TIM MCMILLAN STEPPING DOWN AS MINISTER AND MLA
Released on September 18, 2014
Rural and Remote Health Minister Tim McMillan today announced that he is stepping down from cabinet effective immediately and resigning as the MLA for Lloydminster effective September 30.
McMillan has accepted the position of President of the Canadian Association of Petroleum Producers (CAPP), effective October 1.
McMillan said it has been an honour to serve in the provincial government led by Premier Brad Wall.
“This province has seen such a positive change over the past seven years,” McMillan said. “I feel extremely fortunate to have been part of the government during this remarkable period of growth and progress.”
Premier Wall said McMillan will be missed and wished him all the best in his new career.
“Tim has been a great MLA and Minister and I will miss his unique perspective at the cabinet table,” Wall said. “As President of CAPP, I know Tim will continue working hard to develop our resource industry in western Canada, including here in Saskatchewan.”
McMillan noted he will be following all of the provisions of the new Saskatchewan Lobbyists Act which requires that a former minister cannot lobby the provincial government for one year after leaving cabinet.
McMillan was first elected in 2007 and was re-elected in 2011. He has held several different cabinet portfolios prior to his appointment as Minister of Rural and Remote Health in June of this year. These include Energy and Resources, Crown Investments Corporation, Saskatchewan Liquor and Gaming Authority and Tourism Saskatchewan.
Wall said for the time being, Health Minister Dustin Duncan will also handle the Rural and Remote Heath duties. He plans to appoint a new minister shortly.
A byelection must be called by the Premier within six months of the date the seat becomes vacant.
For more information, contact:
Karen Hill Executive Council Regina Phone: 306-787-2127 Email: firstname.lastname@example.org Cell: 306-5299207
New technology means a fast-pace output response to falling oil prices
Special to The Globe and Mail
Published Wednesday, Sep. 17 2014, 5:00 AM EDT
Last updated Wednesday, Sep. 17 2014, 5:00 AM EDT
When the economy slows down, wallets thin out and people have less money to spend. Drivers make fewer trips to the gas pumps. The demand for oil slackens quickly. The price of a barrel goes down. It’s not rocket science.
What about the other side of the oil market? If producers have less money to spend, does production decline swiftly too?
Historically, the output response to lower prices has been slow, much slower than consumer thrift. But that lagging reaction may be history. Because of science and innovation, the character of world oil production has radically changed. Since 2009, oil output has rocketed up in the United States and Canada, and not much elsewhere (see Figure 1). That’s not news. But what may be news is how vulnerable North America’s growth may be to the dropping oil price.
The price of a barrel of international light crude oil – measured by Brent – has hit its lowest level in more than two years. Discounted North American oil prices are softening sympathetically; inside the continent, crude prices are at least $5 to $10 cheaper than barrels labelled with Saudi, Nigerian and British flags. Some oil price analysts, feeding off slowing demand fundamentals in Europe and China combined with growing Libyan production, suggest that price could weaken more. And while we agree that lower prices are possible in the short term, we do not expect price markdowns to be long-lasting.
Here is why. For oil producers, a crude oil discount translates into less cash flow, less appeal to capital markets and therefore less spending power. Yet not all oil production is affected equally by less investment. The world’s 92 million barrels a day of oil production can be divided into four distinct types of production: Canadian oil sands; age-old onshore conventional wells; increasingly high-tech offshore production; and new-age hydraulically fractured tight oil.
Contrary to popular belief, oil will steadily flow from Canada’s oil sands, even with lower prices. Massive sunk costs, scale, and negligible decline rates mean that most existing operations in the region will keep producing, even if the oil price for West Texas intermediate were to reach $55 a barrel (U.S.) or below. The resilience of oil sands production was proven out during the financial crisis: Oil supply remained steady when the price of oil dropped to under $50 in the last few months of 2008.
Overwhelmingly, the bulk of the world’s output still comes from “conventional” vertically drilled onshore wells, combined with a growing wedge of supply from the larger scale and more technically challenging offshore projects. Historically, these production types have flowed reliably during low price episodes, and there has been a steady string of global megaprojects that have come online to offset legacy production declines.
But this landscape has changed. Producers from outside North America have been plagued with falling output, technical challenges, a lack of investment, outages due to civil war, corruption, sanctions or all of the above. New large megaprojects such as Kashagan or Brazil’s deep-water subsalt have been long delayed. Organization of Petroleum Exporting Countries production is increasingly prone to outages. Even assuming that new international developments come on line, once declines from the existing production base are factored in, the collective capacity expansion from outside North America is flat at best. Or looking through the lens from the other side, the reverse argument is that U.S. and Canadian hydraulically fractured light oil fields will mostly determine the industry’s free-market response to lower oil prices (OPEC may respond at some point, but that’s another story).
