By David Yager, November 17, 2016
Entrepreneur. Consultant. Journalist. Political Activist.
It’s yet another tough day at the office when the major decisions to drive a meaningful economic recovery only come from the capitals of foreign countries. Like Vienna, Austria and Washington D.C. For two years since OPEC abandoned supply management causing oil prices to collapse, Canada’s oilpatch has faced virtually continuous bad news. Things just kept getting worse. The relentless onslaught of economic misery was compounded by costly and self-inflicted domestic decisions other major oil producing jurisdictions have been spared.
Following is a summary of some of the major external and internal events this formerly vibrant industry has been forced to endure. Many companies and many more workers didn’t make it.
- November 27, 2014: OPEC decides market share more important than price, abandons quotas, precipitates oil price collapse
- May 5, 2015: The NDP, never considered a friend of the oil industry, wins Alberta election on platform of higher taxes on corporations and high income earners and royalty review
- June 19, 2015: NDP announces 20% increase in corporate tax rate effective July 1, end of flat personal income tax rate effective October 1
- October 19, 2015: Liberals win federal election promising more environmental protection, review of NEB hearing and pipeline approval process and increased taxes on high incomes earners
- November 6, 2015: U.S. President Obama rejects Keystone XL in time for Paris climate change conference citing U.S. national interest
- November 22, 2015: Alberta introduces Climate Leadership Plan including carbon taxes and oil sands emissions cap in time for the upcoming Paris climate change conference
- December 31, 2015: Year ends with an average of only 197 rigs drilling daily, lowest level in 23 years since 1992 when the average was only 131
- January 21, 2016: Montreal mayor Denis Coderre and other Quebec regional mayors publicly oppose Energy East pipeline calling it “too risky”
- February 11, 2016: WTI closes at US$26.19, lowest price in 13 years and about 75% of June 2014 price
- April 4, 2016: Insolvency of Sanjel Corp., largest family owned service company in Canadian history, announced after it defaults on over $1 billion in debt
- May 3, 2016: Wildfires overrun Fort McMurray and region forcing evacuation of the city and the shutdown of about 1 million b/d of production
- May 31, 2016: Alberta spot price gas averages only C$1.14 per GJ for the month, the lowest price this century. Average price for October 2016 C$2.65/GJ
- June 30, 2016: Federal court overturns prior federal and NEB approval of Northern Gateway pipeline citing inadequate aboriginal consultation
- August 29, 2016: Three protestors storm Energy East NEB hearings, Ottawa declares conflict of interest and suspends hearing process indefinitely the next day
- September 4, 2016: North Dakota Access pipeline protesters in violent clash with police, a week later U.S. “activists” sabotage five U.S. pipelines carrying Canadian oil to American markets
- October 5, 2016: Trudeau announces national carbon tax for January 1, 2018
Now the good news.
Vienna, Austria: November 30
The next OPEC meeting is set for organization headquarters in Vienna on November 30. The outcome could change everything in the short and medium term. At a preliminary gathering in Algeria in late September OPEC discussed and agreed to material production cuts at this meeting. This helped lift WTI to US$51.59 on October 19, the highest closing price since July 2015. This price was almost double what WTI fetched seven months earlier. That’s an increase of C$33 for Canadian crude which is a lot of money for an industry producing over 4 million b/d. Nice.
After the OPEC announcement, the shorts went long while producers locked in their sales price a year out on the right side of US$50. This will help finance the workover, maintenance and drilling activity recovery currently underway.
The problem is OPEC hasn’t done anything yet, leaving the trade press free to speculate resulting in several stories daily about what OPEC will or won’t do, often conflicting. This has been going on for 40 years. The fact OPEC production reached a record 33.8 million b/d in October is hardly a confidence builder. The International Energy Agency (IEA) wrote in its monthly report on November 10, “If the OPEC countries do implement their Algiers resolution the resultant production cut will see the market move from surplus to deficit very quickly in 2017, albeit with a considerable stock overhang that will take time to deplete. On the other hand, if no agreement is reached and some individual members continue to expand their production then the market will remain in surplus throughout the year (2017), with little prospect of oil prices rising significantly higher.”
There are many reasons not to believe OPEC. Since it was created in 1960 its member countries have taken turns dealing with major conflict within their borders or with each other. From 1980 to 1988 Iran and Iraq were at war. Venezuela, Libya and Nigeria are suffering terrible domestic strife pulling millions of barrels off the market. Today Iran and Saudi Arabia are having a proxy war in Yemen while Iran pokes its nose into Iraq and Syria. Those which can are producing more in the hope they will fetch a higher quota during allocation negotiations. Nigeria, Venezuela and Libya want no part of an output cut because they’re already below historic quotas. What OPEC members won’t do is reported daily. What OPEC will do remains unknown.
