Sunday, 24 January 2016

FOUR REASONS DIVESTMENT DOESN'T WORK:


Oil and Gas 101: THE DIVESTMENT CHALLENGE

What is the Fossil Fuel Divestment Movement?
The fossil fuel divestment movement is an attempt to convince groups such as wealthy individuals, universities and major pension funds to divest themselves of financial assets in companies involved in fossil fuel extraction. It is being promoted by some environmental NGOs as a means to combat climate change.
In Canada, 19 universities currently have a student-led divestment campaign. To date, only Concordia University has begun divestment of about $5 million from their portfolio.
Some universities will be voting on divestment motions in upcoming months, and others have already rejected the idea, citing the benefit to students and all Canadians created by the energy industry.

THE ECONOMIC IMPACT OF DIVESTMENT: UNIVERSITY OF CHICAGO STUDY
A study performed by Daniel Fischel (2015) of the University of Chicago Law School compared two hypothetical investment portfolios over a 50-year period: one that included energy-related stocks and one that did not.
The University of Chicago study found divested portfolios performed more poorly. Meanwhile, there was no evidence of financial impact on companies targeted by divestment.

 



RESPONDING TO DIVESTMENT PROPONENTS
When engaging divestment proponents, Suncor senior sustainability specialist, Peter MacConnachie, says it’s important to discuss both the economic and the motivational sides of the issue. “I often ask students, what are you trying to achieve? When they say ‘Stop climate change,’ – which, at the end of the day, means changing atmospheric CO2 levels – I point out that this approach, divestment, simply isn’t going to do it.”
Beyond the sheer size of fluidity of capital markets, making it unlikely for divestment proponents to achieve tangible bottom-line success, MacConnachie points out a number of factors divestment proponents typically overlook (see Four Reasons sidebar). These include the fact that 80 per cent of the world’s oil and gas reserves are controlled by state-owned enterprises with no publicly traded shares.
“Even if divestment proponents were somehow wildly successful, all that would happen is that all the OPEC nations would say, ‘Thanks,’ and take up more market share,” says MacConnachie. Oil production, consumption and the resultant GHG emissions would be unaffected.
MacConnachie, who works closely with Suncor’s Investor Relations team suggests  divestment proponents would be better served directly engaging with oil companies to continually improve GHG performance, rather than effectively removing themselves from the conversation through divestment.
FOUR REASONS DIVESTMENT DOESN’T WORK:
1. COUNTER-PRODUCTIVE:
Many companies in the oil and gas industry are driving innovation in the very areas highlighted by some divestment groups as the reason not to invest in them.
2. STATE OWNERSHIP:
Eighty per cent of the world’s oil supply is controlled by government-owned oil companies who don’t rely on publicly traded shares, and of then don’t face the same requirements for transparency and environmental performance that public corporations do.
3. GROWING DEMAND:
The international Energy Agency estimates that global energy demand will grow 32 per cent by 2040. Fossil fuels are expected to continue supplying the majority of the world’s energy needs.
4. COMBUSTION AND CONSUMPTION
Production accounts for only 20 to 30 per cent of the GHG emissions associated with fossil fuels. It’s the combustion of fossil fuels (through vehicles or production of goods and services) that creates 70 to 80 per cent of those emissions --- and those emissions are created through consumer demand. Divestment ignores this reality.


Friday, 22 January 2016

EXPECTATION vs REALITY

EXPECTATION AND REALITY
by maryline vuillerod and jeff kralowetz
It may seem intuitive that Canada could gain more benefit from its crude oil resources by refining them in Canada and exporting refined products. But this theory fails to account for the structure of global markets, constraints in infrastructure and geography, and trends in global demand for refined products.

THE STRUCTURE OF GLOBAL MARKETS
 Any company considering investing $10 to $15 billion dollars in export refineries must take into account significant Asian growth that has been matched by rapid building and even over-building of refining capacity in China, India and the Middle East. Even there, refinery utilization has fallen.
Any new Canadian refinery would enter a market in which capacity has been over-built and refinery utilization has been falling since 2006, particularly in the Organization for Economic Cooperation and Development (OECD) member countries.
 Source: IEA, June 2014 Medium Term Market Report: Market Analysis and Forecasts to 2019

 
Oceania Constraints in infrastructure

 Furthermore, the world is cutting back on refinery construction projects and closing existing capacity. Since 2008, 4.5 million barrels per day (b/d) of OECD refining capacity has been shut down. Source: IEA, June 2014 Medium Term Market Report: Market Analysis and Forecasts to 2019



The Goldilocks principle states that reasonable argument falls within certain margins rather than occupying extremes. Consider the argument over how much refining is right for Canada. One extreme holds that we should refine all Canadian crude in Canada; the other that we should refine no crude in Canada.
The former suggests markets for refined products are unlimited and there is more value in refining crude than selling it as a critical Canadian commodity. The latter proposes reliance on imported transportation fuels, exposing Canada to supply insecurity and foregoing the associated economic and social benefits of refining.
The reasonable position is the middle ground, where market forces dictate the wisdom of selling and refining crude.
Refining is a complex business and an integral component of Canada’s oil and gas value chain. The industry provides jobs for nearly 18,000 workers and contributed over $5 billion to GDP in 2014. The industry operates 15 refineries in seven provinces for a total capacity of nearly two million barrels per day—enough to meet Canadian demand and ensure we are a net exporter of products.
 It is an industry that has been shaped by the market, if sometimes harshly. Since 1970, 20 refineries have closed; others have increased efficiency and expanded their capacity to remain competitive and satisfy Canada’s current demand. Production and demand in Canada are in positive balance, with Canada a modest net exporter of refined products.
The outlook for demand is flat, which explains why, to date, investors are skeptical of new refinery proposals such as BC-based Kitimat Clean and Pacific Future Energy. Kitimat Clean is projected to cost $21 billion—with requests for government loan guarantees in the vicinity of $10 billion.
 How will local declining demand impact the business case? Where are the markets?
Canada’s export refiners must compete on a continental and global stage to survive and thrive. We currently export refined products where geography— specifically tidewater locations— makes us competitive. For example, the northeastern U.S. is a strong and reliable export market served by refineries in Newfoundland and New Brunswick.
In effect, we have struck a marketbased balance between selling and refining crude. According to the Goldilocks principle, we likely have got it just right.

