Crude Observations

The Fuse is Lit -Show me the Money!

Well that was an interesting week wasn’t it? I feel sometimes that I write these blogs on a Friday and by the time I come back into work on Monday, the whole world has changed or the premise of what I was saying has been turned upside down or something happens that seems to indicate that I am some kind of Energy Prophet, able to peer into the arcane depths of this most confusing sector and emerge Gandalf like with the one true path.


So it was last week, when I went off on how investment is leaving our country at an accelerating pace due to a combination of tone-deaf grandstanding politicians, regulatory overkill, rising taxes and an intractable enviro-warrior opposition that won’t consider anything aside from their position. Then, on Sunday, there it was. Kinder Morgan announcing that it unless it was given certainty that it would be able to proceed to completion of its already federally and provincially approved pipeline expansion project by May 31st it might elect not to proceed. In the interim, it said that it was stopping all “non-essential” spending – whatever “non-essential” spending really means – no more Timbits for the spreads?


At any rate, this poorly timed press release may as well have been a pre-emptive North Korean missile strike into downtown Ottawa judging by the hysterical response. The reaction was swift, passionate and at times downright apocalyptic as the federal government suddenly themselves fully in possession of a proverbial lit bomb.


Responses ranged from ill-considered tweets from federal NDP MPs crowing “we won” to the typical end of society as we know it hyper-ventilating from those on the right side of the political spectrum and a fair amount of everything in between. I think it is fair to say that the reactions and theories and statements over the past week have been nothing short of an amazing spectacle of over-reaction, hyperbole, bad ideas, good and bad analysis and an opportunity to delve into constitutional issues in a way that one never sees without the word Quebec in the mix.


Having had the good fortune to wait a week to address this, I get to skip the over-reaction part. Which is actually really disappointing, because as we all know, I’m all-in on over-reaction. That said, sometimes it’s the last guy to say something who is remembered as the smartest. I guess only time, and this Sunday, will tell. Plus, with so much time to prepare, I can make it really, really long…


So here’s the first thing I’d like to say. And this may piss people off a bit. But can we all take a deep breath and calm down?


Yes, this is a crisis and yes it needs to be solved. But an over-the-top polarized militaristic dialogue laced with words like “revenge” and “don’t mess with us” and fear and recrimination is not going to endear anyone to anyone else, nor will it engender the goodwill to other viewpoints that is required to resolve this crisis. Although I was hoping that instead of channelling George W. Bush with the whole “don’t mess with us” shtick that Rachel Notley had chosen Clint Eastwood as her role model… “Are you feeling lucky, punk? Are you?” Maybe she’s saving that for Sunday.


Anyway, calm down. Take a deep breath. There. Is that better?


Look. I get where Kinder Morgan is coming from. They have a legitimate concern. They are about to spend a lot of money this summer to advance the expansion project because as everyone knows you can’t work in the mountains in Canada in the winter. They are geared up to spend up to $300 million a month. That’s a lot of pipe going in the ground. If they start doing that and there is a risk to the pipeline outside of the construction and business risk already imposed by 157 NEB conditions, the entire management team should be fired, the board of directors replaced and a new team brought in place. So duh, they want a resolution to a manufactured political crisis or at least a path to one. They are the only ones playing by the rules in all of this. It’s fair for them to ask the respective governmental players to figure it out.


I also understand where BC is coming from, where Alberta is coming from and where the Federal government is coming from. What needs to happen is for a pragmatic Canadian solution to be arrived at that balances the need for Alberta to get its oil to other markets via a port, the need for the Federal government to show that it can enforce the rule of law and get national interest projects done and prove Canada is a great place to invest for global players and for BC to have to comfort that everything possible is/has/will be done to ensure their coastline and environment is protected.


The pipeline has been federally approved, they have jurisdiction, BC doesn’t, Alberta is an interested observer and the Liberals HAVE to get it done or lose all credibility with Canadians and the investing community. Hopefully this Sunday will be better than last Sunday in that regard with Trudeau hosting Horgan and Notley for tea and crumpets.


So, to get there, and I wish the Three Amigos will take the time to read this, I think it is important to revisit exactly what TransMountain is and a little bit of what it isn’t. If only to calm down the rhetoric and get the focus back on the basics.