Fortunately, the mathematics favor cooperation. The IEA reports world oil demand in Q3 16 was 96.2 million b/d, up 2.6 million b/d from Q3 14 when oil prices were heading for the dumpster. Supply in Q3 16 was estimated at 97.2 million b/d. The 1.1 million b/d surplus is one of the smallest the agency has reported in two years. For Q4 16 the IEA estimates demand of 97.1 million b/d. What this means is the amount of oil output OPEC must disappear to materially move the needle on price is very modest. Be reminded that in 1986 OPEC had shut to shut in 14 million b/d, not just 1. Notwithstanding the Iran/Iraq war, that year the Saudis withdrew 5 million b/d from previous output to stabilize the price. This has been done before.
If OPEC reduces output to 32.5 million b/d this could easily cause Brent crude to trade US$10 a barrel higher in 2017, maybe more. So, if OPEC members can figure out how to cut production by 4% the value of their produced oil would rise by 20%, perhaps higher. The spread is an extra US$260 billion per year and they all desperately need the money. The rough math is the Saudis would get almost one-third, Iran and Iraq combined about 25%.
I’ve been wrong on oil prices so many times I should quit trying. But I believe the OPEC meeting in Vienna is going to provide a desperately-needed economic boost for the oilpatch. Hats off to the third world for bailing out Canada.
Washington D.C.: January 20, 2017
You know this industry is in tough shape when the best news in a long time is the election of Donald Trump to the President of the U.S. Whatever readers may or may not think of his business career and shamelessly self-promoted success, nobody in American political history has conducted a campaign in a more undignified manner. His personal attacks on all who disagreed with or questioned him would be grounds for dismissal in any respectable company with a 21st century human resources manual or corporate code of conduct. Imagine if one of your staff was on social media writing things like Trump did about one or more co-workers. The door is right over there Donald.
But Trump is a knuckle-dragging capitalist in a country (make that two including Canada) that has not seen enough shameless boosterism for free enterprise, profit and the private sector in a long time. He’s made a bunch of money, did what he had to along the way, and is not the least bit apologetic for being successful. He and his fellow Republicans won the Oval Office, the Congress and the Senate. They’re all supporters of Keystone XL (KXL). During the campaign Trump said if he became President one of his early acts would be to reverse the outgoing President’s refusal to permit KXL.
When you operate from the largest landlocked oil producing jurisdiction in the world and can’t get pipe to tidewater because other provinces like B.C. and Quebec remain stubbornly opposed (and the new federal government’s biggest contribution thus far is to retool how the National Energy Board functions), this is very good news. Getting more low-cost takeaway capacity for Alberta crude is a major component of restoring investor confidence in the Canadian oilpatch. This is significant when considering the damage Canada has done to itself.
But it’s complicated. When Obama vetoed KXL TransCanada Corporation officially gave up, took a C$2.5+ billion write down on its investment, and sued the U.S. government for damages. Oil shipper and buyer contracts on both ends of the pipe underpinning its commercial viability were terminated. The day after the U.S. election TransCanada said it would start the process again. Great, but what does that mean?
When KXL was first proposed in 2008 it was to be filled with future production expected to come on stream five or six years later. What needs to be determined is if the shipper interest is still there after so many oil development projects, particularly in the oil sands, have been cancelled or postponed. The next question is if the regulatory approvals on both sides of the border granted as long as six years ago are still valid, or if TransCanada must start all over with the application and review process.
As President, Donald Trump may again declare he loves KXL on January 21 but that doesn’t necessarily mean the project is still commercially viable, defined as finding shippers and buyers prepared to commit to moving 830,000 b/d. In its June 2016, crude oil forecast the Canadian Association of Petroleum Producers (CAPP) saw oil sands production rising from about 2.6 million b/d in 2016 to 3.3 million in 2020, a 700,000 b/d gain. But light crude and liquids in the WCSB will fall by about 159,000 b/d over the same period reducing the total production gain to only 541,000 b/d. There is no question the WCSB needs more pipe to tidewater just to fetch a higher price. Ottawa appears to be telegraphing it will approve Kinder Morgan in December but when construction will start given the ongoing opposition is unknown. The time frame to get Energy East to the stage of digging ditch and laying pipe is so far off and unpredictable it is all but meaningless for the rest of the decade.
The logical approach is for Alberta and producers to support all three and somehow convince TransCanada to spend the money to sponsor and restart KXL. However, this is not the position of the Alberta government. When asked about Trump and KXL, Premier Notley went on the record as preferring the two Canadian routes, ostensibly because her government supports upgrading. But there is no requirement for upgrading for the NDP to support for Kinder Morgan or Energy East.
What the NDP believes about oil sands and pipelines is at minimum, confusing. Like many new governments, the NDP and its extended family have acquired political amnesia regarding what they have said, opposed and supported prior to forming government. The number of historic and current pipeline and oil sands opponents in key positions in government and its new agencies is forcing many to embrace Trump over Notley no matter how bombastic and self-absorbed they find the former reality TV star.
It is regrettable the only good news after two years in the trenches must come from places as far away as the U.S. east coast or Europe. But it sure beats no good news at all.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
David Yager can be reached at Ph: 403.850.6088 Email: [email protected]et