The tale of Alberta's first commercial oilfield

A quaint town called Turner Valley in Alberta, Canada may not mean much to the current crop of oil and gas industry observers. However, it has a special place in British history as well as that of the industry itself. Back in 1914, the town acquired the status of Western Canada's oil hub and had the country's first commercial oilfield which, for a while, was the largest oil and gas production base in the entire British Empire as it stood then.

 

Hell’s Half Acre by David Finch is a meticulously researched and entertaining tale of the townsfolk of Turner Valley, and those who came from further afield to make it all happen back in the day. The author, who has been researching the social history of Western Canada’s oil and gas industry since the 1980s and has no fewer than 15 books about the region to his name, recounts where it all began in earnest for the province.

 

The drilling rigs, processing plants and pipelines are all there, and so are anecdotes of the wildcatters and workers who put it all in place, who made it happen and who lived to tell their tales. In order to make for a lively narration, Finch has gelled archived material and the dozens of interviews he conducted extremely well. But this pragmatic book of just over 200 pages, not only narrates a tale of commercial success, but also what costs were paid by Turner Valley in its (and by default) Canada's historic quest for black gold; an effort, which as fate would have it, was sandwiched between the two World Wars.

 

Hell's Half Acre is a very real place in a coulee just outside of Turner Valley, writes Finch. For two decades, companies piped excess natural gas to the lip of this gorge and burned it – in order to produce valuable gasoline they had to also produce the natural gas for which there were limited markets at the time. In fact, the glowing sky could be seen as far south west as Calgary, the author tells us.

 

Canada's national treasure also became a military target for while. At its height, and before peaking in 1942, the Turner Valley provided 10 million barrels per day towards the Allied War Effort. As you would expect, what was then (and still is) a cyclical industry saw its own booms and busts. The companies and their cast of characters from Turner Valley have also been delved into, and in some detail, by Finch.

 

The Oilholic first came across this book on a visit to Calgary and a chance visit to DeMille Bookstore at the recommendation of a local legal expert. For that, this blogger is truly grateful to all parties concerned, and above all to the author for enriching one's knowledge about this fascinating place. Hence, this review was long overdue!

 

Today Turner Valley, a harbinger of the success of Canada's oil and gas industry, is known for tourism, leisure and for being the hometown of Laureen Harper, the frank and vivacious wife of Prime Minister Stephen Harper. So Finch's colourful book could serve as a timely reminder of the importance of a bygone era as Turner Valley begins the countdown to its centennial celebrations of the 1914 discovery of oil.

 

The Oilholic is happy to recommend this book to all those interested in the history of the oil and gas business, origins of the Canadian energy industry, Alberta's place in the global geopolitical oil and gas equation and last, but not the least, anyone seeking a riveting book about the Great Alberta Oil Patch.

 

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2013. Photo: Front Cover – Hell’s Half Acre © Heritage House Publishing

Price correction, Saudis hurt Canada & Russia!

Finally, we have a price correction which saw both global oil benchmarks reflect the wider macroeconomic climate accompanied by a dip in stock markets and a downgrade of 15 of the world’s largest banks by Moody’s. NYMEX WTI forward month futures contract fell below US$80 per barrel on Thursday for the first time since October 2011 while Brent is just about resisting the US$90-level trading at US$90.77 when last checked.

The benchmarks have shown bearish trends for almost three months but they were still not reflecting the wider macroeconomic climate; until yesterday that is. The ‘only way is up’ logic based on a linear supply-demand permutation oversimplifies the argument as the current situation demonstrates. Factors such as the absence of QE3 by the US Federal Reserve, a stronger US Dollar, and weaker Chinese, Indian and European data finally influenced market sentiment – not to provide the perfect storm but to provide the perfect reality! A decline in German business confidence levels reinforces bearish trends which will last for a while yet.

Despite negative sentiments and the possibility of Brent trading below US$100 per barrel for prolonged periods between now and Q1 2013, OPEC did not cut its quota last week. Saudi Arabia, which is so dominant within the cartel, actually wanted to send the price lower as it can contend with Brent falling to US$85 per barrel.

