So, after weeks and months of wandering in the wilderness, the energy sector, nay the world, was finally blessed with some seeming good news this week, at least enough to temporarily lift spirits that were otherwise sitting despondently nursing a warm gin and tonic. That is, before reality and the overwhelming negativity of the analyst community and the market at large crushed this nascent hope like a bug.

 
What are these good news/bad news stories?

Someone Blinked

As postulated in this space last week, OPEC did indeed surprise the market with an announcement of an agreement to pursue a production cut going forward. What followed was an entirely predictable oil price spike followed by howls of derision from the analyst community that it was just words trying to talk up the price, that OPEC was finished, that the shale community was going to get back to work and render the cut meaningless, that Russia wasn’t going to play ball, that the big new Kashaghan oilfield was going to overwhelm the market anyway, that it was impossible to enforce… you get the picture.

Okay, fine. Yes there are complications. There always will be complications when you are dealing with that many sovereign nations trying to protect their own economic self-interests, particularly when there are so many deep regional rivalries at play.

But it’s important to take a step back and look at the big picture of what actually occurred as opposed to heaping all of these extraneous items all over it. In the lead up to the meeting, there was speculation a deal could be had, then it appeared the wheels came off as Saudi Arabia and Iran couldn’t come to a compromise, other nations started peeling away and Russia said they would wait and see.

Then, on Wednesday we hear that an agreement has been reached – not to freeze production, but to cut it by up to 800,000 barrels a day. Totally unexpected.

While the details about how the cut is to be shared are to be determined at the formal meeting in November and the wheels could easily fall off in the lead up to or at that meeting, what’s missing in the analysis is the remarkable turnaround in direction and there is only one party that could have made that turnaround happen, who is in fact the only party that has the wherewithal to actually cut production (not to mention the track record of adhering to production cuts) and that is Saudi Arabia.

So, all other noise to the side, Saudi Arabia has blinked. They want higher prices. They need the money machine to start working again and stop the internal bleeding before they lose control domestically. The oil price has a floor.

I am Justin Trudeau and I Approved this Pipedream

On the other side of the world from Algiers – otherwise known as Richmond BC, a capitulation of a different sort occurred when the Federal Liberals finally gave the green light to one of the many Liquified Natural Gas (LNG) projects on the West Coast.

Effectively approved previously and granted an initial investment approval by Petronas, the proponent and majority owner of the project, the Pacific Northwest LNG project had been referred back to the Canadian Environmental Assessment Agency by the Liberal government with a report to be issued to cabinet at the end of September.

So, in receipt of said report, the Liberals elected to approve the project subject to 190 “legally binding conditions”, many of which are standard for projects of this nature but also included some not insurmountable provisions related to the environment and emissions.

At any rate, the Liberal government decided that notwithstanding the environmental footprint of this project it was in the country’s best economic interests. And how could you not? This is a $36 billion project that will add in excess of $2.6 billion to GDP and provide some $2 billion a year in royalty income and other taxes to various governments over its 40 year life as well as generate thousands of jobs.

Of course the only problem is that the environmental crew are already screaming bloody murder that this project is inconsistent with Canada’s ratification of the Paris Accord (note to anyone who will listen – this hasn’t stopped any other country on the planet from approving energy projects – what makes us different?).

On top of this, the analyst community and media is split on whether Petronas will actually proceed with this project due to a variety of factors including the current depressed prices for LNG in the Asian market, the cost of the project, carbon taxes etc. There is even an article circulating that Petronas, which had a less than stellar year, is looking to unload its interest in the project.

Look, all of these things are possibilities, but let’s give the ink some time to dry before we burn the paper.

I have no definitive opinion or inside knowledge on whether this project will proceed, but in the face of all the negative comments and the acknowledged right of Petronas to take this report and conditions, review and understand them before making any investment decision, consider the following:

• The cost of the project is estimated at $36 billion. But this includes $7.5 billion that will be spent by TransCanada building the pipeline, about $5 billion spent by Petronas to buy Progress Energy to secure the resource and probably in excess of $2 billion already spent making swiss cheese out of Northeast BC to prove out the resource. So the remaing cost to build is a bit over $20 billion and Petronas is in it already for at least $7 billion. It’s hard to see that investment parked.
• Yes, Canada is a high cost jurisdiction to build in. But the cost of delay is high. If you were a project proponent, when would you rather build, when labour and material is cheap because of a crushed energy market or when rates start to accelerate because of a rallying commodity price environment and you are competing for labour with a resurgent upstream sector and a possible TransMountain approval. Wait a few years and see costs escalate. Start now????
• Finally, on the commodity price side, the earliest possible commissioning date for this project is probably after 2020. Dwelling on current LNG prices reflects typical North American short termism. National Oil Companies by their nature play a long game and are trying to secure their energy future decades out, not trying to meet quarterly profit expectations.