Even in non-OECD countries, refinery expansion and construction is being scaled back in the face of over-building.
Source: IEA, June 2014 Medium Term Market Report: Market Analysis and Forecasts to 2019



SHELTERED BUT NOT IMMUNE
 The U.S. has been the exception to refinery construction cutbacks. Why? Cheap natural gas for fuel, the U.S. ban on crude exports that keeps feedstocks cheap, and easy access to Latin American and other export markets for refined products from the Gulf Coast. But this experience is regional. Over on the U.S. east coast, there has been 800,000 b/d in refinery closures in last 10 years.
 Canadian refiners are similarly affected, as evidenced by recent refinery closures in Montreal and Dartmouth. While refinery expansions have occurred, no new refineries have been built in Canada since the 1980s (a new 50,000 b/d bitumen refinery is now under construction in Alberta; see next page).
TRENDS IN GLOBAL PRODUCTS DEMAND AND SUPPLY
To complicate matters, North American products consumption is declining as a result of vehicle fuel efficiency standards, ethanol/ biofuels mandates, a more urbanized population and the growth of online shopping. This situation exists in all OECD countries. The sole markets where demand for refined products is growing are non-OECD countries. As a result, North America is oversupplied with refined products, and the glut is growing—and will continue to grow at least through 2019.


GLOBAL MARKET COMPETITION FOR CANADIAN REFINING INVESTMENT
What prevents Canada from competing globally in refined products markets as the U.S. Gulf Coast refiners have? The answer is that Canada is constrained by geography. We are located further from Latin American or Asian markets where refined product demand is growing.
And today there is no way to cost-effectively move crude to a coast, refine it and compete with a Chinese or Indian refiner running Russian or Middle Eastern crude that arrived at a lower cost.
Canadian crude availability is located offshore in Newfoundland and land-locked in the West—away from high-demand areas. We can’t move closer to clearing markets where the wholesale commodity price is determined.
North America is oversupplied with refined products, and the glut is growing – and will continue to grow at least through 2019.

CONSTRAINED BY CONFIGURATION
Not all refineries are alike. East coast Canadian refineries were built to run light crude. American Bakken and Eagle Ford feedstocks are good options, but most domestic Canadian crude production is heavy. Therefore, these refineries are not well placed to monetize Canadian domestic crude resources.
Currently, east coast refineries are refining less than 50 percent of the east coast offshore Canadian grades. And locking into one feedstock source threatens the profitability of refiners. Building a refinery solely to monetize one type of crude is perilous, as the light/heavy spread can change, and margins can contract or even disappear.

Mandating processing in Canada would almost inevitably raise prices for Canadian consumers. In the end, the best way to achieve optimal natural resource utilization and fair prices for consumers is to allow markets to function rationally, allowing market forces to allocate supply where it is needed. The constraints of inflexible infrastructure and the geographical challenges of stranded supply pools and scattered demand centers no doubt complicate the efficiencies that markets could bring. But intervention along the supply chain will only stop the flow and distort prices in ways we simply cannot predict.

Wednesday, 20 January 2016

EVOLUTION vs. REVOLUTION

Mike Doyle is the 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 www.cagc.ca.

It has been a tough couple of years. All of Canada is figuring out how closely it is tied to the price of oil and other resources. Our dollar is dropping, EI rolls are being hit in all Provinces, and our growth is slowing. We are absolutely moving to a lower standard of living. The Celebrity Circuit decries the greed of the Oil and Gas Industry which is allegedly ruining our world yet fails to appreciate where their wealth came from – on the backs of a culture with leisure time and excess money from a standard of living brought on by fossil fuels. On this note an interesting article follows:

EVOLUTION vs. REVOLUTION
By Pierre Desrochers is an associate professor of geography at the University of Toronto.
Magazine: Canadian Fuels Association - Perspectives – Fuel 2015


From wind to horsepower to steam power and internal combustion engines – how we get around has evolved our world.

Two centuries ago, renewable technologies such as human and animal power, windmills and watermills helped feed and drive economies for the world’s 1 billion human inhabitants. Those power sources were, of course, the best available.

At that time, humans had a one in three probability of being malnourished, average incomes of around a dollar a day and a life expectancy of around 30 years. Life was short, even for most of the relatively well off. Put another way, people’s average standard of living in wealthier nations in the early 1800s was similar to the poorest rural inhabitants of today’s least developed economies.

Then something extraordinary happened….

Humans began to develop coal, crude oil and natural gas-powered technologies. With the introduction of the internal combustion engine, fuelled by hydrocarbons from petroleum, the commute to prosperity and personal independence was underway. These innovations played a crucial role in changing some very grim statistics.

