Crude Observations

Where did all the moneys go?

OK, I admit it. Time to come clean. I lied. I never intended to stop doing the blog. It’s too addictive. I can’t quit the energy sector and the bully pulpit this blog gives me that easily. So I lied to you. It was a cheap April Fool’s stunt, mainly concocted to distract from my egregious forecasts. But many of you saw right through it, so kudos to you. On the other hand, I did manage to fool quite a few people, so yay for me! I guess.



Of course now that I admit to this whole “lying” thing, I realize that I am back writing another blog and this week, for whatever reason, I have a monumental case of writer’s block. So much so that I actually considered taking a week off, if only to prolong the agony of “the lie”. But I decided to tough it out and try.


I’m not actually sure what’s causing the blockage. Actually, that’s a lie. I’m pretty sure I know the cause. It’s this interminable winter. It just won’t break and it’s starting to suck the life out of me. I mean, it’s April, that time of year when Calgary temperatures are supposed to climb steadily and we get subjected to random blizzards. Instead what do we have? The absolute drudgery of an endless series of windy sub-zero days and never-melting, rock hard glaciers on our streets and backyards.



It’s not even like there isn’t anything to write and/or complain about, there always is. Rather, maybe it’s because there is so much percolating and topical that it’s hard to pick only one. Let’s go with that, see where it leads.


So, in order to break out of this writing funk, and also get as much mileage as I can out of all these random thoughts in my head, I am going to have to resort to one of the oldest and most hackneyed tools a blogger or journalist can resort to, the dreaded list. Even worse, the random, unassociated list.


Or as I like to call it – Stuff that’s on my mind, listed in no particular order, that may one day merit a column. Or, a series of mini-rants with silly titles.


Thanks for the memories Canada but I’m putting my money elsewhere and why Canadians should maybe sit up and take notice, if not panic a little bit.


So there’s been a lot of news and handwringing this week about foreign direct investment into Canada falling and the punditry has certainly taken this on, at least until the next Trump tweet comes out or Justin Trudeau buys a new pair of socks. Which is a way of saying that this is a flavour of the day story that doesn’t really have staying power because let’s face it, capital flows ain’t sexy.


But, and it’s a big but, let’s be 100% clear, this is a VERY BIG DEAL. Why? Because investment in Canada and its industries has always been sizeably underwritten by foreign money. Why? Because Canada is a trading nation with massive amounts of natural resources, so people put money in to take products out. And when that flow of funds slows down or reverses, the whole economy suffers.


The best example is in the energy industry where the exodus of international firms is well-documented and probably a bit overdone. But judgement has been passed on the energy sector and for the time being, we are in the proverbial penalty box.


But this is also Canada problem, not just an energy one. As has been pointed out by pretty much everyone who has spoken about this – from economists to bank CEO’s to industry executives to academics to lonely, anonymous energy bloggers, Canada has a competitiveness problem vis a vis other jurisdictions. We have regulatory gridlock. We have tax issues. Our real estate is too expensive and our energy costs are too high. Labour costs are too high and productivity is bottom quartile. Our domestic market is small. The stock market is one of the worst performing in the world so far this year. We are toxic. So investment, if it was ever here, leaves. And it leaves in a hurry.


The problem with an exodus of capital is that it’s hard to turn back around. Money is mobile and fickle. Once labelled a loser, it is hard to get the attention back. Just saying we are good guys isn’t going to cut it. We need specific, targeted policy changes to get the focus back on Canada as a place to invest or risk being marginalized in the North American context. It is important to realize that no one, repeat, no one is going to put cash to work in Canada when they can do it more cost-effectively and at a better net outcome south of the border. If we want our qualitative attributes to win over investors, we need to at least match the quantitative advantages the US has. Accelerated CCA to encourage investment in capital assets, lower corporate taxes to match the US, lower energy prices to match operating costs and a reduced and rationalized regulatory environment to eliminate all the headaches that come with being a business person in Canada. And we need action. Fast. Not at a governmental pace. At a non-partisan, let’s all pull up our socks and figure out how to fix this now. Special session of parliament. This is probably the single largest headwind facing Canada right now, much more critical than climate change – all due respect to the natural governing party. If we don’t do something to reverse this now, we doom ourselves to the B-leagues. The Canadian moment is over.