North America’s hydraulically-fractured, tight oil production follows a “just-in-time delivery” business model. When prices are robust, production can grow quickly, because each new well delivers very high initial production rates. However, high decline rates in these wells imply that output should fall off quickly when investment (drilling) is reined in. This downside hypothesis has never been tested, but if low prices were sustained, the economic experiment would be on.
Tight oil or shale oil exploitation is heavily dependent on the rapid recycling of cash flow and access to capital markets. Price weakness slashes unhedged cash flow. Price weakness also sours the appetite of capital markets to invest in oil companies. So production growth should moderate, or even retreat, with a low-price cash famine. This would, in effect, set a floor for the oil price. Depending on the rocks and the operator, the break-even price for North American tight oil varies widely. But we would expect that, notionally, the trigger price to start to witness an investment slowdown is about $85 a barrel for the West Texas intermediate benchmark (still about $10 under today’s price).
The just-in-time nature of North American tight oil, combined with the difficulties in adding new supply elsewhere, suggests that the world’s oil supply will quickly adjust to falling demand or surplus production. The lower prices go, the greater the probability they will rocket up again. But that’s not rocket science either.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
Canada oil-train boom may thwart winter crude price slump
CALGARY — Reuters
Published Monday, Sep. 15 2014, 5:08 PM EDT
Last updated Monday, Sep. 15 2014, 5:14 PM EDT
Each winter for the past four years, Canadian oil sands producers have watched in dismay as local crude prices slumped.
Limited export pipeline capacity coupled with the end of the U.S. summer driving season led to oil gluts in Alberta, sending prices tumbling and depriving producers of billions in potential revenue.
Not this year, predict industry players.
Revamped U.S. refineries are absorbing heavy Canadian crude and new oil-rail terminals built by companies like Gibson Energy Inc. and Canexus Corp. are loading trains to deliver crude to markets across North America, and potentially abroad, limiting the downturn and keeping prices buoyant compared to the past seasons.
Thanks to the emergence of these “train pipes”, the market is “unlikely to get that deep of a squeeze on the deliver-ability side,” said Bart Melek, head of commodity strategy at TD Securities.
Shipping crude by rail can be up to twice as expensive as by pipeline, roughly $14 to $21 per barrel to the Gulf Coast. But just a small volume of such shipments could help avoid the short-term supply overhangs that have burdened the market for years.
In recent winters, the price of Western Canada Select (WCS) heavy blend crude has fallen to fetch between $33 and $42 per barrel less than the U.S. benchmark WTI crude, far cheaper than the typical discount of around $20 per barrel during the rest of the year.
With oil sands production at just under two million barrels per day, each $1 increase in the discount equates to some $2-million a day in lost revenues for producers like Cenovus Energy and Suncor Energy, and wipes billions of dollars a year off Alberta government revenues.
After U.S. oil tumbled to its lowest prices in nearly two years this month, a sudden slump in prices this winter would be particularly unwelcome. At around $79 per barrel, the absolute price in Canada is getting nearer the break-even cost for major new developments.
Thus far, Canadian crude is holding up well around $13.50 per barrel under WTI, which fetched about $93 a barrel on Monday. That was the narrowest differential since July, 2013.
Some traders say WTI minus $20 per barrel is now a realistic floor for discounts – with the dark days of minus $40 a thing of the past.
A $20 discount would improve the economics of crude-by-rail. In Calgary they say a rule of thumb is WCS should trade around $15 to $20 per barrel below WTI to be worth railing to the U.S. Gulf Coast, where it competes with Maya, a Mexican blend of similar quality.
“There may be periods of lower differentials in which rail is less profitable than pipeline, but there are still benefits to transportation by rail including new market development,” said Cenovus spokeswoman Jessica Wilkinson.
Some of the factors behind the winter slump in Canadian crude prices remain: North American refiners still shut down for maintenance in the autumn, diminishing demand for crude. Road construction also tends to ebb, limiting the need for asphalt, a significant by-product of refining heavier oil sands crude.
Seasonal discounts are exacerbated by congestion on Canadian export pipelines that can leave crude bottlenecked in Alberta, sparking wild price swings. TransCanada’s Keystone XL pipeline, which was proposed more than five years ago to help relieve congestion, has been repeatedly delayed by the Obama Administration amid fierce environmental opposition.