In 2015, human life has improved beyond recognition in most of the world, especially in developed countries. We are born, go through our daily existence and die surrounded by petroleum-derived products, and petroleum continues to be the most reliable liquid energy known to humankind. It has brought us greater wealth by enabling swift and affordable transportation, by bringing us consumer goods that improve our lives, by fuelling the delivery of foods and other necessities from around the world—the list goes on. Our resulting greater wealth has helped society build better infrastructure, technologies and supply chains of all kinds that constitute our best possible insurance against starvation and other potentially fatal challenges.

The fact is, petroleum-derived products have changed our lives, mostly for the better. And that reality isn’t going to change any time soon.

Has our transformational relationship with petroleum-based fuels arrived with some risk? Certainly. Greenhouse gas emissions are a serious concern in many quarters of society and there is no doubt that we must move forward with measures to protect the environment from further harm. But the associated rewards of having modernized society through the use of petroleum-based products far outweigh the hazards by most people’s reckoning.

Consider a world without petroleum-based products. Life as we know it would be brought at a near standstill, as roughly two thirds of these products are used as fuels to power land, water and air transportation. Cars and, to a lesser extent, buses, trains and aircraft give us unprecedented individual mobility, not to mention the associated benefits such as access to employment, more varied recreational options—in general, greater prosperity and personal independence.

Equally important, the large-scale, reliable and affordable long distance transportation of goods—be it by petroleum powered trucks, railroads and container ships—has also delivered a wide range of benefits.

Consider:
• improved nutrition with the concentration of food production in the areas best suited to grow it, making food more plentiful, diverse and affordable
• the eradication of famines by moving surpluses from regions with good harvests to those that have experienced mediocre ones
 • large-scale urbanization and the wealth creation that can occur only when a large number of people move away from the countryside and into cities Can you imagine a world in which we would be comfortable getting along without these conveniences and necessities? Neither can I.

So, what do we do?

Many options, but no magic solution

There is much wishful thinking in society about a “revolution” in transportation energy that would see widespread adoption of electric cars, for instance, or hydrogen fuel cells on the road in high numbers. It’s an alluring fantasy indeed.

But I prefer to focus my attention on the realities: No viable alternative exists at present to the high energy density, affordability, relatively clean combustion, relative safety, greater ease of extraction, handling, transport and storage of raw product than petroleum-derived fuels. Alternative power sources such as wind turbines, solar panels and geothermal systems that produce electricity are showing some promising applications. And many talented individuals and organizations are working toward incremental solutions that will, eventually, broaden the mix of fuels available and the technologies to utilize them.

But where the rubber hits the road in today’s day and age, electricity has been shown not to be of much practical use— at least not until a radically new battery design comes along that can reliably and sustainably power trucks, aircraft or container ships. Most locomotives continue to be powered by diesel because battery technology is not yet a realistic option for trains that travel beyond the geographical confines of large urban areas. Generous taxpayer-subsidized research has enabled some progress with battery electric, hybrid electric and plug-in hybrid vehicles for regular Canadians. But we have not yet seen meaningful gains in market share against gasoline or diesel-powered cars.

Part of the challenge is the limited power and range of electric vehicles, the charging period they require, their performance in cold weather (relatively poor) and security concerns, especially in collisions. Another significant challenge is the time and investment Canada will need to build a robust production and delivery infrastructure for electrically powered vehicles. The fact is, you have to fill up somewhere, and you can’t always be close to home. Realistically, Canada will need a national network of fuelling stations for electric cars (likely decades in the making) before Canadians will adopt these vehicles in high numbers.

One bright spot for alternative fuels is the recent abundance and affordability of natural gas, which, in its liquid form, could be a worthy option in some niches. But natural gas is not as energy dense as petroleum fuels. And, again, Canada faces a challenge with the delivery infrastructure for natural gas. Realistically, natural gas is well suited to vehicles that have large storage capacity and that can return regularly to fuelling stations. This makes it a viable alternative for city buses, which is encouraging.

 As for biodiesel and ethanol, even Canada does not have sufficient agricultural capacity to produce more than a tiny fraction of the fuel our modern economies would require without gasoline and diesel.

The future will see incremental innovation

Most observers agree that over the next 25 years or more, petroleum-based fuels will provide 85 percent of global transportation needs. That’s the reality and we need to move forward as constructively as possible within it. Without a doubt, climate change is a major concern and focus for Canadians, and fossil fuels contribute to the GHG production that has exacerbated climate change.

But we’re getting better.

The Canadian transportation fuel industry had made great strides in reducing its GHG production at refineries (page 32). More efficient fuel consumption by Canadians, better driving behaviors (page 26) and smart urban planning are all part of the short-term solution to reducing Canada’s GHG production (page 12).

 Petroleum-based fuels are far from perfect. And they clearly will not last forever. But they have been a remarkable blessing to humanity, and the way humans use them continues to improve with every passing year. Together, Canadians can make a difference in reducing transportation’s environmental footprint by fully understanding the complexities and options within our situation, by accepting the realities of our continuing dependence on petroleum-based fuels, and by sharing in the real, actionable opportunities for becoming more environmentally aware and responsible within a society that will continue to be petroleum-based for many years to come

Appreciate what we have before fear and politics take it all away……..

From Brainy Quotes

Growth is the only evidence of life.
John Henry Newman


Monday, 18 January 2016

Saudi Arabia: A Weak Kingdom On Its Knees?

The great Kingdom of Saudi Arabia—the long-time dictator of crude oil prices for the world—is struggling on all fronts.

The Saudis are losing their proxy wars in both Syria and Yemen; their OPEC leadership is under threat; they are not winning the crude oil price war; and its long-running alliance with the West is in question.

