Thursday, 11 December 2014

Canadian Pipelines in Purgatory

By: Mike Doyle, CAGC

Keystone XL is a proposed 1,897-kilometre pipeline that would carry crude oil from Hardisty, Alberta to Steele City, Nebraska, where it would link up with other pipelines that run to the Gulf Coast and the U.S. Midwest.

The pipeline would carry an average of 830,000 barrels of oil per day to refineries in the Midwest and the Gulf Coast.

TransCanada (TSX:TRP) would develop the US$5.4 billion pipeline. In May 2012, the company filed a new application for a presidential permit — a requirement for any cross-border pipeline —after the U.S. State Department denied its first application.

The Canadian Energy Research Institute estimates that Keystone XL will add $172 billion to the United States’ gross domestic product by 2035.

Earlier this year, the State Department put off its decision again, pending the outcome of a court fight in Nebraska over the proposed route. A decision is not expected before next year. 

However, last week’s midterm elections, which left the Republican party in full control of the U.S. Congress, could force the issue through expected legislation.

But there are potential pitfalls that could prevent progress on the pipeline.

Here are some of them. 

— The Veto: A bill needs two-thirds support in Congress to override a presidential veto — which is 67 votes in the 100-seat Senate. The bill being pushed by Louisiana’s embattled Sen. Mary
Landrieu does not have those votes. 

There’s already huge pressure on Obama from environmental groups to veto it, on the logic that he’d be tarnishing his own legacy on climate change by allowing the pipeline just after striking a historic emissions deal with China. 

One columnist in the Washington Post pointed to another concern: the bill starves Obama of valuable leverage he might prefer using in two months. 

The next Congress, to be sworn in early next year, will be dominated by Republicans. One of their biggest policy priorities — perhaps even their No. 1 issue — is pushing Obama to approve the pipeline. In exchange for that kind of political victory, Obama might have insisted on something in return from the Republicans.

 —The Legal Issues: The pipeline doesn’t even have an approved route, at least not for now. In Nebraska, the courts have thrown out the existing route, declaring that the state’s Republican governor used unconstitutional methods to approve it.

The case is before the state’s Supreme Court. Dave Domina, the lawyer fighting the pipeline on behalf of holdout Nebraska landowners, said he expects a decision by the state Supreme Court
soon, possibly by the holidays.

Domina said lawmakers need to remember not only that there’s a gap in the route in Nebraska but also that the final decision belongs to the president, not Congress. A hasty move in Washington could prompt more lawsuits, he suggested. 

Northern Gateway

Northern Gateway is a proposed 1,177-kilometre twin pipeline that would carry diluted bitumen from Alberta to the town of Kitimat on the British Columbia coast, where it would be shipped overseas by oil tankers. 

One pipeline would carry an average of 525,000 barrels a day of petroleum products west to Kitimat. The other pipeline would carry a daily average of 193,000 barrels of natural-gas condensate — used to dilute oilsands bitumen — east to Bruderheim, Alta., just north of Edmonton. 

Calgary-based Enbridge Inc. would develop the $6.5-billion pipeline. The company submitted an application for the pipeline to the National Energy Board in May 2010. Consultations were then held with opponents and supporters of the project. 

In December 2013, a federal joint review panel recommended approval of the project, subject to 209 conditions. The government approved the project, contingent on those conditions being met, and further consultations with affected aboriginal communities.

The Northern Gateway project is worth an estimated $300 billion in gross domestic product over 30 years. 

Energy East 

The $12-billion, 4,600-kilometre Energy East pipeline would carry 1.1 million barrels of crude oil per day from Alberta and Saskatchewan to refineries in eastern Canada. 

The project would involve converting an existing natural gas pipeline to oil, then building new lines in Alberta, Saskatchewan, Manitoba, eastern Ontario, Quebec and New Brunswick to extend the existing line. It would require construction of two marine facilities, on the Gulf of St. Lawrence near Quebec City and in Saint John, N.B. 

The project would also deliver oil to existing Quebec refineries in Montreal, near Quebec City and in Saint John. New pipeline would be built in Alberta, Saskatchewan, Manitoba, eastern Ontario, Quebec and New Brunswick.

TransCanada filed its regulatory application for Energy East to the National Energy Board two weeks ago. Several environmental groups have vowed to fight the pipeline, raising concerns over the ecological harm that would result from a spill as well the project’s enabling role in oilsands growth.

Trans Mountain Pipeline

Kinder Morgan’s proposed $5.4-billion expansion of its Trans Mountain pipeline would nearly triple its capacity to ship petroleum products to 890,000 barrels a day along a 1,000-kilometre route to Burnaby, BC up from the current daily flow of 300,000 barrels.