But before I do that, I’m going to skip ahead and tell you what the solution is because it has become clear to me in the last few days. So I am going out on a limb. Any politicians reading this? Take it to your leaders. It will work.


Here goes:


The Federal government needs to provide the province of British Columbia with an unconditional guarantee that it will pay ALL costs associated with a spill not payable by the pipeline operator or tanker owner for any on/offshore spill and to further fund research into specific best practices for cleaning a bitumen spill. In exchange, the BC government agrees to allow the TransMoutain project to proceed as planned. End of story. If there’s no spill, it costs nothing. If there is, BC is off the hook. Bob’s your uncle.



Simple right? I’m told it would work.


Anyway, back to the refresher course. What is the TransMountain Expansion (TMX) anyway?


The TMX involves the twinning of the existing 1,150-kilometre pipeline between Strathcona County (near Edmonton), Alberta and Burnaby, BC that was first proposed in 1951 and has been in operation since 1953. When complete, it will create a pipeline system with the nominal capacity going from 300,000 barrels per day to 890,000 barrels per day.


What the TMX isn’t is the reckless expansion of an American-based corporate-raiding, environmental rules flouting, open trench feeding gooey, tarry, dirty, evil, Mordor-sourced, environment killing, climate apocalypse causing, orca and salmon displacing, bitumen ooze directly into English Bay by the millions of barrels.


It’s a pipeline, not even a particularly big one. It’s not the end of civilization.


Here’s a little additional context.


The existing pipeline capacity of 300,000 barrels per day shipped in “batches” of refined and unrefined products. Of this, about 70-80,000 is exported, 140,000 is shipped to the Puget Sound refinery, 50,000 is sent to the Parkland Refinery in Burnaby and the rest is refined product used to supply about 60% of the lower mainland’s fuel requirement – gasoline, jet fuel etc.


Once the new line is built, the old line will likely be used almost exclusively for refined products thus providing some much needed relief for Lower Mainland consumers who are supply constrained for fuel and unnecessarily pay some of the highest fuel prices in the country.


The new line will be used to ship heavy oil and bitumen to the Westridge terminal where it can be redirected to refineries using the existing pipeline network or loaded onto tankers to go to other destinations.


So, any shipments on the TMX that aren’t consumed locally will be loaded onto Aframax, double-hulled tankers and escorted through the Vancouver harbour using tugboats and local pilots until they are safely out of the congestion zone. A number of these tankers may actually stop at the Cherry Point refinery in Washington which is looking for heavy oil to process. Other tankers may stop at refineries along the California coast or cross the Pacific to heavy oil markets in Asia. Ultimately though, the purpose is to diversify the customer base and provide a steady source of supply to these other jurisdictions, which in turn will give Alberta producers the Holy Grail of a lower differential to global prices, resulting in the higher royalties and taxes to the provincial and federal treasuries.


Cool, but aren’t we guaranteed to have a spill?


Statistically yes. There is always a chance. But it’s infinitesimal. Let’s look at the record. Since 1961, the existing pipeline has reported 82 spills to the NEB. 70% of these spills have been contained at facilities and the balance are pipeline related. For a pipeline network in service this long, the track record is actually pretty stellar. As for tankers, they have been loading and transporting crude oil from the Westridge terminal since 1956 without a single incident.



The new pipeline will be built to the highest standards of any pipeline ever built. Why? Because it should be and that is how Canadian rules work.


A lot of the concern centres around the possibility of a tanker spill and the impact on the coastline and the behaviour of bitumen in colder seawater. Well, all of this was studied and assessed in the NEB hearing stage and forms part of the conditions to building the expansion. The Federal government has established and earmarked funding for the ocean protection plan to the tune of $1. 5 billion over 10 years, to be based in Vancouver and the Company is paying for and developing a top tier land spill response plan, all in response to the BC government’s five conditions that had to be met before they would approve the pipeline.


Even the current B.C. government in their proposed reference to the Supreme Court makes specific mention of spill response and not increased shipments of bitumen. So if that’s the case – provide the guarantee!


What else?


The economic impact of this pipeline is substantial to both B.C. and Alberta, and the rest of Canada. The combined impact on government revenue for construction and the first 20 years of expanded operations is $46.7 billion; revenues that can be used for public services such as health care and education – British Columbia receives $5.7 billion, Alberta receives $19.4 billion and the rest of Canada receives $21.6 billion.