From Saudi Arabia’s perspective, Iran seems to be gaining ground everywhere. Saudi Arabia has several weaknesses that help explain the current anxiety emanating from Riyadh.

1. Saudi Arabia losing its leadership in the OPEC
Saudi Arabia has been the default leader of OPEC; however, despite Saudi insistence to the contrary, the U.S. shale boom, increased Russian oil production, and a very resolute Iran are challenging this leadership.

The result is that Saudi Arabia now finds itself powerless in supporting oil prices. Instead of the much-needed production cuts, during the 4 December 2015 meeting, the OPEC nations refused to adhere to any ceiling, which has been the practice for years.

Related: Get Ready for Iran’s Oil: Sanctions Could Be Removed Next Week
2. Burning through reserves—fast

(Click to enlarge)
Source: www.tradingeconomics.com

Iran is waiting for the lifting of sanctions, expected sometime in 2016, to pump more oil to improve its economy, whereas the Saudi’s are losing they are burning through their cash reserves quickly. The above chart speaks for itself, depicting the kind of damage low oil prices are inflicting on Saudi reserves. By the most optimistic opinion, Saudi Arabia can survive low oil prices only for four years.

3. Iran has assumed a very significant leadership role among Shia Arabs
Both Iran and Saudi Arabia are currently locked in a bitter proxy war on two fronts: Syria and Yemen.
Iran has the support of Hezbollah in Lebanon, along with support from the majority of Shiites in Iraq. More to the point, Iran has even managed to grow its Shiite support base among Sunni-ruled nations. The execution of Shia Sheikh Nimr Al-Nimr by the Saudis is an indirect acceptance of the growing influence of Iran among the suppressed 15 percent Shiite population in Saudi Arabia. This shows that the Saudi leadership is feeling threatened on their own soil.


Related: Saudi Aramco IPO More About Geopolitics Than Finance

4. Saudi Arabia cannot defeat Iran in a direct war
Iran is a much larger nation than Saudi Arabia by population and has held its own in numerous long wars. By comparison, the Saudis have an army that is inexperienced, led by loyalists of the Royal family who occupy plum postings. These are not the war-hardened generals of Iran.

While Saudi Arabia has a nice arsenal with the latest weaponry, the kingdom is heavily dependent on the West for its use and maintenance. Its indecisive and ineffective handling of three conflict fronts—Iraq, Syria, and Yemen—give us no confidence in its ability to take on Iran.

5. Saudi Arabia knows it won't have U.S. support for a direct war with Iran
The painfully misguided wars in Iraq and Afghanistan are enough to deter the current U.S. administration from entering into full-fledged war in the Syrian and Yemen theaters. Washington's non-committal stance, along with efforts to broker a deal with Iran, should serve as very loud signals to Saudi Arabia. The message to the kingdom is this: Don't go to war with the hope that that U.S. will support you. And without the West, Saudi Arabia knows it stands no chance of winning a war against Iran. The royal family will probably not take the risk of losing power by indulging in such a war.

These relationships are anything but clear, and everything about balance. So the U.S. will continue to sell weapons to Saudi Arabia to allow it to maintain a bit of balance—with the latest deal approved in October—and Washington and Tehran will continue to play cat and mouse as they near a nuclear deal and a removal of sanctions. This is best illustrated by the recent detainment and then quick release of U.S. sailors for an incursion into Iranian waters, and the statement and then denial by Iran that it had completely closed off a key nuclear reactor that would have sealed the nuclear deal.

Related: War Between Saudi Arabia And Iran Could Send Oil Prices To $250
The Saudis are in a state of panic all around—from its OPEC status and dwindling reserves to its proxy wars that absolutely cannot turn into full-fledged wars and its growing friendlessness. The fact that oil fell briefly below $30 a barrel on Tuesday for the first time in 12 years won't have helped.
At the end of the day, Saudi Arabia has overextended itself, and overestimated its prowess and it does not have the clout that it once had to be able to do this effectively.

If you're wondering whether there will be an all-out war between Saudi Arabia and Iran, it's unlikely. At this point, the Saudis are likely to continue the proxy war and hope that the Iranians do something foolish to upset the nuclear deal with the West. Until then, Saudi Arabia will make a lot of noise and attempt subversive activities, but nothing more.


By Tom Kool of Oilprice.com

Why cheap gasoline is a setback for going green

The Globe and Mail


Barack Obama can expect a hero’s welcome when he visits the Detroit auto show for the first time as U.S. President this week. The Detroit Three auto makers owe their current glory to Mr. Obama’s 2009 bailouts of General Motors and Chrysler and the domestic oil boom that occurred on his watch. Almost 650,000 U.S. auto jobs have been added since he took office. New-car sales set records on both sides of the Canada-U.S. border in 2015, after hitting near three-decade lows in 2009.

There is just one very big thing wrong with this picture. Mr. Obama’s grand plan for sparking a transportation revolution with hefty subsidies for electric cars and increasingly stringent fuel-economy standards has been entirely overwhelmed by surging U.S. oil production (and the resulting low gas prices) and consumers’ love of SUVs and pickups, which generate the highest profit margins for auto makers, but which consume the most gas and produce the highest carbon emissions.

The average fuel efficiency of new vehicles sold in the United States fell throughout 2015 to hit 24.9 miles per gallon (9.45 litres per 100 kilometres) in December. Auto makers were supposed to market 2016 fleets with an average fuel economy of 35.5 mpg (6.6L/100km) under a 2011 agreement with the Obama administration that the Canadian government also signed on to. They won’t even come close. The average mileage of cars sold this year is expected to fall again.

