Crude Observations

Stop him, his consciousness may stream

One of the nice things about Thanksgiving, which I failed to mention last week is the copious amount of turkey and potatoes and gravy and stuffing you get to eat, which of course is one of the bad things about it too. Combine this overindulgence of tryptophan with, say, a bit too much bourbon and wine and then stir in the beginnings of a “man-cold” and you have a recipe for the crazy weird dreams I have been having.


And after having lived through the last few months of project approvals and delays, record price differentials, carbon tax protests, pipeline nonsense, fires at refineries, exploding gas pipelines, the massive overhaul planned for how the government reviews and approves energy projects – the whole energy nightmare as many call it, it’s safe to say the dreams were all energy related, and some were better than others!


Note – before I go any further, I feel the need to clear this up – none of what follows has anything to do with the illicit and soon to be legal products I described last week. I promise.


So, back to these dreams. There were quite a few of them but this one in particular was pretty memorable.


I’m walking down the stairs holding a razor, a mirror and a bowl of lather. Wearing some nasty yellow robe. I’m not sure what significance that has – I have a beard and everyone hates it – maybe that’s it?


I’m looking out a window and it’s clearly early summer because the leaves are green. It feels like it’s sometime in the near future because a self-driving car just went by. Let’s call it June 16, 2020 just for fun.


In the dream I turn on the television and there is some special on the energy industry. The announcer reads off some prices and I see that Western Canada Select is priced at about $15 less than WTI, western Canadian natural gas is free flowing around the continent at a price that allows producers to make money. A further report on unconventional activity in the Montney, Duvernay and Viking among others shows continued growth, the oilsands are expanding at a measured pace and all this was happening with full, active and engaged consent and economic collaboration with First Nations.


Talk about an alternative universe!


OK back to the story. Like all good dreams the scene shifts instantly. Suddenly I’m lying in bed awake and drenched in sweat. I’m totally disoriented. My alarm has gone off and the radio is playing. Some smarmy radio host is yammering about the differential to WTI being $50 and how the IPCC has come out with a report saying unless we cut emissions to zero tomorrow, the world will end. I don’t know whether I’m awake from a dream or have fallen asleep and am dreaming of dreaming. Maybe it was an alternate reality. Or maybe sweat drenched delirious guy is the nightmare the happy guy is having.


Anyway there I was, delirious, somewhere in the matrix and unsure which reality is real and I started getting mad, if delirious mad is actually a thing. Mad because I saw the unattainable perfection of an industry in balance only to have it taken away, mad because there is a very real possibility that the nightmare side of it was real.


Then I fell asleep. I must have pushed snooze. Or maybe I was asleep the whole time and just dreamed I was awake, I don’t know.


I woke one more time and all that anger had washed away replaced by a determination to get back to that dream like state before it was too late – there must be a path to get there, a way to stitch together some of the phenomenally positive undercurrents that are already occurring with some positive ideas to get ourselves back on track and to really share in the rally that has so far appeared to pass us by. Maybe there is one thing that needs to happen right now to fix some of these problems. So that I could get back to that dreamlike state!


Still not 100% convinced I was actually awake and not hallucinating due to the turkey and man-cold combo I determined the best path forward was to write down notes from my out of body dream experience just in case there was some nugget in there that could, I don’t know, SAVE ALL OF CANADA! Or something along those lines. Of course I could just be dreaming about the notes. Who knows. But out of respect for delirious awake/not awake me, I present them unedited and in order, stream of consciousness almost…


Canada – among the best regulated energy industries in the world. With some of the most respected jurisdictional regulators – even if Trudeau wants to dismantle one of them. Don’t bother me with most “ethical” or cleanest. The former is specious, the latter just wrong. Seriously, isn’t best regulated enough? It is oil right?


Also, Canada, one of the largest producers and exporters of oil and gas in the world.


Canada, a country with one client, who buys our oil as cheap as they can get and some of our gas, if they feel like it.


Canada, a regulatory gong show that over the last half-decade couldn’t get out of its own way in its over-weaning desire to win favour with first the energy industry and then, presto-chango, virtue signalling to the global climate change movement by announcing wholesale changes to regulatory processes that, while in need of adjustment, were far from broken.


Canada, where pipelines are seemingly more important to politics than the economy or health care or public transit or indigenous poverty or whatever…


All fair to say.


