Ever wonder why we talk about “oil” all the time?

Here in Alberta we are in the throes of a recession and fiscal crisis the likes of which haven’t been seen in a very long time.

Clearly the crash in oil prices is to blame, as the collapse in royalty revenue has cratered government finances and the pullback in capex has resulted in massive job losses across the Western Canadian Sedimentary Basin.

But it seems a little naïve to hang the entire blame on oil, since oil is only one part of the royalty equation in Alberta. All things being equal, one would be remiss not to hang some of the blame on the systematic destruction of the natural gas market, which has been battered by, wait for it, a collapse in prices, lack of pipeline access and competition from prolific shale deposits in our largest trading partner and biggest (only) export market.

It’s funny how we don’t talk about it. It’s all about oil, because oil is sexy (sort of – you know what I mean) while gas is… what you grill your steaks with, the little blue flame that heats your water, the smell of rotten eggs, the feedstock for your electricity, the feedstock for plastic – you know, small stuff.

A few weeks ago when the Alberta budget was released there was a tweet making the rounds, saying basically that “I remember back in the late 1990’s and early 2000s when Ralph Klein balanced the budget and paid the debt with $14 oil!”, the implication of course being that the PC party was able to magically accomplish so much in a low oil price environment. And they did, absolutely.

Except a quick look at the actual numbers* as shown in the charts below shows that is only half the story. *Source – ADOE

In the eight years ending in 2007, the government collected a staggering $45 billion in royalties from natural gas or 74% of the $60 billion total. The comparable percentage in the subsequent 8 year period (ending in 2015) is a mere 30% or $18 billion (similar total), $11 billion of which was in the first 2 years! In the last 6 years, the Alberta government has collected only $7 billion in natural gas royalties, less than what was collected in 2006.

Even an, ahem, NDP government could have balanced the budget and paid off the debt with these royalty streams. Arguably, the current hole in the budget has been almost a decade in the making, and partially attributable to the degradation of the natural gas industry.

Thus the real story of the Alberta energy economy is not just simply what IS happening with oil prices it is actually what HAS happened to the natural gas market.

And as mentioned above, with gas it has been a triple whammy – massive supply growth in the US with the shale gas revolution, the collapse in prices that this oversupply caused and lack of market access. So not only are collecting less royalties on what we produce on a price basis, but we have also been losing significant market share.

And of course, as with all things Canada, the one thing under our control is the market access question, specifically getting gas to LNG facilities on the coast. And the one thing we continually fumble as a nation is getting what we have in abundance to those who don’t have as much. The chart to the right shows how important LNG is to Canada’s gas production given a projected terminal decline in US exports and fairly flat domestic demand.

And let’s be straight up about it, it is important to know that in addition to existing conventional production, Alberta and British Columbia have world class natural gas deposits in the Montney, the Horn River, the Liard Basin (among others), enough to replace foregone gas volumes previously shipped to the United States and to supply a burgeoning LNG industry (even if we can’t get our own act in gear, the gas destined for Veresen’s Oregon LNG facility is slated to come predominately from Canada) and thus kick-start the royalty revenue stream in both provinces of what was once, and conceivably could be again, the royalty king in Western Canada.

A Final Comment on the OPEC production freeze.

I found the chart to the right that shows monthly OPEC production since the price correction began in July 2014. During this time, OPEC production has increased by a net 1.4 mm barrels per day, or 5%. If you remove Iraq, production has increased by only 1%. With no new production set to come onstream except seasonal increases by Saudi Arabia (for domestic consumption), incremental increases by Iran and the ongoing disaster that is Venezuela and Nigeria, does it even seem that a freeze is needed? Those are some pretty flat lines.

