Chasing tankers in Beautiful British Columbia

The Oilholic has crossed the international dateline and has gone from being 6000 miles east of London in Tokyo, Japan to being 4700 miles west in "Beautiful British Columbia, Canada" as vehicle registration plates in Vancouver remind you with customary aplomb.

It’s a bit cloudy and tad soggy here, a marked contrast to sunny Tokyo. In between meeting family, friends and contacts, yours truly has also penned two Forbes columns – one on the direction of the South Korean economy and a second one on the oil price bottoming out.

This blogger would say it is all well and good that both global benchmarks – Brent and WTI – are lurking at or just below the $40 per barrel level, and some, including the International Energy Agency, are opining that prices may well have bottomed out. While accepting those sentiments is not difficult, China’s anticipated flat demand could spell trouble over the medium term, as one explained in the latter Forbes post. 

Shipping traffic out of this Canadian province where yours truly is at the moment, typifies the oil and gas world’s dependency on emerging markets in general and Far Eastern economies in particular, led by – who else – but China.

Wherever you admire BC’s amazing shoreline and Vancouver’s beautiful waterfronts – atop Grouse Mountain (above left), Concord Pacific Place in Downtown Vancouver (right), City Harbour inlet (below left), Port Moody or on the other side of the Burrard Inlet from English Bay beach (one's favourite spot) – you cannot miss umpteen oil and gas tankers either waiting to dock or waiting to leave with their crude cargo from the area.

Over the last 12 years on each visit to the area, the Oilholic has only seen the volume of traffic rise exponentially. Unsurprisingly, it causes much consternation among the very strong regional environmentalist groups. Their worst fears were heightened again by the spillage of bunker fuel in April 2015 off West Vancouver’s Sandy Cove.

Prior to that, there have been other incidents, though the most serious one dates back to July 2007 when an excavator working on a sewage line pierced a oil pipeline releasing more than 250,000 litres of crude oil. Nearly 70,000 litres flowed into the Burrard Inlet, with the resulting clear-up costing the province $20 million.

Yet loading and outflow of oil (and gas) from British Columbia, a province which has very little of its own and serves mainly as a transit point, to the Far East is only going to increase not decrease. In the last election, Canada’s new carbon footprint conscious Prime Minister Justin Trudeau’s Liberals bagged 17 of 42 seats in the province; their best result since 1968.

Some, to quote a retired civil servant and old contact, can be described as “tree huggers”, which is not necessarily a bad thing and there are plenty of trees to hug in BC. Tree huggers or not, Trudeau promptly appointed three of his MPs from BC to his cabinet. 

But with the Canadian economy going through a lacklustre patch, oil markets grappling with oversupply and China expected to buy less, the stakes are going to get higher even if the Western Canadian Select – which trades at a discount (currently above US$14) to the West Texas Intermediate – goes lower. Quite frankly, there is very little the carbon conscious PM can do here.

Furthermore, if anecdotal evidence is to be believed, BC Premier Christy Clark and her provincial Liberals were actually banking on an oil and gas boom in time for a 2017 regional election, eyeing both jobs and revenue.

Instead they, along with much of the oil and gas world, now have a complicated and prolonged bust on their hands, with the general direction of Canadian oil dispatches more than likely to be Eastwards, even if the US remains Canada’s largest trading partner for oil and much else. Just ask neighbouring Alberta; the politics (and economics) of it all is likely to get much more complicated! 

However, given lower demand from both Japan and China, it is quite likely that you might spot marginally fewer tankers in British Columbian waters. The Oilholic does stress on the word ‘marginally’ though, and that won't satisfy the tree huggers. That’s all for the moment from Vancouver folks! Next stop San Francisco, California, USA via short stopover in Phoenix, Arizona. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo I: View of Vancouver from Grouse Mountain, North Vancouver, Photo II: Concord Pacific Place, Downtown Vancouver, Photo III: City Harbour inlet, Vancouver, British Columbia, Canada © Gaurav Sharma, March 2016.