Congestion can be worse during cold weather, which makes oil sands bitumen even more viscous than usual and forces producers to blend in a higher proportion per barrel of ultra-light oil known as condensate so the bitumen can be shipped through pipelines, according to traders. This means there are higher volumes of diluted “dilbit” crude squeezing through an export network already pumping flat out.
But several important factors have changed, including the expansion of key North American refiners that have invested billions of dollars in consuming more Canadian heavy crude.
This will be the first full winter for BP Plc’s revamped 405,000 bpd Whiting, Indiana, refinery, which has been upgraded to process 80 per cent Canadian heavy grades.
RAIL TO THE RESCUE
The larger factor is the emergence of the oil-by-rail industry, with a host of operators building new terminals to help mop up barrels that would otherwise be stranded in Alberta.
National Energy Board data shows Canada exported 163,000 bpd of crude by rail in the second quarter of 2014, a 22 per cent rise on the same period a year earlier. That figure does not include shipments to major refineries in eastern Canada.
The Canadian Association of Petroleum Producers estimates current rail loading capacity is much higher at around 800,000 bpd and could hit 1.4 million bpd in 2016.
Certainly, there is a risk that current firm prices will pull back. Supply outages as a result of planned maintenance currently taking place in the oil sands will come to an end, and demand from linefills on Enbridge Inc’s new Flanagan South and reversed Line 9 pipeline is finite.
Jackie Forrest, analyst at ARC Financial, said if there are no big outages on pipelines, WCS differentials should widen to reflect the cost of rail transportation from Alberta to the Gulf Coast. Right now they reflect the cost of moving a barrel by pipeline.
Forrest said if differentials widen to reflect rail economics WCS would trade around $15 per barrel below Maya, or $20 per barrel below WTI.
“With more market options via new pipe connections and rail, we expect large discounts to be less in number and duration than compared to the past,” she added.
Environmental extremism a rising threat to energy sector, RCMP warns
OTTAWA — The Globe and Mail
Published Sunday, Sep. 14 2014, 5:08 PM EDT
Last updated Sunday, Sep. 14 2014, 7:29 PM EDT
RCMP analysts have warned government and industry that environmental extremists pose a “clear and present criminal threat” to Canada’s energy sector, and are more likely to strike at critical infrastructure than religiously inspired terrorists, according to a report released under Access to Information.
Written by the force’s critical infrastructure intelligence team, the 22-page RCMP document argues there is a “growing criminal phenomenon” associated with environmentalism that aims to interfere with regulatory reviews and force companies to forego development.
“Environmental ideologically motivated individuals including some who are aligned with a radical, criminal extremist ideology pose a clear and present criminal threat to Canada’s energy sector,” said the report, written in March 2011. Since then, the RCMP has held regular meetings with energy companies and federal officials to review potential threats to infrastructure, and faces formal complaints that it conducted surveillance on environmental groups that oppose construction of Enbridge Inc.’s Northern Gateway pipeline.
The paper highlighted Canada’s oil sands sector as one that has attracted considerable opposition because it is a major producer of greenhouse gases that cause climate change. Law enforcement and national security officials worry about a “growing radicalized environmentalist faction” who oppose the oil sands and other energy development, it said.
The oil industry has run into vehement opposition to plans for crude oil pipelines through British Columbia and across the country to the port of Saint John, N.B. But the oil sands sector needs access to new markets – whether in the U.S. Gulf Coast, Asia Pacific, or the Atlantic basin – if it is going to meet ambitious growth plans that would see production doubling to four million barrels per day by 2025.
Some First Nations leaders warned their people may resort to whatever means necessary to block construction of the Northern Gateway pipeline. But neither First Nation leaders nor environmental groups have advocated violence.
Most of Canada’s counter-terrorism effort has been aimed at international jihadis, and there have been a number of high-profile prosecutions against Canadian residents who plotted to conduct attacks either at home or abroad.
“In reality, criminal occurrences attributed to environmentalists have and are more likely to, occur within Canada,” the report said. It added that the Canadian Security Intelligence Agency (CSIS) monitors individuals and organizations that might be involved in domestic terrorism, “including the threat or use of violence by groups advocating for issues such as the environment.”
Carleton University criminologist Jeff Monaghan, who obtained the document, said the RCMP authors constructed a trend from isolated incidents. He worries police and other security agencies are using anti-terrorism legislation to broaden their investigation and monitoring of groups who oppose development.
RCMP spokesman Greg Cox denied the force is targeting protesters or environmental groups in general. “The RCMP does not investigate individuals, groups or movements, but will investigate the criminal activity of any individuals who threaten the safety and security of Canadians.”