Not as rosy as it seems but we’re trying right? Or are we. Is there a vision? Is there a goal? Or are all of our politicians running around blindfolded whacking each other repeatedly with foam bats? I suspect it’s the latter. Cheap sound bite political points designed to tilt the balance in one direction or another as we wait for the endless campaign to end and it’s left to industry to pick up the pieces and figure out what just happened.


We live in a world of sweeping generalization and poorly formed policy that is like quicksand for industry. The polarization between the two primary competing visions federally creates regulatory rigor mortis when the government changes over. And no one works collaboratively to find a solution.


In Alberta, it literally is “he said she said” as both leaders tout their energy industry bonafides without ever really articulating what it is they see as the future for growth in the energy industry in Canada or how to solve the obvious immediate problems.


What is the goal? It can’t be this. Because this is chaos. And it’s costing us jobs and money. All of us. Oilpatch workers, three levels of government and industry.


Where is the politician that is willing to step up and say:


“Look folks, here is my vision for the energy industry. Our national epic has yet to be written. I want to see a fair, independent and practical regulatory environment that isn’t subject to random change every time a new government is elected. I want to encourage the prudent and environmentally responsible development of our natural resources which are a fundamental underpinning of our national prosperity and a focus of increasing demand both in our traditional markets and emerging markets in Asia. Currently we face regulatory and development gridlock in terms of getting our product to market which is resulting in lower realized prices for our producers meaning Canadians are sacrificing tax and royalty revenue because we can’t get out of our own way, my plan to address this is…”


Wait. What was that word? Plan?


Funny that. How come we never hear that word?


Federal government buys a pipeline – what’s the plan?


NDP is confronted by plummeting WCS prices when they should rolling in a bed of royalty dollars. What’s the plan?


Presumptive Premier and Opposition Leader Jason Kenney stands on the sidelines talking about the “job-killing carbon tax”, hobnobbing with the King of Ontario and says he will do better. But what’s the PLAN?


Seriously guys. What’s the plan?


I’ll tell you what the plan is. There is no plan. And where there is no plan, you get what we have right now.


So industry has to step in. And push forward where they can to make the incremental changes that may eventually lead to something instead of some focused, industry aware policy that makes sense.


Ultimately it all comes back to the regulatory environment stifling investment and the resulting lack of pipeline infrastructure to broader and other markets forcing Canadian product to be sold at a huge discount (differential). I feel like I’m on a roll so I’ll address these if I may since as they say a man of genius makes no mistakes. His errors are volitional and are the portals of discovery. (look, it was in the notes, sue me)


Regulatory Environment


The approval process for pipeline and energy infrastructure in Canada is an acknowledged mess. The Liberals propose to overhaul it with the dreadfully named Bill C69.


C-69 refers to the new review process that will via Impact Assessment Act create a new regulatory body that will replace the NEB as the assessor of new energy projects which formerly fit in the NEB’s mandate. This Bill replaces the Stephen Harper implemented CEAA of 2012 which replaced the NEB act of 1992 I believe and so on and so on. Anyway, long story short, in 2012 the Conservatives tried to streamline the pipeline approval process to please industry and in 2015, convinced (wrongly) that a majority of Canadians thought that the NEB was in the pocket of the oil industry and not trust-worthy, the Trudeau government set about appeasing their base – Gerald Butts – with this bill.


Released to much consternation by industry and opposition, the bill was rushed through parliament and sent to the Senate for review which is where, finally, some people aside from the ever-present defender of the pipeline industry Chris Bloomer at the Canadian Energy Pipeline Association finally started paying attention.


Among many changes, this bill expands the definition and thus number of intervenors, introduces gender as an assessment criteria, front loads some of the politics into a two stage process, assesses upstream and downstream emissions and tries to centralize all the hoop-jumping into one all-encompassing sausage grinder that theoretically will deliver shorter timelines, more certainty and more finality to proponents.


There are critics on both sides who say it either doesn’t go far enough or that it’s so egregious that no energy infrastructure project will ever be built in Canada ever again.


The answer as always is somewhere in the middle. Mining companies actually like the new bill, so how do you square that with the energy industry?