What prospective Albertan pipelines mean for BC

If a new permit application by TransCanada for the Keystone XL pipeline from Hardisty, Alberta to Port Arthur, Texas does not get approved after the US 2012 presidential elections, attention will shift towards expanding the pipeline network westwards within Canada. If the project does get approved, well attention would still shift towards expanding the pipeline network westwards within Canada.

The Oilholic’s conjecture is that policy debate within Canada is already factoring in a westward expansion of pipelines eyeing exports via the Pacific Coast to China, Japan, India and beyond, whether the Keystone XL pipeline extension gets built or not. When US President Barack Obama did not grant approval to the original Keystone XL pipeline application earlier this year, Canadian Prime Minister Stephen Harper expressed his ‘disappointment’, had a candid conversation with Obama at an Asia Pacific leaders summit and then got on a plane to China.

He has also been to India on a high level mission in recent memory. At the 20th World Petroleum Congress in Doha last year, Indian officials listened intently to what was coming out of the Canadian camp. Canadian Association of Petroleum Producers (CAPP) has already noted increasing interest from Korean and other Asian players as well when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Club it all together and a westward expansion is inevitable.

Central to a westward expansion is British Columbia (BC), the Canadian province neighbouring Alberta, which could become as important in terms of pipeline infrastructure as Alberta is in terms of the crude stuff itself. From the standpoint of a ‘crude’ analogy, the situation is a bit like South Sudan (which has all the resources) and Sudan (which has the infrastructure to bring the resource to market) with a good Canadian fortune of zero conflict or geopolitical flare-ups. Thankfully for Canada and the importers club, Albertans and British Columbians also get along a tad better than their Sudanese counterparts and what is Alberta’s gain could also be BC's gain.

Last year, over a meeting with the Oilholic in Calgary, Dave Collyer, President of CAPP, noted, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

At present, there are five major pipelines that are directly connected to the Albertan supply hubs at Edmonton and Hardisty – Enbridge Mainline, Enbridge Alberta Clipper, Kinder Morgan Trans Mountain, Kinder Morgan Express, and of course the original TransCanada Keystone pipeline.

Of these, the Trans Mountain system transports crude to delivery points in BC, including the Westridge dock for offshore exports, and to a pipeline that provides deliveries to refineries in the US state of Washington. It is the only pipeline route to markets off the West coast and is currently operating as a common carrier pipeline where shippers nominate for space on the pipeline without a contract. Since May 2010, the pipeline has been in steady apportionment.

Excess demand for this space is expected to continue until there is additional capacity available to transport crude oil to the west coast for export according to CAPP. The available pipeline capacity depends on the amount of heavy crude oil transported. (For example, in 2010, about 27% of the volumes shipped were heavy crude oil).

So four more have been proposed via BC (see map above) – namely Enbridge Northern Gateway (from Bruderheim, Alberta to Kitimat, BC, Capacity: 525,000 barrels per day), Kinder Morgan TMX2 (from Edmonton, Alberta to Kamloops, BC, Capacity: 80,000 bpd), Kinder Morgan TMX3 (from Kamloops, BC to Sumas, BC, Capacity: 240,000 to 300,000 bpd) and Kinder Morgan TMX Northern Leg (Rearguard/Edmonton, Alberta to Kitimat, BC, Capacity: 400,000 bpd).

Given that it’s green BC in question, there already are legal impediments as well as a major bid to address the concerns of the Native Indian First Nations communities according to the Oilholic’s local feedback here. Environmental due diligence should be and is being taken seriously on the West Coast. Then there is the spectre of a socialist NDP provincial government or a hung parliament at the next elections in BC which could hamper activity and investment.

Taking in to account all this, realistically speaking not much may start happening before 2015, but there is a growing belief within the province that happen it most likely will and the benefit to the provincial economy would manifold. To begin with jobs, direct construction related to the proposed pipelines and revenues spring to mind. Additionally, there is likely to be a decade long rise in service sector jobs in the province.