This is not to say that the project will happen, I’m just suggesting that there are considerations that need to be made before it gets buried and that ultimately, the decision rests with the proponent – not the media. And the proponet may have different motivations than we think.

Ultimately though, I think the signal from Federal government is important here as we look forward at other files, such as TransMoutain and Energy East – namely, that the government will assess the project, be tough in its conditions, but if it is in the economic interest of the country and passes the smell test, then they will risk the political capital and approve it. Which makes Canada an investable option for large infrastructure, which is a good thing.

Prices as at September 30, 2016 (September 23, 2016)

• The price of oil ended the week up mostly on OPEC action.
  • Storage posted a surprise decrease
  • Production was down marginally
  • The rig count was up
• Natural gas was pretty flat during the week, and gave ground at the end of the week

• WTI Crude: $48.24 ($44.48)
• Nymex Gas: $2.906 ($2.955)
• US/Canadian Dollar: $0.7629 ($ 0.7595)

Highlights

• As at September 23, 2016, US crude oil supplies were at 502.7 million barrels, a decrease of 1.9 million barrels from the previous week and 44.8 million barrels ahead of last year.
  • The number of days oil supply in storage was 30.2, ahead of last year’s 28.3.
  • Production was down for the week at 8.497 million barrels per day. Production last year at the same time was 9.096 million barrels per day. The change in production this week came from a decrease in Alaska deliveries and lower 48 production.
  • Imports fell to 7.835 million barrels a day, compared to 7.554 million barrels per day last year.
  • Refinery inputs remain high but were off during the week at 16.334 million barrels a day
• As at September 16, 2016, US natural gas in storage was 3,600 billion cubic feet (Bcf), which is 6% above the 5-year average and about 3% higher than last year’s level, following an implied net injection of 49 Bcf during the report week.
  • Overall U.S. natural gas consumption was down 2% during the week on decreased power consumption
  • Production for the week was flat at 1% and imports from Canada rose by 4%
  • The gas story in the United States is increasingly bullish as additions to storage have significantly slowed relative to prior years as the heating season approaches
• As of September 27, the Canadian rig count was at 144 (21% utilization), 102 Alberta (22%), 13 BC (17%), 27 Saskatchewan (23%), 1 Manitoba (7%)). Utilization for the same period last year was about 25%.
• Oil rig count at September 23 was at 425, up 7 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 4 at 96.
  • Rig count at January 1, 2015 was 328
• US split of Oil vs Gas rigs is 82%/18%, in Canada the split is 52%/48%
• Offshore rig count was up 2 at 22
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• You know, not much. Aside from the two biggies up top
  • Enbridge agreed to sell its South Prairie region liquids pipeline assets to Tundra Energy Marketing for $1.075 billion
  • TransCanada has offered $848 million in cash for the acquisition of the remaining Columbia Pipeline Partners LP stock it doesn’t already own
  • Rice Energy is buying sector player Vantage Energy for $2.7 billion
  • Centrica, one of Britain’s leading utilities, is exiting Canada, selling all of its operations here.
  • Petrobras workers rejected a contract offer and could strike at any time. Troubled Petrobras has slashed spending to help manage its $125 billion in debt
• Drumpf Watch – So there was a “debate” this week, which means that we are fianlly in the home stretch of this awesome reality show of an election. I watched the debate, every single painful 90 minutes of it. I heard the reviews and the opinions of the pundits. And I am not sure they watched the same debate. What I saw was an unprepared, angry old man get his butt handed to him by a supremely prepared, knowledgeable and unflappable Hillary Clinton. Look, I get it if you are a true believer and you can’t ever vote for the other person, but to not even acknowledge the flaws in your guy is just plain crazy. The smirking, interrupting, facial ticing and evasive, incomprehensible rambling should not even be compared to what Hillary presented. Afterward the Donald said that he went easy on Hillary, out of respect for Chelsea but the campaign promised to double down on her by bringing up Bill Clinton’s infidelities. Really? Is that the best you can do? Because I was actually surprised that Hillary went easy on Drumpf – no Drumpf University, no Drumpf Foundation, no Putin ties… This campaing is heading for the gutter. You can count on it. It’s gonna be ugly and it’s gonna be fun.