The transportation sector accounts for more than a quarter of U.S. greenhouse-gas emissions and a similar, if somewhat smaller, proportion in Canada. This requires the auto industry to be a key partner of governments in reaching emissions-reductions targets. Both Canada and the United States have been banking on higher sales of compact cars and electric vehicles to attain their targets.

Instead, the subcompact-car market is comatose and EV sales are on life support. Both categories of vehicles experienced declining sales in 2015. Despite offering more EV models every year, the auto makers are deeply conflicted when it comes to promoting these vehicles. They lose money on most EVs. And because no large auto maker produces its own batteries, the costliest component in an EV, they prefer selling cars with the gas-powered engines they do design and manufacture. It’s a question of control.

EVs were a tough sell when gas was at $4 (U.S.) a gallon ($1.05 a litre) in the United States. With gas below $2 a gallon, they’re an afterthought. Regulations in California, where auto makers must sell an increasing proportion of EVs or buy credits to offset the sale of gas-guzzlers, have provided some support. But the EV market remains a niche sector that mostly caters to well-heeled Tesla fanatics.
Fewer than 120,000 of the 17.4 million new cars sold in the United States in 2015 were all-electric models. Fewer than 6,000 EVs were sold in Canada in the first 11 months of 2015, accounting for 0.33 per cent of all new-car sales. Adding in sales of hybrids bumps the figures up somewhat, but not enough to signify real change.

Expect auto makers to push for a relaxation of fuel-economy standards that are supposed to reach 54.5 mpg (4.3L/100km) by 2025, wreaking havoc with North American greenhouse-gas targets. Without exponentially higher gas taxes and massively larger tax rebates for electric cars, neither of which are likely any time soon, there is little prospect of consumer uptake of EVs.

Even in China, which has the most lucrative electric-vehicle incentives on the planet, EVs accounted for fewer than 200,000 (according to the most liberal estimates) of the record 21.1 million passenger cars sold last year. EV enthusiasts call China a great success. If that’s what success looks like, the planet is truly in trouble.

In November, the Paris-based International Energy Agency predicted that oil prices of around $50 (U.S.) per barrel through to 2020 would dramatically stall development of low-emissions vehicles, leading the world to forgo “around $800-billion-worth of efficiency improvements in cars, trucks, aircraft and other end-use equipment, holding back the much-needed energy transition.”

When even the greenest president ever touts low gas prices as great news – “Gas under two bucks ain’t bad either,” Mr. Obama said in touting his achievements in last week’s State of the Union address – you can hardly blame U.S. consumers for going on a joy ride. Their love affair with the internal-combustion engine is stronger than ever. That’s what saving the auto industry gets you.



Thursday, 14 January 2016

Analysts Differ On Outlook For Oil Markets

By: Pat Roche

Article originally published by the Daily Oil Bulletin on Jan 13, 2016. It can be accessed here: http://www.dailyoilbulletin.com/article/2016/1/13/analysts-differ-outlook-oil-markets/  



The global oil glut will shrink in the second half of this year and supply will match demand in 2017, a top analyst expects.
World crude production currently exceeds demand by about 1.5 million bbls a day, and that oversupply will continue during the first half of this year, but will drop significantly in the second half, predicts Mike Wittner, head of oil market research at Paris-based investment bank Société Générale S.A.
“So the important thing is the second half is going to look and feel much different than the first half of the year,” Wittner told a Conference Board of Canada oil and gas conference in Calgary on Tuesday.
He said statistics about oil inventories in Organization for Economic Co-operation and Development (OECD), which are more reliable than non-OECD data, tend to drive prices.
In the second quarter of this year, a lower OECD stock build will be “the light at the end of the tunnel for a more balanced market in 2017,” Wittner predicted. “So just to be clear: this is not going to be a balancing year; it’s next year. But by the second half of this year we think we’re going to get a taste of that.”

U.S. shale decline to accelerate


Wittner expects the decline in oil production from the three big U.S. shale plays to gather momentum in the latter half of 2016.
In the wake of the oil price slide, which began in mid-2014, production from the Bakken, the Eagle Ford and the Permian has been more resilient than many expected.
Total U.S. oil output peaked last April at 9.7 million bbls a day. By October, the most recent month for which figures are available, U.S. production had fallen by only about 350,000 bbls a day — which won’t have much impact on a 96-million-bbl-a-day global market.
“It’s still the U.S. that the market is looking at to get the rebalancing process underway,” said Wittner, who views the weak shale production response as “a big reason” for continuing low prices. Also, he said declines from the shales have been offset by new projects ramping up in the U.S. Gulf of Mexico. Unlike shale wells, multibillion-dollar offshore projects take years to bring onstream and aren’t typically shut in when prices collapse.
But while output from shale plays can fall with prices, Wittner noted it can also rise as prices recover.
The Société Générale analyst said one reason production declines from the shales have been so gradual — even as the rig count fell precipitously — is that roughly 80 per cent of the output comes from roughly 20 per cent of the wells. So a 40 per cent cut in capital spending idled rigs in the poor areas rather than the sweet spots. This was also one of the factors cited by IHS Energy which did an in-depth analysis of what’s happening in the shale plays (DOB, Dec. 14, 2015).
While Bakken and Eagle Ford oil production is declining, the Permian has been bucking the trend, but Wittner said preliminary data from the U.S. Energy Information Administration indicates Permian production is starting to flatten out. He believes this foreshadows an acceleration in the total decline from the U.S. shale plays.
“That’s kind of what our forecast is based on for a steepening pace of decline this year,” he said. He expects the increasing difficulty of raising money through debt and equity will also affect production.
“[Last fall’s] round of borrowing base re-determinations was, by and large, pretty gentle on the E&P companies,” Wittner said. “The borrowing base was only trimmed by about 10 per cent. That’s expected to take a much bigger hit this spring.”
He said the biggest factor governing the production outlook is capital spending, which was cut by 40 per cent last year and which Société Générale expect to be cut this year by another 25 to 30 per cent — or more.
“Unless prices bounce back in the next couple of weeks, we expect announcements to start coming out that spending is being trimmed even further,” Wittner said.
Société Générale expects West Texas Intermediate (WTI) crude to average roughly US$40 a bbl this year, or roughly $35, $40, $45 and $50 a bbl in the first, second, third and fourth quarters.
But Wittner added a caveat: “One key factor for the markets — both for the fundamentals and for the market psychology — continues to be U.S. shale. If U.S. shale does not decline the way we think, we’re going to be at a much lower price.”
“But really, the current price environment strengthens my confidence that U.S. output has to go down,” he added.