On top of that, the BC government is going to receive payments from Kinder Morgan of $25 to $50 million per year for 20 years or up to $1 billion.


With all of the above and approvals up the wazoo, it stands to reason that Kinder Morgan would feel it is good to move forward.


But, as we know, they aren’t quite yet. But where are we at and what can be done? Well in my world, and most others, it’s going to come down to money. And probably lots of it.



For that reason, I’m not going to belabour all the shenanigans BC is engaged in to obfuscate, delay, frustrate and, in their view, hopefully derail the project. Other pundits have covered that.



Nor am I going to discuss the constitutional mumbo-jumbo that can be dreamed up or implemented, what version of the War Measures Act Trudeau the younger can implement or the various versions of scorched earth countermeasures the Alberta government has threatened to unleash on our neighbour.




Instead, I’m going to focus on the one weird money thing. The statement from the Notley government that they would be willing to buy into a portion of the project, or all of it if need be, and the noises coming out of the federal government that they would consider the same thing.


Clearly, the first question out of that is – What the … ? Is that a good idea? Why would they consider it? Then it starts to make some sense. Why?


Well, first and foremost, it would show both BC and Kinder Morgan that government is serious about getting this done, especially if the feds are involved. Part of the Horgan playbook is the demonization of the “Texas” company that doesn’t care about defiling the virgin BC coast (at least the non clear cut parts).  That populist rhetoric loses pretty much all its mojo if the it’s the federal government as owner.


An investment also bolsters the national interest argument – i.e. it matters so much we are spending actual money on the actual thing. Plus, as owners, it would put both Alberta and Canada on the hook for their share of spill cleanup cash if something were to happen.


Ultimately your hand is always strengthened through ownership. I am not averse to this at all as part of the solution.


Even Rachel Notley’s statement that they would buy the whole thing isn’t that far-fetched, although I think it would have to be all of Kinder Morgan Canada being purchased. The province could then farm out the construction and running of the pipeline to another local and theoretically palatable operator and sell when the time is right.


Plus, since it’s a regulated pipeline, it’s a fairly stable investment, once it’s done, right?


Of course the question, why in the world would Kinder Morgan want these feckless kooks as a partner?


Here’s a thought…


One thing that comes to mind as the dust settles is how surprised the federal or Alberta governments actually were by these developments. Quite a bit I guess given their “sudden” kneejerk interest in taking an ownership position in the project. Or maybe not since subsequent reports disclosed that they had already been talking to Kinder Morgan for some time. Umm what?


Why would they be doing that? And who would they be talking to and what was it about? And why would they be doing that?


Perhaps it’s all innocent and they were simply responding to Kinder Morgan queries or seeking to give some assurances that they would backstop losses if KM began spending money in earnest and the BC thing went sideways. If I were KM, that might be enough to keep me going – but if that was the case,  we wouldn’t be here… right?


Hmm, interesting. Let’s take a look under the hood. Like, who it is we are dealing with.


Kinder Morgan Canada owns the existing Trans Mountain Pipeline and a bunch of terminal assets in Burnaby and Edmonton and other smaller assets. It is also the proponent for the expansion.


Kinder Morgan Canada’s share structure is complicated, but the simplest way to think of it is that it is 30% owned by external shareholders (mostly Canadian) after its IPO and the balance is owned by Kinder Morgan Inc., a Texas-based company.


In order for the Feds or Alberta to provide some financial backing, it would have to deal with Kinder Morgan Canada, either through the purchase of shares, or by providing loans or loan guarantees.


Kinder Morgan Canada has project financing from a Canadian led syndicate of banks in various tranches for up to $5.5 billion of the $7.4 billion project cost ($6.3 remaining) so there is need for at least $800 million in additional financing. Keeping in mind that there is no real value in the pipeline until it is built except the approval, there are avenues for either level of government to involve themselves without paying full freight.


Taking a step back, assuming no government cash, the balance of funds would have to come from Kinder Morgan Canada cash flow, more debt, a share offering or the parent company. Without any regulatory certainty and faced with a hostile political actor, how easy is it going to be to raise that extra capital from external sources?


