Another week, another outstanding bunch of crises and if you are an energy sector participant, this is pretty much the end, right? Turn out the lights, the party’s over?

No formal theme this week, just a bunch of disparate thoughts as the patch lurched through a whole range of wrenching issues this week. Call it ideas that may one day grow up to be full-fledged blogs.

Please, don’t read that Big Short book (or see the movie – that Steve Carrell is so lovable isn’t he?), what we’re telling you is truth…

Goldman Sachs is now starting to talk up an oil price that could get down into the teens (the teens!) and a trading range of between $20 and $40. Massive volatility, bad for the sector, but… a great and profitable trading opportunity. I shudder to think what massive trade Goldman has that is seeing them so aggressively play up this scenario, but I am very hopeful their attempt to guide the market doesn’t meet reality.

I’ll swap one credit default for another….

Janet Yellen, Fed Chair, was quoted in the middle of the week about the possibility of Fed rate raises and did nothing to assuage those who feel that the global credit market may be in a bit of a pickle due to lower growth and recession fears. The tone deaf nature of the remarks are puzzling given the fragility of markets, which subsequently went into a multi-day swan dive. Tucked inside all of this is some pretty serious spread wideing of corporate and sovereign debt and instability in the global banking sector as it seems we still can’t shake the after-effects of the 2007-8-9-10 financial crisis.

A Bunch of Hot, Carbonated Air

Also this week, the Canadian Environmental Assessment Agency released its report on Pacific Northwest LNG, which as you may know is the $11.5 billion project sponsored by Petronas. At any rate, the report said that while the project was reasonable from an environmental perspective and wouldn’t pose any threats to critical salmon stocks, it also said that emissions from the project would add some 8 million tonnes to Canada’s total, which of course will set everyone alight and provide cover for government to torpedo the project. This comes on the heels of Shell’s postponing its Final Investment Decision (FID) on its $36.5 billion LNG project.  Is this enough to be the final nail in the coffin of these economy changing projects for BC? Maybe. Probably? But the jury is out. (note an earlier version of the blog incorrectly identified the Pacific NW project proponent – many apologies)

Big Oil has a Pity Party

At the International Petroleum Week conference this week in London, the heads of the international energy community got together for a cry-fest and lamented the way lower for way, way longer scenario for oil while drinking swanky cocktails and enjoying fabulous meals. Seriously, is there anything that screams hypocrisy more than a bunch of overpaid executives confabbing about the pain the industry is going through while scarfing oysters and whole roast lamb? And on the subject of the price of oil and the noise coming out of the conference about prices staying at this level for years to come, with BP jumping on the Goldman bandwagon and suggesting $10 a barrel, I feel I must do the public service announcement and point out that these are the same overpaid executives who were completely blindsided by the collapse in oil prices a scant 14 months ago.

Of course there is a method to this madness – by playing up the crisis, no doubt energy companies should be able to scare panicky and short sighted governments and stakeholders into providing further concessions to attract investment. After all, many of these companies have had to, horrors, cut their dividend to fund their capex and service the massive amounts of debt they have incurred!

It Must be Built Now!

Speaking of panicky governments and energy infrastructure, it was a relatively quiet week on the Energy East front. As in, there were less than 2 articles a day excoriating the various levels of government on their inaction/opposition to the pipeline. As mentioned in my fearless forecast, I expect progress on the Energy East front this year, because as a project it makes sense on so many levels – Canada imports oil in the East from foreign jurisdictions but over produces in the West. We are a net exporter with a signle discounted market, so we should be self-sufficient and our dollars spent on oil should support our domestic industry to harvest all the tax dollars we can from these companies. The connection from Western to Eastern Canada already exists so let’s go ahead and safely build it. But there is a regulatory process and it is playing out as it has to.

But it just feels like too many people are hanging too much on the outcome of this project which is neither approved nor shovel ready. Does anyone in their right mind want a project rushed through the approval process? And even if the upstream emission review delay hadn’t been tacked on, the project isn’t expected to be shovel ready for a few years and won’t be in service until 2020.

It’s a project that makes a lot of sense for the industry and has supposed Nation-building optics built into it, but seriously, how does this help the energy sector today????