Then given that BC has a proven crown agency in Partnerships BC which since its inception has been building generally bankable infrastructure projects; an ancillary social infrastructure boom to cater to what would become a burgeoning Kitimat and Kamloops is also within the realm of possibility.

Over the last ten days the Oilholic has gathered the thoughts of legal professionals, financial advisers, provincial civil servants and last but certainly not the least the average British Columbian you’d run into in a bar or a Starbucks. The overriding emotion was one of positivity though everyone acknowledges the impediments.

Furthermore, many think the pipelines would assist in diversifying BC's economy which is largely reliant on tourism and timber to include yet another key sector without necessarily compromising its green credentials and a record of accommodating the First Nations Native Indian population. That’s all from Canada folks! Yours truly is off to Houston, Texas. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Map: Proposed (in dotted lines) and existing pipelines to the West Coast of Canada © CAPP 2011.

Tankers in English Bay & Canada's Confidence

The Oilholic headed to downtown Vancouver from the suburbs this afternoon, up on Burrard Street, turning right on Davie Street, down Jervis Street straight through to Sunset Beach in order to get a look in at the English Bay which is quite a sight. Standing bang in the middle of the beach, to your left would be Granville Island, the Burrard Bridge overlooking it and Granville Bridge reaching out to it.

To your right would be two more beaches and Stanley Park on the Vancouver Downtown Peninsula and looking out to the horizon you’ll see pristine waters of the Bay littered with tankers (see image above on the left, click to enlarge). The view is a vindication of Western Canada’s growing crude credentials and its clout in the world of oil & gas exports. Yours truly and other onlookers would often spot the odd oil or LNG tanker on the horizon making its way to or from Vancouver Harbour and docking bays on the inlet towards Port Moody. However, this afternoon the Oilholic counted 12 tankers - the most yours truly has ever counted on five previous visits to the Bay!

There is a new found confidence in the Canadian energy business and a palpable shift in the balance of economic prowess from a manufacturing-led East Coast/Eastern dominated macroeconomic dynamic of the 1950s to a natural resources-led West Coast/Western dominated economy since 2005 or thereabouts. Furthermore, an ever mobile financial services sector with its hubs in Montreal and Toronto now looks increasingly Westwards. Law firms and advisory firms are increasing their presence in Western Canada by expanding practices and a network of partners in Calgary and Vancouver.

Calgary now has more corporate headquarters than Montreal. Of the top 20 most profitable Canadian companies by exchange filings in 2010, eight were natural resources companies with a Western Canadian slant (viz. Suncor, Barrick, Imperial Oil, PCS, Teck, CNR, Goldcorp and EnCana).

A recently spurned merger between natural resources and banking sector(s) dominated stock exchanges of London (LSE) and Toronto (TSX) would have been ideal. But much to the dismay of the Oilholic, the Canadians involved wanted to go it alone and whether you agree or not. In more ways than one LSE and TSX are rivals, especially when it comes to attracting mining companies.

Switching tack to big shots in Ottawa – well to begin with Prime Minister Stephen Harper is an Alberta man. Bank of Canada governor Mark Carney, Chief Justice Beverley McLachlin and the inimitable Rt. Hon. Joe Oliver – the country’s Natural Resources Minister and the most vocal among his G7 peers with an identical ministerial portfolio – are all ‘Western’ Canadians.

Having visited Canada on an annual basis since 2001, the Oilholic has seen the transformation of Canadian politics and the country’s economy first hand and it has been extraordinary in a positive sense. Harper’s “ocean of oil soaked sand” in Northern Alberta has more of the crude stuff than any other crude exporting country bar Saudi Arabia. Let’s not forget the Saudis’ reserves position has been verified by Aramco, Canada’s has been subjected to scrutiny by half world’s independent verifiers of different political leanings and persuasions.