So if new third party capital is harder, what about cash flow and internally generated funds? Well at December 31 2017 Kinder Morgan Canada had about $300 million cash and had annual cash flow of about $100 million. Hardly sufficient to fund the balance.


Climbing up the ownership chain we have the parent company which is under no obligation to provide additional capital. And while KMI has plentiful access to capital, they also operate in what can be charitably called a much looser regulatory environment, one in which projects are easier to get approved, get done sooner, have lower actual and qualitative costs of capital and, with recent changes to the corporate tax environment, a much higher after tax rate of return. How many Canada cash calls can they actually stomach, if any?


Meantime, with all the ongoing delays, the estimated cost to build out the TransMountain expansion has to be going up, what with rising interest rates and the cost of steel and labour, all thanks to the Tariff master in chief.


I’m going to go out on a limb and call the increased cost to complete with all the delays, standby charges and all that at 20%, so add another $1.5 billion to the total or up to a potential $2.5 billion unfunded amount with no plan as yet for how to fill it.


Enter government. Maybe those earlier calls had a purpose after all.


Can it be that after all this the TransMoutain expansion is a dollar or two short and that this whole shlamozzle is just a giant smokescreen covering up a need for cash?


Probably not. But then again, why were they already talking to the Alberta and Federal governments? And when?


Money. A different type of green. It matters.


Anyway, this is just a theory – an internet theory and you know my proposed solution. I wrote it out earlier. It works. It’s simple. And once the BC issues are resolved, KM Canada will be able to raise the money they appear to need. Who knows, maybe at that time with loan guarantees from the Feds…


What’s your solution? Feedback appreciated.


Prices as at April 13, 2018 (April 6, 2018)

  • The price of oil rose sharply during the week on Mideast tensions and a thaw in the trade war
    • Storage posted an increase
    • Production was up marginally
    • The rig count in the US was mixed
  • After a small withdrawal, natural gas recovered a bit from a steep fall…


  • WTI Crude: $67.27 ($61.93)
  • Nymex Gas: $2.735 ($2.699)
  • US/Canadian Dollar: $0.7939 ($ 0.7843)


  • As at April 6, 2018, US crude oil supplies were at 428.6 million barrels, a increase of 3.3 million barrels from the previous week and 104.7 million barrels below last year.
    • The number of days oil supply in storage was 25.4 behind last year’s 32.7.
    • Production was up for the week by 65,000 barrels a day at 10.525 million barrels per day. Production last year at the same time was 9.235 million barrels per day. The change in production this week came from a decrease in Alaska deliveries and a increase in Lower 48 production.
    • Imports rose from 7.898 million barrels a day to 8.650 compared to 7.878 million barrels per day last year.
    • Exports from the US fell to 1.205 million barrels a day from 2.175 last week and 0.689 a year ago
    • Canadian exports to the US were 3.401 million barrels a day, down from 3.430
    • Refinery inputs were up during the week at 17.019 million barrels a day
  • As at April 6 2018, US natural gas in storage was 1.335 billion cubic feet (Bcf), which is 22% lower than the 5-year average and about 35% less than last year’s level, following an implied net withdrawal of 19 Bcf during the report week
    • Overall U.S. natural gas consumption was up 7% during the report week, influenced by weather
    • Production for the week was up marginally. Imports from Canada were up 1% compared to the week before. Exports to Mexico were up 16% as pipeline maintenance concluded.
    • LNG exports totalled 17.7 Bcf.
  • Can you say “Break-up”? As of April 10 the Canadian rig count was 108 – 97 Alberta, 5 BC, 5 Saskatchewan, 0 Manitoba and 1 elsewhere. Rig count for the same period last year was about the same.
  • US Onshore Oil rig count at April 13, 2018 was at 815, up 7 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was down 2 at 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 was up 4 at 16
    • 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%



  • Something to do with pipelines happened – it was hard for any story to get traction in the face of that,
  • Trump Watch: Trump lost another advisor this past week – Jim Bossert? Not actually sure what he did. Anyway, he’s gone. James Comey has released a book about his time under President Trump. Based on the few excerpts released to the media, it sounds very childish and petty. Currently, the Don is trying to assess a measured response to chemical weapons attacks in Syria.
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