Prices as at April 29, 2016 (April 22, 2016)

• The price of oil ended the week up
  • Storage posted a small increase
  • Production was down again
  • The rig count fell
  • Conitnued production declines in the US are helping keep prices up, beware the first week rig counts increase though, the market is skittish
• Natural gas rose marginally during the week as the rise in crude prices was offset by moderate weather – no real draws for heating and no power drain for electricity generation

• WTI Crude: $45.94 ($43.72)
• Nymex Gas: $2.178 ($2.140)
• US/Canadian Dollar: $0.7974 ($ 0.7884)

Highlights

• As at April 22, 2016, US crude oil supplies were at 540.6 million barrels, an increase of 2.0 million barrels from the previous week and 49.7 million barrels ahead of last year.
  • The number of days oil supply in storage was 33.6, ahead of last year’s 30.6.
  • Production was down for the week at 8.938 million barrels per day. Production last year at the same time was 9.382 million barrels per day. The decrease in production this week came from the Lower 48.
  • Imports decreased during the week
  • Refinery inputs were off during the week
• As at April 22, 2016, US natural gas in storage was 2,557 billion cubic feet (Bcf), which is 48% above the 5-year average and about 52% higher than last year’s level, following an implied net injection of 73 Bcf during the report week.
  • Overall U.S. natural gas consumption fell by 1.2% for the week on moderating weather
• Oil rig count at April 29 was down to 332 from 343 the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was down 1 at 87.
  • Rig count at January 1, 2015 was 328
• As of April 25, with break up in full force, the Canadian rig count was at 37 (6% utilization), 27 Alberta (6%), 8 BC (10%), 2 Saskatchewan (3%), 0 Manitoba (0%)). Utilization for the same period last year was about 10%.
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 20%/80%
• Offshore rig count was at 25
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• Earnings season is here! Earnings season is here!
  • Cenovus reported Q1-16 cash flow of $26 million compared to $495 in Q1-15
  • Husky reported Q1-16 cash flow of $434 million compared to $838 in Q1-15
  • Conoco Phillips reported Q1-16 cash from operations of $0.4 billion compared to $2.1 billion in Q1-15 and reduced its capex from $6.4 billion to $5.7 billion
  • Exxon reported Q1-16 net income of $1.81 billion versus $4.94 billion in Q1-15, exceeding analysts expectations.
  • Imperial Oil (Exxon’s Canadian subsidiary) reported Q1-15 cash flow of $49 million and a loss of $101 million versus cash flow of $281 million and net income of $421 million in Q1-15
  • BP reported net cash from operating activities of $1.9 billion for Q1-16, similar to Q1-15.
  • Suncor reported an operating loss of $500 million and cash from operations of $$682 million compared to $175 million and $1.475 billion in Q1-15. Suncor also announced that subsequent to the end of Q1, it enetered into an agreement to buy Murphy Oil’s 5% interest in the Syncrude Joint Venture for $937 million
  • Chevron reported a net loss of $725 million in Q1-16 versus a $2.6 billion profit in Q1-15. This is the first Q1 loss for Chevron since 1992.
  • Baker Hughes reported Q1-16 EBITDA of $108 million and a loss of $981 million versus EBITDA of $468 million and a loss of $589 million in Q1-15. Revenue was down 42% from the same period last year
• Schlumberger purchased coiled tubing units from Calgary based Xtreme Coil Tubing for $205 million
• Enbridge’s Line 3 Replcament Project was approved by Canada’s National Energy Board subject to 89 conditions. This project will increase shipping capacity out of Western Canada by 370,000 barrels a day. The U.S. portion of the project is awaiting state approval but is not subject to any addtional US federal approval as this is already in place.
• Pacific Northwest LNG announced some leadership changes with a Petronas Executive being appointed President of the LNG project. This appointment is a positive sign for the project as the individual appointed brings decades of LNG construction and project management to the company and is a Petrona insider.
• Drumpf Watch – Drumpf swept the “East Coast” primaries. He followed up the big win by delivering what was touted as his “foreign policy platform”, a largely incoherent blend of narcissism, nationalism, contradictory military policy and self-defeating economic blather that he probably should have told people about long before anyone decided to vote in favour of his nomination.