Dumb Trade Stuff Part 1 – NAFTA silliness. In many ways, this is a big contributing factor to and continuation of the exodus of capital discussion above. Sure Donald Trump has some crazy ideas about how bad NAFTA has been for the US and his trade team has proposed some ridiculous, impractical and unachievable amendments such as the 85% content rule on autos and a sunset clause for the agreement. But we are in no way an innocent victim. Canada has probably been the biggest beneficiary of NAFTA – it may be time to let go of some of our sticking points and get a deal done, because the uncertainty is going to help kill the economy. Supply management in dairy? We threw it under the bus to get the TransPacific Partnership, why treat the US differently? Canadian content and protections for arts and culture? Seriously? We lost (and won) that battle years ago. Reduced duties on goods purchased online? Give up. Every Canadian who has ordered a pair of socks online and had to pay Purolator or whoever the $50 duty and handling charge should be up in arms about this. The Americans may be negotiating in bad faith on certain things and the tweet-master may change his mind 16 times before a signature gets recorded anywhere, but we need this deal to at least stabilize the economy and get the dollar flow back in our direction. If we lose free trade within North America, the exodus of capital will become a stampede.


Dumb Trade Stuff Part 2 – Speaking of the Tweeter-in-chief… One, two, three, four, I declare a trading war! Why, oh why, when the world is finally completely synced in terms of global GDP growth (except Canada) and firing on all cylinders, is it necessary to pull out the pointy protectionist stick and poke yet another major trading partner in the eye. Not content with the random tariffs on steel and aluminum and the softwood lumber nonsense with Canada, Donald Trump has set his sights on the second largest economy in the world and the largest holder of US sovereign debt.


Look, I understand Trump’s concern with the US/China trade deficit (although I disagree with his obsession with it being the be-all, end-all measure of trade), but surely there is a more effective way to address the fundamental issues than an ill-conceived bucket of tariffs on random things?  All this does is invite the inevitable retaliation. Tit for tat. $50 billion early in the week, retaliation a day later, then a pause, then $100 billion on Thursday. To what end? Is it a bluff? Maybe. But bluffs can backfire and running a country isn’t the same as buying real estate. You get the impression that Trump maybe doesn’t understand what a tariff even is – maybe he thinks it’s a direct cash payment? Who knows.


The reality is of course much different and more frightening. And contrary to presidential pronouncement, a trade war is in fact NOT easy to win, protectionism almost always leads to conflict and the biggest losers are individuals who lose jobs and see the cost of living increase needlessly and the last time I checked, these people are also called “voters”. It’s a no one wins, everyone loses game.


Maybe, rather than using the blunt tariff instrument that has a marginal chance of success, wouldn’t it make more sense to really bear down on the two or three actual irritants you have with China – dumping, market access and intellectual property rights and maybe let the international institutions and rules America created to deal with trade issues do their jobs? I’m willing to bet that many countries would join that action rather than sit on the sidelines saying “Dude, what are you doing with this?”. Oh, and maybe lose your China-bashing lunatic economic advisor Peter Navarro while you are at it.


Dumb Trade Stuff Part 3 – OK, so it’s not all directed at Trump. This one is Canada focused. Can we please stop with the insistence on touchy-feely social justice items in trade deals? You can’t measure it, it interferes with other countries sovereignty and it makes us look like total flakes on trade. Either you want liberalized trade or you don’t. Stop trying to virtue signal everything. Canadians will be happier if the economy does better and, for better or worse, I am pretty sure that gender equality in Indonesia isn’t really a high priority item for the average automotive worker in Ajax.