The total value Canada’s natural resources according to various estimates at 2009 prices comes in at US$1.1 trillion to US$1.6 trillion, with the bituminous bit and shale alone accounting for at least 45% per cent of that depending on which financial analyst or economist you speak to.

“Canada’s biggest advantage as an oil exporter in the eyes of the world is that it’s no Saudi Arabia. Furthermore, in a business full of unsavoury characters, dealing with Canadians makes for a welcome change,” quips one patriotic analyst on condition of anonymity.

In the oil business there are no moral absolutes and no linear path to the Promised ‘Crude’ Land. Canada will have its fair share of challenges related to extracting, refining and marketing the oil. The will to do so is certainly there and so are the buyers. The Oilholic’s timber trade analogy has won him quite a few beers from Canadians and pragmatic macro analysts who loved it. There is an unassailable truth here – American dithering and often unjust punitive action against Canadian timber exports in the 1990s lead a Liberal party-governed Canada to look Eastwards to Japan and China.

Fast forward to 2011-2012 and history is repeating itself with President Obama’s dithering over Keystone XL (although TransCanada’s reputation in relation to leaks has not helped either). Akin to the 1990s, there are other buyers in town for the Canadian crude stuff, with India joining the tussle for Canadian attention along with Japan, South Korea and China.

When a Liberal-led Canadian federal government looked elsewhere in the 1990s to market and sell its dominant natural resource at the time, if the US government thinks a present-day Conservative government with a parliamentary majority and a forceful character like Stephen Harper at the helm won’t do likewise (and sooner) when it comes to oil, then they are kidding themselves more than anyone else.

The presence of Korean, Indian and Chinese NOCs can be felt alongside top 20 IOCs in Calgary. Not a single oil major worth its weight in crude oil has chosen to ignore the oil sands, just as onlookers at Sunset Beach can’t ignore tankers on the English Bay horizon. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil & LNG tankers on the English Bay horizon, British Columbia, Canada © Gaurav Sharma 2012.

Canadian & Russian supply risk scenarios

Happy Easter folks! Following on from California, the Oilholic is once again back in Beautiful British Columbia, as vehicle licence plates from the province would point out, should you need reminding in these serene picturesque surroundings. When talking non-OPEC supply of the crude stuff – Russia and Canada always figure prominently in recent discussions, the latter more so than ever.

In fact, when it comes to holding exposure to oil price sensitivity, as recommended by some analysts for the next two quarters, via mixed bag of investments – Russian equities and “natural resources linked” (and not yet showing signs of Dutch disease) Forex including the Russian Rouble and the Canadian dollar are flagged-up more often than ever. In fact the Canadian Dollar, often called south of the border by Americans as the “Loonie” (based on a common bird on the CAD$1 coin), is proving pricier and more worthy than the world’s reserve currency itself in the post-Global financial crisis years.

Between Russia and Canada, given that the latter has a more diverse range of exports, the Russians have a bigger problem when it comes to oil price swings. In fact, ratings agency S&P reckons that a sustained fall in the price of oil could damage the Russian economy and public finances and consequently lead to a cut of the long-term sovereign rating.

"We estimate that a US$10 decline in oil prices will directly and indirectly lead to a 1.4% of GDP decline in government revenues. In a severe stress scenario, where a barrel of Urals oil drops to, and stays at, an average US$60, we would expect the general government to post a deficit above 8% of GDP. In that scenario, the long-term ratings on the Russian Federation could drop by up to three notches," says S&P credit analyst Kai Stukenbrock.

The rise in oil prices over the past decade has supported an expansionary fiscal policy, while still allowing the country to build up fiscal reserves. Still, fiscal expansion, not least significant countercyclical spending during the recent crisis, has led to a significant increase in expenditures relative to GDP.

As a result, despite record revenues from oil in 2011, S&P estimates the general Russian government surplus at merely 0.8% of GDP. To balance the budget in 2012, the agency thinks the government will require an average oil price of US$120 per barrel.