The pipeline would enable crude exports to Asia through the Vancouver area, but opponents of the Trans Mountain project have warned of the potential impact of a spill, either from the pipeline itself or from increased tanker traffic. 

The National Energy Board plans to begin oral hearings examining the Trans Mountain expansion in July of next year. A final report is due to federal cabinet in January 2016.

Monday, 1 December 2014

Analyzing the Downturn (of Oil) - Only Market Forces Will Increase Oil Prices and OFS Activity

From MNP, Oilfield Service News, December 1st, 2014

By: David Yager, National Leader, Oilfield Services

There was a time when the Organization of Petroleum Exporting Countries (OPEC) truly did control world oil prices. As producers of the greatest quantities of the world’s cheapest oil, OPEC – particularly Saudi Arabia – possessed what had come to be known as “swing” production. While the rest of the world produced every possible barrel, OPEC could adjust production and therefore prices. Increase production and prices would decline. Decrease production and prices would rise.

Those were the days. No longer.  At 30 million b/d OPEC only produces about a third of the 90 million barrels a day of the oil the world produces and consumes daily. The United States, Russia, Canada and China combined now produce as much oil as OPEC. With the exception of Russia, these other countries are not as dependent upon oil to power their economies as the 12 members of OPEC. The United States and China, the world’s two largest oil importers and consumers, actually benefit greatly from lower oil prices.

At the OPEC meeting on November 27 the decision was made to make no attempt to constrain production. Oil prices tanked immediately. In fact, world oil markets had already anticipated this decision to a great degree. With WTI closing at US$66.15 on November 28, crude traded at the lowest price in over five years, July 29, 2009. Western Canada Select (WCS, Canada’s blend of bitumen, synthetic crude and condensate) closed at Cdn$55.31. Following is a snapshot of crude prices for the last trading day of November, a year ago, and the average price for each commodity so far this year.

Source: First Energy Capital Corp.

All of these commodities are trading about $30 a barrel lower than their average price so far this year even when favorable Canada/U.S. currency exchange rates are taken into consideration. While WTI and Brent prices have improved by about US$2 a barrel in early trading today, they are still well below the levels that have generated the type of spending activity that OFS operators have become accustomed to in the past few years.

What does this mean for the Canadian oilfield services sector? There is no good news. Canada produces about 4.1 million barrels a day of conventional crude, bitumen, synthetic crude and natural gas liquids. If oil prices in 2015 were to stay at these levels, and natural gas stayed the same, the size of the pie as measured by the value of all the oil produced would fall about 29% or $45 billion compared to 2014 from 2014 record levels of about $155 billion. The figures that follow are the value of all hydrocarbons produced in Canada per year dating back to 1998. The red line is how 2015 could compare with previous years.

In reality, it isn’t likely to be this bad. What the $45 billion decline figures do not factor in is how much current oil production is “hedged” or locked in at higher prices on the futures market. At least for a while. Revenue in 2015 will be higher than estimated above for this reason. The other is a recovery in oil prices based on supply and demand fundamentals next year, which will be explained later in this article. 

There have been lots of theories floated about why OPEC (particularly the Saudis and other low cost producers like Kuwait, Qatar and United Arab Emirates) decided not to reduce output and sustain higher prices. One was to punish a potentially nuclear and ambitious Iran. The other was to put pressure on expansionist Russia.

But what it really means is that market forces have ended OPEC’s ability to dial in world oil prices. Likely forever.

The biggest single change in world oil markets in the $100 a barrel world since 2008 has been the application of new technology and extraction methods in North America to previously uneconomic or marginal reservoirs containing oilsands and shale oil. Canada and the United States have increased their combined production by about 5 million b/d in the past six years. This is the biggest change in world oil production patterns in decades. If prices stay at high levels, this will continue to increase. Estimates from CAPP and CERI have indicated that Canada could double oilsands production in the next ten years, triple in the next 30. As has been written many times, the United States appears to be able to continue to increase production in oil shale deposits in places like the North Dakota, South and West Texas.

So what really happened with OPEC last week is global crude oil market realities have been analyzed, acknowledged and accepted. Should OPEC shut in production to sustain higher prices, the result would be a permanent loss in market share because it would keep new supplies of higher cost oil economic to develop. You can pay now or you can pay later. The Saudis in particular have finally concluded that they will indeed pay and have decided to trade short term pain for long-term market share and price stability.