Eventual return to US$75 a bbl?


Whether prices will ultimately return to US$75 a bbl will depend on whether global demand growth can be met without high-cost production, Wittner believes.
Demand is expected to continue to grow at a “reasonably healthy” 1.2 million bbls a day this year, he said, after growing by a “much healthier than expected” 1.8 million bbls a day last year.
Wittner puts the supply options in three cost categories.
“You have low-cost Middle East crude. You have medium-cost U.S. shale oil. And then you have high-cost production from the Canadian oilsands [and] deepwater offshore.... If you believe that we can meet demand growth from low-cost Middle East crude oil and medium-cost U.S. shale oil, then we’re not going to [$75 a bbl]. We don’t need to. All we need to do is go back to [$50 or $60 a bbl]. Fine,” he said.
“However, when you work the numbers, I strongly believe that we cannot meet global demand growth from low-cost and medium-cost crude. If we can’t do it with Middle East [crude] and U.S. shale oil, we’re going to need output increases [from projects in the] Canadian oilsands and deepwater offshore. If that’s the case, prices, one way or another, have to go back to $75 in order to make that happen.”

Sub-$30 threshold looms


For Ed Morse, head of commodities at Citi Research, Wittner’s presentation apparently wasn’t quite bearish enough.
“One point that Mike didn’t mention in his commentary: we’re now confronting $20 oil, not $40 oil,” Morse told the conference.
Speaking to reporters later, Morse said: “It’s hard to be optimistic over the short term when you have as much inventory being put into storage as we’ve seen happening right now [and] when Iran is going to put a significant amount of oil on the market.”
He added: “I think a lot of the uncertainty about Iran will dissipate once we know how much oil they’re actually [going to be] putting in the market. It may take a month or two months.... Whatever the number is, whether it’s 100,000 barrels a day or 500,000 barrels a day of incremental supply. This will have a disruptive impact on flows because it will take market share away from somebody somewhere and that oil will have to find another home.”
Pressed for his own outlook, Morse suggested $20 WTI shouldn’t surprise anyone. Given that WTI has been hovering just above $30 a bbl, “the likelihood is fairly great” that it would fall below $30 a bbl, he said. (Later on Tuesday, WTI did briefly dip below $30 a bbl.)
Asked about the view of some analysts that prices will improve in the second half of this year, he said there is no consensus, adding that it is “always dangerous” to predict when prices will hit bottom. “Reading Bloomberg this morning, I saw one analyst who is perpetually bullish who is now looking at a $10 level of prices before you hit a bottom.”
Morse suggested a good sign that prices have hit bottom will be major consolidation in the industry, which Citi expects to occur in the second and third quarters of this year. “By that time maybe we’ll have a good judgment call that the bottom will have been passed.”

Low prices unsustainable


But even Morse doesn’t believe oil markets can sustain low prices.
“They cannot maintain a price below the $30 level for very long. The question is: How much longer?” he said. “We, like other market analysts, have prices going up — not much in the first half of the year, but in the second half of the year after we see more industry consolidation, after we see some more supply coming out of the market. The adjustment up could be fairly dramatic.”
Morse expects the shut-in of stripper wells — wells that produce 15 bbls a day or less — could significantly reduce U.S. production.
“The U.S. has more than a million barrels a day, maybe as much as 1.5 million at its peak in 2015, of oil coming from stripper wells,” he said. 
About half of that amount -- or roughly 750,000 bbls a day at peak -- was from wells producing a bbl a day or less, he said. "They have cash costs in the $50 to $60-a-barrel range. That's a big chunk of oil -- 700,00-barrels-a-day-plus -- that's not profitable... You can expect that to disappear. That's a big chunk of oil to come out of the market."

2016 to average $40 a bbl?


Glen Hodgson, senior vice-president and the chief economist at the Conference Board of Canada, believes it may be 2017 before oil gets back to $50 a bbl.
The not-for-profit research group, which organized the conference, prepares forecasts four times a year. It last ran its model just before Christmas.
“At that point we felt we were being very prudent making an assumption [for] this year of $40-a-barrel WTI oil,” Hodgson told the audience. “And that may well prove to be a prudent assumption.”
Noting that while “we’re all freaking out with oil at [roughly] $30 today,” he observed “a year’s a long time.” But he fears that a return to “even something around $60 a barrel is going to take a number of years.”