Much of the opposition is really a desire to leave it as is but, hang on now, Northern Gateway, TransMountain and Energy East were all assessed under the 2012 changes and we know where that went. All the other pipelines approved by the Conservatives that got built? Under the old, old rules.


So what, really, have you got to lose with this new one? We ain’t going back.


Besides, many experts say that there isn’t anything in this new mega process that wasn’t already part of the approval process somewhere along the line with some other government agency.


The Bill is in the Senate for its sober second thought. Aside from the image that conjures to a delirious mind, there are a number of problematic areas in the bill – interference in provincial jurisdiction is one, uncertainty in the application of the more qualitative tests. How are we going to get these addressed? What will the recommendations be?


It’s hard to tell as the majority of people fighting it want it dead and interested provincial governments and opposition leaders are silent on what they want, at least in public. What is the average Canadian to think?


Here’s my view. Killing C69 is a losing proposition. It puts the whole regulatory mess on hold for at least until after the next election in late 2019, then all bets are off as to what you will see next and when. You want to kill energy infrastructure investment in Canada? Keep the regulatory system in flux for another two to three years.


I read recently an idea that maybe letting the damn bill get approved with suggested changes and “test-driving” it would work. Seems reasonable right? Odds of it happening are slim, but, in my feverish mind, flawed or not, the bill needs to pass because right now, no one is doing anything and most of the world is laughing at us, as a recent twitter exchange can attest.


If it’s really that flawed, it will become obvious as it gets implemented. Changes can be made after the fact too. But going backward isn’t the right way to do this. The horse has left the barn


Fix the Price Differential


I hear this a lot. So does everyone else. I have the near daily Twitter reminder of the differential from some lady who takes a photograph of the prices in the Globe and Mail and helpfully circles both prices.


Yes. Fix the differential. All we need is the Liberal government to push TransMountain through, right? Maybe Energy East! Revive Northern Gateway! This will solve all our problems. It’s all the government’s fault. Rachel Notley hates the energy sector. Blame BC. If only it was that simple. It’s really more a matter of time and space.


What do I mean? OK, let’s unpack the price differential discussion and theory so that everyone is on the same page.


Currently, Western Canada Select, the heavy blend of oil that us Canadians ship to our single market, is trading at a discount to WTI or West Texas Intermediate. That discount is currently $45, which has ballooned massively outside of the normal $15 to $25 range due to a number of factors. Some we control, some we don’t.


Outside of our control:


Canada is a long way away from end markets and it costs money to ship oil on a pipeline. The WCS price doesn’t include that cost.


Crude quality matters:


Canadian heavy oil has a high sulfur content and a lower gravity than WTI, so the product, while certainly in demand, is fundamentally different. The comparison is not perfect. A better comparison would be heavy oil from Mexico, which fetches close to market price in the Gulf Coast but that price is already burdened by shipping costs etc. The real price to use is likely a well-head price. Anyway, the point is different product, not really comparable. Canadian heavy is also blended with diluent to make it flow through the pipeline, so a barrel isn’t really a barrel because there’s other stuff in there. Hmm, go figure. So costs more to process and not even the same as WTI means different price no matter what.


Here’s another thing we can’t control. One of the largest buyers of WCS, the BP Whiting Refinery is down for a maintenance/turnaround. This has removed about 250,000 or 300,000 bpd of demand, close to 10% of demand. While it would be nice to tell them to stop, maintenance matters. In the meantime, oil builds up in storage, discounts get offered, pipelines are filled. Think about this. On September 5 the differential was $25. The turnaround started mid-month and the differential proceeded to rapidly widen to where it is today. Turnaround season ends at the end of October. Whither the diff after then? You tell me.


So a lot of the price differential is out of our hands and not due to some nefarious plot or governmental incompetence. As they say, people could put up with being bitten by a wolf but what properly riled them up was a bite from a sheep.


Oh, as an aside, spare me a tear for the hard done by oil producer who no doubt has hedged a chunk of production going forward at prices will above the current benchmark – they ain’t no dummies.


OK then, what can we control?


Not much. The product is the product. And the customers are the customers. The only thing really within our theoretical control is the shipping method. Or pipeline capacity.


Currently Canada has sufficient off-take capacity for its product assuming that no variables change in any meaningful way. As we’ve seen with modest production growth and refinery maintenance, this can get sidelined in a hurry.


