Or, on the bright side – a certain amount of oil has always been shipped by truck, usually over shorter distances. How do I know this? Because I pay attention, but also because we sold a business that did just that. Anyway, 250,000 barrels of oil shipped by truck in August is a record and a bit of an eye opener… But… One, it shows that the market is already finding the short term solutions for transportation issues. Two, it also sure makes use of some under-utilized equipment in the patch and puts some quite likely under-employed drivers back to work at a fairly decent salary. So I ask you. Is this a bad thing? See how easy that was? Sometimes the solution to a problem can also help alleviate another problem


Take that a step further. Consider crude by rail.


Prevailing, consensus view?


Super-dangerous and expensive last ditch option and proof dammit of government failure on the pipeline file. A disaster in the making. Remember Lac Megantic!


Or, on the bright side, or the upside down frown – isn’t rail a natural relief valve for short to medium term transportation challenges in the energy sector? A solution that makes use of a unique Canadian competitive advantage – a trans-continental railroad system that is able to target shipping to precisely the markets that want them – in the case of oil the thirsty Gulf Coast, ports for shipment abroad, the Midwest. See how that works? Oh, and back to our truckers for a minute. Remember them? How do you think a lot of the oil gets to the loading facilities for crude by rail… Nope not always pipeline although the irony of that is fun. No, would you believe by truck? More crude by rail equals more crude by truck equals more employment.




Sure we don’t have enough. We know that. The pipeline file has been an unmitigated disaster for the better part of a decade.


But on the bright side, the resolution to this situation is aggressively unfolding, even if you can’t see it. Line 3 will be done next year. Keystone XL is in preliminary construction, it is highly likely TransMountain is moving forward once it clears its remaining hurdles. That’s a lot of capacity.


More importantly, have any of you stopped to think how the dialogue about pipelines has changed for the better in this country since the whole debate started? We understand pipelines, the issues and the impacts of not having that network more. We are better at explaining it. We are trying to fix the process to get them approved. People actually think about energy security now. It’s getting harder to take it for granted when the people who invest, produce, refine and transport it are in your face 24/7 reminding people why they are necessary. And that theoretical connection from resource extraction to national prosperity? People understand now that it’s actually a physical pipeline, not a notional dotted line.


The NEB reference case on the Coastal Gaslink


What’s this say you. Well, some dude applied at the last minute to have an argument heard that because the Coastal Gas Link ties into the greater Nova Gas Transmission system that the new pipeline is inter-provincial and thus requires a NEB sertificate and not one from the province of BC. And the NEB agreed to hear arguments. Groan right? So what is it? A “here we go again” moment or the ultimate nuisance lawsuit. A petty argument on a technicality that has pretty much zero chance of altering or stopping the pipeline that is going to feed the massive LNG Canada project or a genius challenge to Canada’s ability to make money? The tipping point where the average Canadian is able to finally see how narrow special interests will stop at nothing to cost Canadians more and landlock our natural wealth or the actions of a brave and concerned soul to arrest the scourge of climate change – see how that goes? My own view if it counts is that the NEB is hearing this out in order to quash any further challenges of this nature. Move on. Nothing to see here.


Lack of US investment interest in the Canadian energy sector and depressed valuations


This last one is the biggie. It has been noted for several years now that there has been an exodus of US and international capital from the Canadian market due to lack of access, regulatory gridlock, unfriendly governments, you name it. And yes, it has happened. Capital flows were definitely flowing in the wrong direction for a while and it is hard to raise capital in the oilpatch. It’s yet another nail in the coffin, right? A sign we are done? I mean it’s really depressing. Glass half-empty. On the other hand, maybe the glass is half full. Deals are fewer but they still get done and a consensus is emerging that the Canadian energy industry is way oversold, particularly on the heavy oil side. I guess that means that there is more return available to those who are buying into this market which for now is predominantly Canadian investors.


Plus this whole investors are fleeing story isn’t even entirely true. If the US investor community is so down on or unaware of the Canadian energy sector, why do I get at least three emails a day from US private equity funds asking about deals. You know why? Because below the surface and outside of the eye of public markets, the directional flow is slowly changing. Remember LNG Canada? That is a massive $40 billion foreign vote of confidence in the Canadian energy sector. And BC may be crowing about how awesome they are for getting it, but remember that most of the commodity, engineering and manpower to feed this beast are coming from Calgary companies. Everyone in Western Canada stands to benefit from this and everyone contributed to making it happen.


Canada is a bargain basement compared to other energy-producing jurisdictions around the world, but… we are the only one that combines rule of law with a strict environmental regime, carbon taxes, a prolific amount of resources and proximity to the world’s largest consumer of energy. People know this. I suspect this malaise will pass if it hasn’t started to clear already.