While former Russian finance minister Alexei Kudrin has also expressed fears of Russian over reliance on the price of oil, most analysts have a base price range of US$90 to 100 for 2012. So a fear it may well be; it remains what it is – a fear! Another ratings agency – Moody’s noted last month that as a result of financial flexibility built up over the past two years, rated Russian integrated oil & gas companies will be able to accommodate volatility in oil prices and other emerging challenges in 2012 within their current rating categories.

"In 2011, rated Russian players continued to demonstrate strong operating and financial results, underpinned by elevated oil prices," says Victoria Maisuradze, an Associate Managing Director in Moody's Corporate Finance Group. "Indeed, operating profits are likely to remain stable in 2012 as an increased tax and tariff burden will offset the benefits of high crude oil prices. All issuers have stable outlooks and our outlook for the sector is stable."

Nevertheless, developing reserves in new regions remains a major challenge for Russia as traditional production areas deplete; a problem which the Canadians don’t have to contend with. In 2006, Prime Minister Stephen Harper, whose hand is now politically more stronger than ever, told an audience in London that Canada was ranked third in the world for gas production, seventh in oil production, the market leader in hydroelectricity and uranium. He described it six years ago as “just the beginning.”

Harper’s journey to make Canada an ‘energy superpower’ is well and truly underway. The Oilholic charted the view from Calgary on his visit to Alberta last year and has followed the shenanigans related to the US ‘dis’-approval of Keystone XL pipeline project over the course of 2011-12. Over the coming days, yours truly would revisit the subject with a take on prospective exports to Asia via British Columbia.

Continuing with non-OPEC supplies, the Oilholic’s old contact in Warsaw – Arkadiusz Wicik, Director of Energy, Utilities and Regulation at Fitch Ratings – believes Shale gas in Poland could still be a game changer for the country's energy sector despite the disappointing shale gas reserve estimate published in March by the Polish Geological Institute (PGI).

PGI assessed most likely recoverable shale gas reserves to be between 0.35 and 0.77 trillion cubic meters (tcm), which is about one-tenth the 5.3 tcm estimated by the US Energy Information Administration in April 2011. PGI estimates maximum recoverable shale gas reserves at 1.92 tcm.

Wicik believes it is still too early to make any meaningful assumptions about the future of shale gas in Poland, believed to have one of the highest development potentials in Europe. “Less than 20 exploration wells have been drilled by domestic and foreign companies, in many cases with disappointing results. From a credit perspective, we view shale gas exploration as high risk and capital intensive. Partnerships among domestic companies to share exploration risks and costs, or more participation by foreigners would be positive,” he says.

Exploration by Poland's energy companies at an early stage gives them a chance to become major players should the commercial availability of gas be proven over the next several years. This was not the case in the US, where the shale gas industry was developed by a number of smaller, independent players as the Oilholic noted in a special report for Infrastructure Journal. Large US oil and gas companies have only recently started to be active in the sector, mostly through acquisitions.

Wicik notes, “We do not expect that the success in the US, which led to about a 50% decrease in US gas prices between 2008 and 2011, will be easily replicated in Poland. Commercial production in the first five to 10 years is unlikely to substantially lower gas prices given high breakeven costs. Also, Poland and the US differ both in terms of shale formations and the gas market structure.”

A number of foreign companies already have exploration concessions for shale gas in Poland, including ExxonMobil, Chevron, ConocoPhillips (through a service agreement with Lane Energy), Marathon Oil and Eni. Local players that have been granted exploration concessions include PGNiG, PKN Orlen, Grupa Lotos and Petrolinvest.

Another three large domestic companies - PGE, Tauron, and KGHM - also plan to enter shale gas exploration. In January 2012, they signed three separate letters of intent with PGNiG regarding cooperation in shale gas projects. That’s all for the moment folks! Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo: Oil Refinery, Quebec, Canada © Michael Melford / National Geographic.