Tuesday, 12 January 2016

Associations Face Uncertain Future

By: Mike Doyle, President, CAGC

2016 February Recorder article.


As I write this at the end of 2015 to be published in February of 2016 there is little to be optimistic about in our Industry here in Canada. Commodity prices remain low, our Governments are adding on more regulatory and environmental hurdles, and more stakeholder processes. The developed world has suggested (in principle anyway) a shift away from fossil fuels; however such changes will come at a cost to consumers (and tax payers) in the form of higher energy bills and additional costs such as carbon taxes. It seems obvious to me that as an interim step, the world needs to switch to natural gas as much as possible in the meantime as energy systems are slow to change, and often involve much cost. Even here in Alberta there is currently a moratorium on building windmills on crown land. So much challenge lies ahead. The uncertainty also lies ahead for Associations as we tend to be one line in someone’s budget and can be an easy scratch. Bill Whitelaw wrote a bit of plea for us all as follows:

Daily Oil Bulletin Industry; December 147, 2015 Associations Face Uncertain Future by Bill Whitelaw CEO, June Warren-Nickle's Energy Group

(Full disclosure: the author is a director on the boards of two industry groups.)

As our industry contorts and convulses, the dimensions of its various upheavals manifest in different narratives. Many such narratives overwhelm and subsume others — and often rightly so.

Narratives, of course, are the story arcs of a particular subject: how we talk about things, debate them, understand the myriad voices involved and, ideally, have a sense of where they will track to.

How as industry we discuss the consequences of unemployment, for example, is critical. The magnitude of layoffs is producing, and will continue to produce, unanticipated and unintended consequences, many of which we’re currently unable to discern. Already reeling from precipitous commodity price drops, the sector now must contend with a complex policy confluence of climate change and royalty reviews, compounded by the political uncertainty of new governments pushing the boundaries of the energy, economy and environment Venn diagram.

These are critical narratives. They’re also overwhelming and all-consuming.

These are important narratives because history — which is always just one step behind us — will tell us more quickly than we might care for, about how well we navigate them through innovative and creative means. In a very real way, how as an industry we understand these narratives, and their various actors and the interplay between them, will determine how we emerge “on the other side.”

But there are other, less discernible, narratives that are equally important and yet they get virtually no airplay or talk time.

What distinguishes the WCSB from many other global basins is the quality of the various industry groups and associations that for the most part serve the sector in the background. This involves both the work they do individually, and increasingly, aligned with each other.

We all know them by the crazy alphabet soup collection of acronyms — the names by which we describe them in an industrial shorthand.

CAPP. EPAC. PSAC. CAGC. CSUR. CHOA. SPE. CSPG. CSEG. CAODC. PTAC. COSIA.

And so on.

These groups advocate and lobby on behalf of their members, industry itself and increasingly, ordinary Canadians.

They create safe forums for a competitive industry to debate and discuss issues, and find common and unifying ground.

Their membership structures and related mandates are as diverse as the sector itself. They speak on behalf of technologies; address issues of the environment and sustainability; and co-ordinate on operations dynamics as seemingly mundane as safety and field efficiency.

Perhaps most important of late is they help shine a light for ordinary Canadians about the importance of our sector to the country’s well-being. They are our voices at townhall meetings; they’re consulted by various regulators and governments contemplating their own sector build-outs, and they provide neutral insights and perspectives on important issues. Often, they’re also the voices that speak most eloquently in international contexts on our sector’s behalf.

But will they survive?

In many ways these groups are victims of their own success, to the point that the value of their various “brands” goes virtually unrecognized by those in the best positions through financial influence to insure their survival.

Often, that’s the C-suite — the leaders in these days of every-dime-is-a-hostage thinking. Advocates of supporting these groups at lower levels within organizations are increasingly afraid to articulate the value of membership lest it brand them internally as free spenders.

These industry groups are often powered by an incredible volunteer passion. Those volunteers and paid staff, whose ranks are thinning, do the good they do for industry through the way they synchronize and synthesize important dialogues from technology and innovation to social licence and policy development.

In short, they offer a special kind of ROI: return on insight.

Our industry’s leaders face many investment decisions in the next several months. These decisions will be critical to the industry’s reset and rebuild.

This is an outreach, on behalf of those industry organizations and associations, to ask that they get valued as part of our sector’s investment efforts.

These groups are part of our collective sectoral narrative. Without them, we get what we pay for ... or in this case, don’t.

Let us hope for the New Year to be one of recovery for all of us…………

From Brainy Quotes

It's not what happens to you, but how you react to it that matters.

Epictetus

Thursday, 7 January 2016

Challenges Continue To Mount For Junior/Intermediate Oil Companies As Commodity Prices Lag And Policy Changes Add To Uncertainty

By: Paul Wells

Article originally posted by the Daily Oil Bulletin on Dec 23, 2015. It has been altered slightly, and it has insight from EPAC President, Gary Leach. Original article can be found here: http://www.dailyoilbulletin.com/article/2015/12/23/challenges-continue-mount-epac-member-companies-co/ 



The Canadian oilpatch has witnessed a monumental shift this year in the political environment under which the industry operates, not only provincially in Alberta, but federally as well.

In essence, the climate change policy in Alberta has been sold by the government as necessary to secure pipeline approvals, and support generally for the industry, both on the national front and abroad.


To wit, while unveiling its new climate change strategy, the government received support on the stage from both environmental non-government organizations and some heavyweight industry CEOs. But will these new policies, in terms of oilsands emissions caps and planned methane emission reductions, achieve the desired goal of support for infrastructure projects, or will it just turn into another hoop for industry to jump through, as some fear? 

Leach said the political changes in the last six months, both federally and in Alberta, have been “sweeping and de-stabilizing” for an industry already facing major challenges. And, at least at this point, it’s a wait-and-see scenario that has yet to fully play out.