But in all reality, the projects that are currently underway in Canada – Line 3 (+500k bpd), Keystone XL (+1,000k bpd) and, when it gets re-approved, TransMountain (+590k bpd) plus some mysterious Enbridge “system improvements” (+500kbpd) will provide more than enough transportation options to meet even the most optimistic Canadian production growth scenarios for the next decade. Oh, and last time I checked, none of these have anything to do with Bill C69. Good right?


Except of course all these things take time. Which is where our bold politicians, those lads and ladies with the plan need to step up so that we don’t get in this situation again.


The only fix that matters in the short term:


What should they be doing? The mocker is never taken seriously when he is most serious but here’s what I think: Governments should be articulating how they plan to diversify the energy value chain, encourage more petrochemical investment here in Alberta to soak up surplus oil. There should be joint Federal/Provincial strategy to address crude by rail as the flex shipper to accommodate the interim periods between now and when pipelines are finished. Why does Cenovus have to be the trailblazer? Why aren’t they doing it now? Where’s the cooperation? Are we already in full campaign mode? Will nothing happen until May? We need to stop the politicking about every single aspect of the industry and understand where our customers are – American MidWest, American Gulf Coast, American West Coast, China, maybe India at some point. And we need governments laser focused on the solutions to get our oil to those in-demand locations safely and efficiently. We need to stop wasting time on projects that have come and gone and had their day. By my math, we need an extra 300-400k bpd of rail capacity in the short term to tide us over until approved pipelines come on stream over the next two to three years. Want to win votes? Yes! Say how you’re going to make that happen, don’t tell me about a job killing carbon tax or who posed with who at what rally or how the impact on the female population of remote communities of pipeline projects doesn’t matter. Who’s in? And another thing… Wait, that was the thing. Yes, there it is! It was on the only real piece of note paper I actually found.


“Get the crude by rail expanded already, it’s the only short term solution.”




Whoops, dozed off again. Where was I? I forget. Oh right. Crude by rail. Delirium gone. Strangely want to book a trip to Dublin. Who’s in? Man I’m tired.


Prices as at October 12, 2018, (October 5, 2018)

  • The price of oil fell during the week on supply build and stock market jitters.
    • Storage posted a big increase
    • Production was up marginally
    • The rig count in the US was up
  • After a smaller than expected injection, natural gas was flat for the week…
  • WTI Crude: $71.61 ($74.35)
  • Nymex Gas: $3.150 ($3.151)
  • US/Canadian Dollar: $76.74 ($0.772)



  • As at October 5, 2018, US crude oil supplies were at 410.0 million barrels, an increase of 6 million barrels from the previous week and 52.2 million barrels below last year.
    • The number of days oil supply in storage is 24.6 compared to 29.1 last year at this time.
    • Production grew slightly for the week at 11.200 million barrels per day (100-barrel increase). Production last year at the same time was 9.480 million barrels per day. The increase was seen mostly from the lower 48.
    • Imports fell from 7.965 million barrels to 7.397 million barrels per day compared to 7.617 million barrels per day last year.
    • Exports from the US grew from 1.723 million barrels per day to 2.576 million barrels per day last week and from 1.270 million barrels per day a year ago
    • Canadian exports to the US were 3.274 million barrels a day, up from 3.110
    • Refinery inputs fell during the during the week at 16.239 million barrels per day
  • As at October 5, 2018, US natural gas in storage was 2.956 billion cubic feet (Bcf), which is about 607 Bcf lower than the 5-year average and about 627 Bcf less than last year’s level, following an implied net injection of 90 Bcf during the report week
    • Overall U.S. natural gas consumption fell 1% during the report week
    • Production for the week was flat. Imports from Canada increased 2% from the week before. Exports to Mexico decreased 3%
    • LNG exports totaled 15.0 Bcf
  • As of October 12, 2018, the COADC 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 12, 2018 was at 869, up 8 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States were up 4 to 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 remained flat at 23
    • 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%


  • Disaster week in Canada as a fire broke out at the Saint John Irving oil refinery and a natural gas pipeline outside of Prince George had a fiery blowout. Fortunately no major injuries were reported and both incidents were brought rapidly under control.
  • Top global oil traders see prices between $65 and $100 for next year. Thanks for the hard work guys. My kids could have done better.
  • Trump Watch: Two words… Kan Ye



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