Big oil find in Bahrain. Why this? I don’t know, I just found it interesting. Here’s the story. The national government of Bahrain announced it had found a major tight oil deposit just offshore. The find is estimated to have 80 billion barrels of oil and 14 TCF of natural gas, vaulting Bahrain into the big leagues as a producer if in fact the resource can be proven out and developed commercially – a big if. The government estimates it will produce some 200,000 barrels per day from this find by 2023.  Why does this matter? It matters because it shows that there are other sources of oil in the world and that they are still being discovered. It also underlines that while we in Canada continue to navel-gaze and debate each and every iota of the energy industry, other countries and actors simply go about their business, discover deposits and set about developing them. This new find could be up and producing, loading oil onto tankers and sending them to Montreal refineries before we even get first oil flowing through the TransMountain Expansion. Think about that.


Shooting ourselves in the foot Federal style – Bill C-69 and the end of Canadian energy as we know it. As a corollary to the Bahrain story, here in Canada we are in the process of re-inventing our regulatory process for how energy and energy infrastructure projects get approved via Bill C-69 and the replacement of the National Energy Board with the Environmental Impact Assessment Agency. At the parliamentary committee hearings, Canadian Energy Pipeline Association President Chris Bloomer offered a delicate, politically correct assessment of the bill when he said he doubted whether any new pipeline project would ever get started in Canada under the new structure. OK, not politically correct, but I would wager probably 90% accurate (there are always small projects that have to happen). As discussed here previously, the new rules are complex, incorporate vague and confusing social provisions, have uncertain timelines and are ultimately subject to political interference. Given that, yes it is highly likely that any self-respecting investor/proponent, domestic or foreign, would more than likely just throw up its hands and say, “that’s it, I’m out”. See Canada’s exodus of foreign capital if you want to know how that unfolds. Ironically, while this sector killing bill is being debated, the Federal government has the gall to tender out to hire a consultant for $300,000 to assess the competitive landscape for the oil and gas industry. I actually started to fill out the application for Stormont (hey, we like money as much as the next advisory firm) but then Dave said I should just tweet my blog to Justin, so I did.



Permania – I can’t quit you! Look, we can’t talk about investment, energy, pipelines, infrastructure, tariffs and all that jazz without talking about the Permian. Unconstrained growth, capex dollars piling up – it’s a thing of beauty. What’s that? Oil out of Midland sells at a discount to WTI? The Permian has an offtake problem? All that production is overloading the pipeline system and discounting prices? They’re starting to be forced into using expensive rail and trucks to move production?


Stop. You can’t have that problem. That’s OUR PROBLEM. So not only is the Permian sucking the life out of the Canadian energy sector and stealing all our capex dollars, now they have the nerve to steal our favourite issues too? Sheesh. What’s next, a Green Party mayor in Houston? Maybe we should send them the Federal Liberals to solve the problem.


Anyway, whatever do you suppose they are going to do to address this issue? Wait, I know the answer to this. Yes, more pipelines. How clever. I wonder how long it will take to get built. Decades right, what with all the needed approvals? What’s that? 2019/2020. Can you imagine that. From identified need to service in less than 3 years. Hopefully they get the gender equity consulting out of the way early.


One last pipeline comment. It turns out that in addition to the developing issue of Permian offtake capacity, the Gulf Coast is starting to have a heavy oil problem, as in they don’t have enough of it, mainly because of the ongoing disaster that is Venezuela. So Canadian imports into the region are actually up quite sharply in recent weeks and could go much higher, if only there was a more efficient and direct way to get the product there instead of the mish-mash of rail, pipe, barge and Uber-oil that is currently the way. Wait, there might be a solution to that? What was it called again? Oh yeah, that one. Keystone XL. What’s happening with that thing anyway? I wonder if someone shouldn’t make a call to TransCanada to find out. They really need to get that thing going before everyone changes their minds.


Hmm. Usual word count. I guess the block is gone.


Oh, and sorry I lied last week. Wish I was lying this week.