“Who, this time last year, could have predicted the current political landscape? Forty-four years of Progressive Conservative government in Alberta swept aside by a completely untested NDP that had never been more than a small, irrelevant opposition party,” Leach said.

“And federally, we had nearly a decade of Stephen Harper’s steady Conservative government … although let’s not forget how they stunned and angered our industry when they wiped out the trust structures in the early years of their government,” Leach said.

Leach noted that the industry are still working to build new working arrangements and channels of communication with a government in Alberta that, “at best, previously had a distant and cool relationship” with the industry.

“Having said that, the [Rachel] Notley government does seem prepared to put its weight behind the Energy East pipeline and, less visibly, the Trans Mountain project to Vancouver. The trade-off is the massive re-orientation of the energy sector in the province: phasing out coal, bringing in more natural gas and renewable power, and the centrepiece: a big re-distribution of money via a carbon tax.

Federally, Leach said that industry is starting to re-build contacts with the Justin Trudeau-led Liberal government.

“The Trudeau election campaign was pretty short on details about the energy sector.  But it seems clear they will design their policy framework for our industry primarily through the climate change and GHG reduction lens,” Leach said.

The carbon tax conundrum


Leach said that the current design of the Alberta carbon tax is something EPAC and its membership have “serious concerns” about.

Unlike British Columbia’s “revenue neutral” carbon tax, Leach noted that Alberta has made no attempt to use this money to reduce the overall burden on taxpayers.

“In Alberta the money collected will be distributed as directed by the government to subsidize renewable power generators, incentivize selected technologies and efficiency programs, and reduce the cost of the carbon tax for lower income Albertans,” he said.

Leach added that the economy-wide carbon tax to be imposed on Alberta businesses and consumers is deductible for royalty payments only by the oilsands sector.

“Thus the conventional sector is distinctly disadvantaged relative to the oilsands sector, let alone our competitors elsewhere in North America who don’t shoulder this type of cost. We have urged the royalty panel to take this into account in their recommendations, particularly to level the playing field with the oilsands sector,” he said.

“We know this carbon tax and the oilsands emissions caps are being promoted as a way to reduce opposition to new pipeline construction. But the carbon cost is a definite hit to cost competitiveness for Alberta producers whereas the promise of new pipelines is just that — a promise with no guarantee. In fact, the new Trudeau government has said it will move ahead with a re-design of the National Energy Board’s [NEB] mandate to include a broader evaluation of environmental impacts.”

So, what does this mean for pipeline projects currently in front of the NEB or on tap — is the Canadian oil and gas industry ahead or behind? Time will soon tell.

“The first one up is the Kinder Morgan [Inc.] pipeline expansion to Vancouver, which will be decided by the NEB sometime in 2016. So this will be in front of Trudeau’s cabinet fairly soon … and we’ll know then whether the rhetoric around Alberta’s improved image is indeed providing momentum to advance new pipeline projects,” Leach said.

The shift away from coal-generated electricity. Is this a positive for the Oil and Gas Industry?


A vital part of the provincial government’s climate change plan is the phase-out of coal and a shift to more renewable and natural gas generation.

However, Leach said that the government has not disclosed “how many billions of dollars” it could cost taxpayers to compensate the owners of coal-fired power generation facilities that would be forced to shut down decades earlier than originally planned.

“The government will offer incentives to renewables, like wind and solar, and natural gas will also be expected to take up an increased share plus be available as an expensive redundant back up for the unreliability of wind and solar power generation,” he said.

“Overall this will drive a significant increase in demand for natural gas in Alberta, which is important to producers here because it will be a struggle to compete in traditional markets in Eastern Canada or the U.S. Perhaps we’ll see some additional gas demand growth in Saskatchewan for the same reason, although the power market there is much smaller than Alberta.”

The bottom line, though, is Leach doesn’t see an Alberta electric power shift as favouring any particular segment such as junior, intermediate or senior producers. “As always, lower cost producers will benefit most.” 

The future role of juniors


With lower oil and natural gas prices, the role that smaller producers play going forward could change. Will we see an erosion of the junior/intermediate sector and a move into a new world where the small and micro juniors disappear; in other words, will we see fewer but larger producers in Western Canada? Will we see a change in business models? How does the sector survive?

Leach is confident many member companies will adapt to the new reality. However, there will be casualties.

“The last few years have seen old business models discarded and new leaders emerge. This has been driven by trends that are relentless — selective market sentiment that favours larger, more liquid companies, the need to scale-up to develop resource play opportunities, increasing regulatory compliance costs and stronger balance sheets to survive extended periods of low commodity prices,” he said.

That said, the largest companies have more options to adjust as they can pursue opportunities elsewhere, rationalize their portfolios, unload assets or sell debt to raise cash and focus on their best projects.

“This flexibility has not been open to many small producers. One obvious sign is that the number of publicly-traded juniors is much smaller than a decade ago,” Leach said.

“Private equity has emerged as a more visible factor. The larger junior and intermediate producer segment is much healthier than the smallest tier and there are some very exciting companies in this space that are EPAC members. I think we are seeing the end of an era that has lasted for many decades since Western Canada’s oil industry really took off after the Leduc discovery.”

Leach believes that the Canadian oil and gas industry will see “fewer but stronger” large junior/intermediate players competing successfully among the large Canadian senior and international players.

“We still need a strong junior and intermediate sector to develop the full spectrum of resource opportunities in Canada. We like to remind the politicians and senior bureaucrats of this fact,” he said.