Encana buys Newfield


What were they thinking right? What a terrible idea. They should be paying down debt, cranking out dividends and staying in their lane. As a result, drop that stock price by 15%! Or, maybe they are now the number 2 unconventional/shale company in the continent, second only to EOG with more than 500,000 bpd of production. A Canadian-made continental powerhouse with its executive offices in Calgary. See it isn’t so hard to make the connection. Or, Canada buys US!


So where do I want to end with all this. We are at a seminal cross-roads moment in Canadian energy history. The runway is long and the opportunity is unlimited. But let’s not take our eye off the ball because it’s way too easy to wallow in all the bad news and forget to look on the bright side of things. I know I trade in relentless optimism as part of my job, but wave away all the fog and it’s maybe not as bad as it seems. If what the energy sector really needs is a shot of optimism, it really starts with us, so…


When you’re feeling in the dumps

Don’t be silly chumps

Just purse your lips and whistle – that’s the thing.

Always look on the bright side of life


Extra crunchy bonus


Official US Midterm prediction


Yes folks here it is. My prediction on the literally thousands of elections being held all across our neighbours to the south on November 6th. The crux? Will it be a blue wave repudiation of everything Trumpy, will it be a surprise red-rebound and consolidation or will it be a goldilocks outcome – not too blue, not too red. A little purple.


Each outcome has major implications for Canada, oh and the United States too. For Canada it mainly revolves around trade and tax. A red rebound leads to more tax cuts and the implementation of USMCA. A blue wave puts USMCA at risk but probably blocks any more tax cuts. A middle of the road result is gridlock. None of these outcomes solves the tariff problem.


My prediction? The obvious races go the obvious way. I believe the blue wave comes but is mainly reflected in the popular vote in those districts that were blue anyway. There will be some surprises, the GOP and Trump hold the Senate and the Democrats flip the House. Some key and symbolic races go the Democrats’s way and they claim some Pyrrhic victories in places where they managed to narrow the gap against all odds. Further to that, on November 7th, Beto O’Rourke begins his run for the Democratic nomination in 2020.


The end result? Two more years of chaos and anarchy. Maximum gridlock and executive orders. Subpoenas and investigations and Mueller this and that. Hearings. Partisan division and increasing party infighting on both sides in the leadup to and epic 2020 confrontation between … I don’t know. There’s no star power anywhere except Trump. But I think there is a good chance that subjected to two years of obstruction Donald Trump ages like all presidents do and decides not to run again. He’s had it easy so far. It won’t be easy from here on. How about Mike Pence against the guy who is running for governor of Florida – Andrew Gillum.


All predictions subject to editing post-publication.


Prices as at November 2, 2018, (October 26, 2018)

  • The price of oil fell during the week on a combination of supply build, Iran shipping and stock market jitters.
    • Storage posted another big increase
    • Production was up
    • The rig count in the US was flat
  • After a smaller than expected injection, natural gas was up slightly for the week…
  • WTI Crude: $62.86 ($67.68)
  • Western Canada Select*: $17.17 ($22.86)
  • AECO Spot *: $0.80 ($0.10)
  • US/Canadian Dollar: $0.7632 ($0.7649)

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


  • As at October 26, 2018, US crude oil supplies were at 426.0 million barrels, an increase of 3.2 million barrels from the previous week and 28.9 million barrels below last year.
    • The number of days oil supply in storage is 26.1 compared to 28.5 last year at this time.
    • Production was up during the week at 11.200 million barrels per day. Production last year at the same time was 9.553 million barrels per day.
    • Imports fell from 7.678 million barrels to 7.344 million barrels per day compared to 7.571 million barrels per day last year.
    • Exports from the US rose from 2.180 million barrels per day to 2.485 million barrels per day last week compared to 2.133 million barrels per day a year ago
    • Canadian exports to the US were 3.190 million barrels a day, up from 3.162
    • Refinery inputs rose marginally during the during the week at 16.417 million barrels per day
  • As at October 26, 2018, US natural gas in storage was 3.143 billion cubic feet (Bcf), which is about 17% lower than the 5-year average and about 17% less than last year’s level, following an implied net injection of 48 Bcf during the report week
    • Overall U.S. natural gas consumption rose 1% during the report week
    • Production for the week was flat. Imports from Canada were down 15% from the week before. Exports to Mexico decreased 3%
    • LNG exports totaled 24.5 Bcf
  • As of October 29, 2018, the CAODC Canadian rig count was 306 (AB – 217; BC – 24; SK – 60; MB – 5; Other – 0. Rig count for the same period last year was 358.
  • US Onshore Oil rig count at October 19, 2018 was at 874, down 1 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States were flat at 193.
    • 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 down 1 at 18
    • 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 65%/35%


  • Encana/Newfield
  • Trump Watch: Caravan.


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