Going in to the OPEC meeting, analysts figured that the market was oversupplied by up to 2 million b/d and only a production cut of 1 million b/d would have a meaningful impact on oil prices. The good news is a 1 million b/d swing in market fundamentals is achievable in 2015.

Low prices will spur demand. A demand increase of 500,000 b/d is less than a 6% increase in world consumption. With prices down by 1/3 (or more if it gets worse), this should be achievable as airline fares decline and it becomes cheaper to travel by automobile everywhere. On a global basis, a US$30 a barrel drop in oil prices will transfer a whopping US$2.7 billion a day or nearly US$1 trillion a year into the pockets of oil consumers. This will be a very positive economic stimulus to the world economy and increase demand for petroleum. 

The other factor is a 500,000 b/d decline in production. While prices are still high enough that nobody is likely to shut in any existing production, the economics of the next tight oil play to be drilled are very different. Many shale oil wells experience production declines of 50% per year. Only steady drilling can sustain or increase production. Access to capital for tight oil developers will be squeezed through reduced credit facilities for existing production (with reserve values re-priced at current prices) and contracted equity markets.

Only the best and most efficient operators in possession of the best tight oil or natural gas liquids assets will be able to sustain their drilling and development programs. It is not a reach to conclude that reduced drilling caused by squeezed economics could easily cause a meaningful decline in North American tight oil and liquids production halfway through 2015. Of the 4 million b/d of increased tight oil production in the U.S., 500,000 b/d is about a 12.5% decline.

As supply and demand start to fall into line, prices will stabilize then improve. Many analysts are forecasting an oil price recovery in the second or third quarter of 2015. This explains why.

What is the outlook for the oilfield services sector? The 1998 – 2015 revenue figures tell the story.

The 11-year run from 1998 to 2008 was fantastic for OFS. The size of the pie increased over 500% during this period and the demand for equipment and services grew with it. After the major correction of 2008, a similar growth cycle occurred where the value of all the oil and gas produced in Canada increased by over 70% from $90 billion in 2009 to over $155 billion in 2014. 

While the type of equipment and services changed dramatically (a switch from many vertical gaswells to fewer but more expensive horizontal oilwells), demand stayed steady. Companies grew. Manpower shortages were endemic. OFS spent billions on new drilling rigs, frac spreads, crude oil transloading terminals, and production infrastructure to handle growing production.

Oilsands development has been delivering steady growth for OFS for almost 15 uninterrupted years. That will end in 2015 and is, in fact, already underway.

Everything has changed in the past 90 days. Forecasts from PSAC and CAODC for over 10,000 wells in 2015 released in the past month were based on US$85 crude. Now prices are only 80% of those levels, possibly rendering these figures optimistic (again, hedged production will increase total cashflow available from exiting production). Oilsands projects that have been postponed, delayed or cancelled will surely stay that way until oil prices stabilize and concrete indications of lower-cost pipeline takeaway capacity materialize.

In these market conditions OFS owners and managers will be asked to share the pain with their E&P company clients through lower prices. While nobody will welcome having to do more for less, it is impossible for OFS to succeed without its clients succeeding. One strategy that can help is consolidation by which OFS operators spread their management and fixed costs over a larger operation and revenue stream, thus creating improved overall margins at lower prices. Another is for companies to exit the business which, unfortunately, always happens when this business contracts this much this quickly.

Increasingly, more crude market analysts and producers are beginning to see a significantly lower price deck as the reality for the next couple of years. This is because many of the tight oil and natural gas liquids plays will still be profitable at $70 or less, and thus development will continue, albeit at lower levels. This will be assisted by lower prices for goods and services and improvements in operating efficiency. And new technologies that reduce costs and enhance production are always winners, regardless of market conditions.

Most oilpatch entrepreneurs purport to be big fans of free markets. What goes up in this business always comes down.

A Moral Case for Fossil Fuels

Recorder Article by: Mike Doyle, President of the CAGC – the Canadian Association of Geophysical
Contractors - representing the business interests of the seismic industry within Canada.
The CAGC website may be found at

It is time to defend ourselves against the anti (Canadian) Oil Interests. The new President/CEO of CAPP, Tim McMillan, says he wants to mobilize the silent majority of energy consumers to speak on its behalf as the industry looks to counter the environmental groups’ campaigns against major pipeline projects.

“I want to convert you from being an energy consumer and endorser to becoming an energy advocate and energy citizen.”

Cody Battershill of Canada Action says it is time to Balance the Conversation on Canadian Oil & Gas - The #oilsands are a major contributor to the prosperity of our country! When you attack our energy you attack us.