Lost in all the current kerfuffle I think is the fate of a project of much more immediate and direct importance to the current state of the Alberta economy and the energy sector, namely the Transmountain, which is due to move from the NEB to cabinet sometime in the fall.

This is a truly shovel ready project that could receive government approval – read that again – government approval this year. Work could start immediately. Resistance to this project is concentrated mainly in the Lower Mainland, specifically Burnaby and Metro Vancouver. These stakeholders have valid concerns that the proponent can address, although it would work better if the local governments were a) more well-versed on the issues; b) less politically motivated; and c) open to reasonable dialogue.

Why we need more good old-fashioned politics

As was pointed out to me the other day, the entire Lower Mainland is anticipating to benefit from massive amounts of federal money for public transit infrastructure ($7.5 billion Sky-Train expansion with one third funded by the Feds) which I believe was in fact mentioned in the BC speech from the throne when they weren’t doing their inexplicable drive by on Alberta.

Given that the feds and the market may have successfully postponed one of the few LNG projects making progress, perhaps it isn’t such a bad idea to allow a project following an existing right of way that will generate thousands of jobs and be constructed by a proponent who has successfully and safely run the existing line for more than 60 years.

Finally, since our Federal Natural Resources Minister Jim Carr has explicitly said that all pipelines are political, how is this – you want your LNG and your federal money for infrastructure? Fine – here’s a pipeline we are going to approve, now step aside.

Prices as at February 12, 2016 (February 5, 2016)

• The price of oil ended the week down
  • Storage was down marginally, finished product inventories remain high as refinery turnaround season is in force
  • Production was down marginally
  • Markets continue selling the storage story for most of the week.
  • The rig count decreased significantly
• Natural gas fell slightly during the week, as cold weather continued but ultimately couldn’t sustain the rally.

• WTI Crude: $28.99 ($30.83)
• Nymex Gas: $1.968 ($2.068)
• US/Canadian Dollar: $0.7214 ($ 0.7202)

Highlights

• As at February 5, 2016, US crude oil supplies were at 502 million barrels, an decrease of 0.7 million barrels from the previous week and 84.1 million barrels ahead of last year. Imports declined during the week.
  • The number of days oil supply in storage was 31.9, ahead of last year’s 27.3.
  • Production was down marginally to 9.186 million barrels per day. Production last year at the same time was 9,201 million barrels per day. As per last week – production growth year over year is finally negative this next week. The decrease in production this week came from the Lower 48.
• As at February 5,  2016, US natural gas in storage was 2,864 billion cubic feet (Bcf), which is 23% above the 5-year average and about 25% higher than last year’s level, following an implied net withdrawal of 70 Bcf during the report week.
  • Overall U.S. natural gas consumption increased by 12.8% for the period led by residential consumption.
• Oil rig count at February 5 was down to 439 from 467 the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States were down to 102 from 104.
  • Rig count at January 1, 2015 was 328
• The massive decline in U.S. rig counts appears to be a somewhat overlooked story at present and is a sign of capitulation to prices which have failed to move decisively with rig count. It remains to be seen what happens when the count starts to rise.
• As of February 8, the Canadian rig count was at 189 (26% utilization), 122 Alberta (26%), 32 BC (40%), 33 Saskatchewan (30%), 2 Manitoba (29%)). Utilization for the same period last year was about 48%.
• Offshore rig count was down from 26 to 25
  • Offshore rig count at January 1, 2015 was 55
• US split of Oil vs Gas rigs is 81%/19%, in Canada the split is 53%/47%

Drillbits

• More companies are starting to report their Q4 and full year 2015 numbers and… it’s not pretty
  • Husky Energy issued layoff notices to an addtional 400 employees this past week
  • Cenovus Energy posted a loss of $641 mm for the quarter vs a loss of $472 for the same quarter last year and cut projected capex to $1.2 billion vs an original indication of $1.4 to $1.6
  • Precision Drilling announced a net loss of $271 million for the quarter compared to a loss of $114 million a year earlier. The company also suspended its dividend.
• Drumpf Watch – Donald Drumpf won New Hampshire handily after Marco Rubio was schooled in a debate by Chris Christie who pulled out of the race after the primary, his work being done. On the South Carolina.