Neither Mr. Cox, nor CSIS spokeswoman Tahera Mufti would comment on formal complaints launched by the B.C. Civil Liberties Association that claim the agencies have conducted improper surveillance activities against law-abiding citizens who oppose the gateway project.
Ottawa lawyer Paul Champ filed the complaints with the RCMP’s Commission for Public Complaints and the Security Intelligence Review Committee, backed by numerous documents obtained under Access to Information, which, he said, show the two agencies were actively monitoring and even infiltrating environmental and aboriginal groups involved in Gateway hearings before the federal review panel, which wrapped up last year.
Oil and gas extraction industry: Capital and operating expenditures, 2013
Statistics Canada – September 12, 2014
Capital expenditures by the conventional oil and gas extraction industry increased 9.0% from 2012 to $42.8 billion in 2013.
Non-conventional sector capital expenditures rose 12.6% to $31.2 billion.
Operating expenses for the conventional sector increased 15.4% to $30.3 billion.
For the non-conventional sector, operating expenses were up 19.7% to $28.6 billion.
Record capital stoking the oil and gas industry
Special to The Globe and Mail
Published Wednesday, Sep. 10 2014, 5:00 AM EDT
Last updated Wednesday, Sep. 10 2014, 10:24 AM EDT
Money is being shovelled into the Canadian oil and gas industry like coal into a furnace. Year to date, hot markets have already offered up $19.6-billion to oil and gas producers. By the end of the year, upstream companies are on track to take in $26-billion from banks and equity investors. The dollar volume will stoke a record year, exceeding the $25.5-billion haul in 2007.
Here are five reasons why the money is coming in at a record pace:
Over the past year, the Canadian dollar is down a dime, natural gas prices have doubled off 2012 lows, and oil price discounts have narrowed. These top-line fundamentals have helped decompress the industry’s bottom line. Compared to the dark period between 2010 and 2013, average industry profitability at the wellhead is running 30 to 50 per cent higher this year, depending on company type and commodity focus. Savvy producers are making money again and investors have noticed.
Nothing instills a sense of urgency more than collapsing margins. Between 2010 and 2013, Canadian producers were realizing the lowest oil and gas prices in the world (they still are, just not as low). Empty pockets sharpened the need to innovate processes and make cost discipline an imperative. Progressive companies became lean and mean by scaling up and using new technology. Lower costs served this group well when the prices rallied. These are the same producers that are attracting a lot of the new capital inflow.
Ten years ago, the oil sands region was recognized as the only multibillion-barrel resource left in the free-market world of oil. Natural gas in the U.S. and Canada was considered “mature.” Then came the shale gas revolution, followed shortly thereafter by tight oil. American plays like the Marcellus, Bakken and Permian Basin demonstrated that billions of barrels of new oil, and trillions of cubic feet of natural gas, could be liberated through new drilling and completion processes. Yet neither geology nor capital recognizes political borders.
Outside investors have been correctly sensing that Saskatchewan, Alberta and northeastern B.C. are ripe for the same innovative extraction techniques that have made Pennsylvania, North Dakota and Texas immature again.
No it’s not a word. But it means that the U.S. and Canadian oil and gas businesses are becoming increasingly integrated, especially on the oil side. The advent of shipping oil by rail began creating many new supplier (producer) and customer (refiner) relationships across the U.S.-Canada border. Savvy investors looked beyond the Keystone XL issue and saw alternatives to one steel pipe. In part, greater market access is why average profitability between the U.S. and Canadian industries has equalized over the past year. During the dark period, U.S. mid- and small-capitalization producers were realizing between $7 to $10 a barrel of oil equivalent more than their Canadian brethren. Not any more. A tighter knit, continental market has led to continental investing.
Risk and return
Canada’s oil and gas industry does have social, political and environmental friction that tends to add to cost. But contrast that kind of rub with civil war, corruption, the threat of expropriation and sanctions found in the rest of the world. Events over the past twelve months have made investment into places like Iraq, North Africa and Russia riskier without any proportional improvement in returns. In fact, the application of new technologies to shorter cycle time projects here is improving the risk-return profile of North America’s industry, while that of the rest of the oil and gas world is deteriorating. This widening risk premium makes it more appealing for foreign capital to come to Canada (and the U.S.); the record inflow of investment capital validates the sentiment.
Canadian investment is set to surpass the 2007 high. Back then the fires of investment were stoked too hot, causing imbalances in the demand for labour and services. Today’s industry has greater capacity to absorb capital, but how much more has yet to be tested. We’ll be watching the gauges carefully.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.