Alex Epstein has recently put out a book from which I take the final chapter as below.

From the Book “The Moral Case for Fossil Fuels” by Alex Epstein - Published by Penguin Random House - 2014

In 2007 and 2008, candidate Obama declared his intention to destroy fossil fuel energy in America and around the world, calling for “emissions targets” that would make it illegal to use more than 20 percent of today’s levels. About oil, the most versatile fuel in the world, which powers 93 percent of our transportation system and, through shale-oil booms in North Dakota, Texas, and elsewhere, has been one of our few sources of economic hope, he said:

“At the dawn of the twenty-first century, the country that faced down the tyranny of fascism and communism is now called to challenge the tyranny of oil. . . . For the sake of our security, our economy, our jobs and our planet, the age of oil must end in our time.”

While he was saying this, the oil industry he was comparing to the mass murderers of the twentieth century was perfecting shale-oil (and shale-gas) technology. Thanks to Obama’s lack of oversight in this area, shale energy technology became the leading positive economic force during his administration.

That is, a revolution in fossil fuel technology occurred because our government didn’t know enough about it to demonize and ban it. This is not the kind of thing we want to depend on.

What if Obama had been aware of this revolution in the making ten years out? He would have no doubt regarded it as a dangerous practice to be stopped, given that he viewed oil as a “tyranny” to be ended, not expanded. Technological progress in the United States would have been thwarted—and with it, progress around the world. The United States is the best place in the world to do fossil fuel research and development, because we have the most private property that can be bought and explored, rather than delegated at the whim of the state.

This example to me captures where we are—incredible threats to progress and incredible opportunities for progress. We are still arguably at the beginning of the fossil fuel age. In several decades we may be able to drill efficiently and safely at any depth, efficiently turn coal or gas into oil, and use fossil fuels to help develop new generations of technology (likely nuclear) and help increase the amount of the most valuable resources—food, water, beauty, and most important, human time. All indications are that, as the amount of CO2 in the atmosphere increases from .04 percent to .05 or .06 percent, we will continue to benefit from more plant growth. If new climate dynamics are discovered, we will adapt—always keeping in mind as full context the indispensable value of industrial civilization.

We can have it all.

We just need to be clear on what is right, then take the time and sometimes social risk to try to reach the people who matter most to us. I wrote this book so you could hand it to the people who matter most to you—and so that you could take its ideas and make them your own, telling the people who matter to you how you think and feel.

I wrote this book for anyone who wants to make the world a better place—for human beings—including many, many people who would start this book opposed to or at least suspicious of fossil fuels. Having held that position myself before, I know it can be well motivated. The idea of ruining the world for the less fortunate and, even worse, for our children or grandchildren is horrifying to us. Thus, when someone tells us of a major risk that our behavior is causing, we want to do something about it.

What we are not taught is that the biggest risk is not using fossil fuels, and that using them is incredibly virtuous. We are not taught that we’re building a civilization that serves us and the future, that we’re creating knowledge and resources that can enrich everyone around the world. We’re not taught that the choices we make often reflect an extremely rational calculation that balances benefit and risk. We’re not taught that some people truly believe that human life doesn’t matter, and that their goal is not to help us triumph over nature’s obstacles but to remove us as an obstacle to the rest of nature.

Make no mistake—there are people trying to use you to promote actions that would harm everything you care about. Not because they care about you—they prioritize nature over you—but because they see you as a tool.

The unpopular but moral cause of our time is fossil fuels. Fossil fuels are easy to misunderstand and demonize, but they are absolutely good to use. And they absolutely need to be championed.

There are many specific battles to be fought. The venue and strategy for each is ever changing, which is why the specific actions we take need to be timely and coordinated. That’s why this book has a Web site,, which will let you know about the latest opportunities to fight for energy liberation, whether it’s promoting a series of debates over fossil fuels, writing a public comment on the EPA’s attacks on coal, or sharing inspiring stories about industrial progress around the world.

But no matter what you read, the need for moral clarity will always be timely. Here, in a sentence, is the moral case for fossil fuels, the single thought that can empower us to empower the world: Mankind’s use of fossil fuels is supremely virtuous—because human life is the standard of value, and because using fossil fuels transforms our environment to make it wonderful for human life.

Somewhere in all of this we begin to believe the repeated rhetoric. Fossil Fuels and Energy have brought prosperity and safety to the human species. And now “civilized” factions wish to turn back the hand of time. This is a good thing? A smart thing?

From Brainy Quotes on the Internet:

Sometimes a concept is baffling not because it is profound but because it is wrong.

-          E. O. Wilson