Prices as at April 6, 2018 (March 30, 2018)

  • The price of oil fell during the week despite a fairly bullish storage report. Something about trade
    • Storage posted a large draw
    • Production was up marginally
    • The rig count in the US was mixed
  • After a larger than expected withdrawal, natural gas recovered a bit from a steep fall…


  • WTI Crude: $61.93 ($64.88)
  • Nymex Gas: $2.699 ($2.732)
  • US/Canadian Dollar: $0.7843 ($ 0.7725)


  • As at March 30, 2018, US crude oil supplies were at 425.3 million barrels, a decrease of 4.6 million barrels from the previous week and 110.2 million barrels below last year. For those of you who care, the first quarter is traditionally an inventory building time and this year, inventories are flat.
    • The number of days oil supply in storage was 25.4 behind last year’s 33.5.
    • Production was up for the week by 27,000 barrels a day at 10.460 million barrels per day. Production last year at the same time was 9.199 million barrels per day. The change in production this week came from a increase in Alaska deliveries and a slight increase in Lower 48 production.
    • Imports fell from 8.148 million barrels a day to 7.898 compared to 7.275 million barrels per day last year.
    • Exports from the US rose to 2.175 million barrels a day from 1.578 last week and 0.575 a year ago
    • Canadian exports to the US were 3.430 million barrels a day, down from 3.477
    • Refinery inputs were up during the week at 16.936 million barrels a day
  • As at March 30 2018, US natural gas in storage was 1.354 billion cubic feet (Bcf), which is 20% lower than the 5-year average and about 34% less than last year’s level, following an implied net withdrawal of 29 Bcf during the report week
    • Overall U.S. natural gas consumption was down 6% during the report week, influenced by weather
    • Production for the week was up marginally. Imports from Canada were down 5% compared to the week before. Exports to Mexico were down 9% due to pipeline maintenance.
    • LNG exports totalled 21.4 Bcf.
  • Can you say “Break-up”? As of April 3 the Canadian rig count was 110 – 96 Alberta, 6 BC, 7 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 6, 2018 was at 808, up 11 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was flat at 194.
    • 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 flat at 12
    • 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%



  • Concho Resources signed a deal to acquire its rival RSP Permian Inc. in an all-stock deal of $9.5 billion, to expand its presence in the prolific Permian play. The agreement marks the largest takeover in the oil and gas industry since 2012 and the biggest pure-Permian deal ever. The acquisition is set to create a humongous Permian Pure-play and likely to make Concho one of the top energy producers in the Permian basin. Looked at another way, Concho paid $79,000 an acre (as opposed to the average price of $44,000) and close to USD $148,000 per flowing BOE for a resource with a 30% annual decline rate. Wow. And people say Vancouver real estate is over-valued.
  • Crescent Point Energy Corp. announced its land position in the emerging East Shale Duvernay light oil resource play, which totals over 355,000 net acres, or approximately 555 net sections, at a low entry cost of approximately $315 per acre. No. That’s not a typo.
  • ConocoPhilips sold some excess Permian assets and some South Texas Acreage for $240 million and reallocated its capital into the Austin Chalk liquids rich play in Louisiana and an additional 35,000 acres contiguous to its existing Montney properties. Before anyone gets too excited, this is not a reversal of the “get out of Canada now” capital exodus.
  • Justin Trudeau went to BC on Thursday to defend the TransMountain Pipeline Expansion and was met by many protestors who were decidedly unhappy. On Friday he went to Fort Mac and met with local officials and Oil company CEOs to assure them the pipeline would be built – they seemed happier. Jason Kenney was unhappy and tweeted that Trudeau needed to do more. Look, I get, but I’m kinda with PMJT on this one – this actually qualifies as “more”.
  • Trump Watch: St0len from Twitter friend Anas Alhajji: DJT – I want $50 billion in tarrifs!; China – $50 billion in tariffs back at you; DJT – Another $100 billion tariffs!; China – OK, we will match that;… DJT – Fine, we will make it $300 billion; … DJT to the American People: We have the best and biggest tariffs in HISTORY!!
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