From a geopolitical standpoint, Saudis not only kicked a sanction hit Iran (maybe gleefully) but delivered bad news for Russia (perhaps intentionally) and Canada (almost certainly unwittingly). Saudi rivalry with Iran has more than a ‘crude’ dimension, but one with Russia almost certainly revolves around market dominance. The Oilholic’s hypothesis is that this intensified when Russian production first overtook Saudi production in 2009.

As the world’s leading producer for over two years, Moscow was causing Riyadh some discomfort. So the Saudis raised their game with the Libyan conflict and Iranian sanctions giving them ample excuses to do so. Constantly flouting OPEC production quotas, this February Saudi Arabia regained its top spot from Russia. Now with prices in reverse, it is the Russians who are sweating having rather bizarrely balanced their budget by factoring in an oil price in the circa of US$110 to US$120 per barrel.

Several independents, ratings agencies (for example S&P) and even former finance minister Alexei Kudrin repeatedly warned Russia about overreliance on oil. The sector accounts for nearly 70% of Russian exports and Vladimir Putin has done little to alter that dynamic both as prime minister and president in successive tenures.

Realising the Russian position was not going to change over the short term and with a near 10% (or above) dip in production at some of their major fields; the Saudis ramped up their production. A masterstroke or precisely a deft calculated hand played by Minister Ali Al-Naimi planked on the belief that amid bearish trends the Russians simply do not have the prowess, or in fact the incentive, to pump and dump more crude on the market has worked.

A Russian production rise to 10 million bpd is possible in theory, but very difficult to achieve in practice in this macroeconomic climate. So the markets (and the Saudis) expect Russia to fall back on their US$500 billion in reserves to balance the books over the short to medium term rather than ramp-up production. Furthermore, unless the Russians invest, the Saudis’ hand will only be strengthened and their status as ‘crude’ stimulus providers enhanced.

Canada’s oil sands business while not a direct Saudi target is indeed an accidental victim. The impact of a fall in the price of crude will also be very different as Canada’s economy is far more diversified than Russia’s. Instead of a decline in production, the ongoing oil sands and shale prospection points to a potential rise.

Canadian prospection remains positive for Canadian consumers and exporters alike; provincial and federal governments want it, justice wants it, PM wants it and the public certainly want it. However, developing the Athabasca oil sands and Canadian shale plays (as well as US’ Bakken play) is capital and labour intensive.

For the oil sands – holding the world’s second largest proven oil resource after Saudi Arabia’s Dhahran region – to be profitable, crude price should not plummet below US$60 per barrel. Three visits by the Oilholic to Calgary and interaction with colleagues at CAPP, advisory, legal and energy firms in Alberta between 2008 and 2011 threw up a few points worth reiterating amidst this current crude price correction phase. First of all, anecdotal evidence suggests that while it would rather not, Alberta’s provincial administration can even handle a price dip to US$35 to 40 per barrel.

Secondly, between Q2 2007 and Q1 2008 when the price of crude reached dizzy heights, oilfield services companies and engineering firms hired talent at top dollar only to fire six months later when the price actually did plummet to US$37 per barrel in wake of the financial crisis. Following a wave of redundancies, by 2010 Calgary and Fort McMurray were yet again witnessing a hiring frenzy. The cyclical nature of the industry means this is how things would be. Canadians remain committed to the oil & gas sector and in this blogger’s humble opinion can handle cyclical ups and downs better than the Russians.

Finally, Canada neither has a National Oil Company nor is it a member of any industry cartel; but for the sake of pure economics it too needs a price of about US$80 a barrel. On an even keel, when the price plummets or the Saudis indulge in tactical production manoeuvres, as is the case at present, you’d rather be a Canadian than a Russian.

The Oilholic has long suspected that the Saudis look upon the Canadians as fellow insurers working to prevent ‘oil demand destruction’ and vying for a slice of the American market; for them the Iranians and Russians are just market miscreants. That the market itself is mischievous and Canadians might join the 'miscreants' list if proposed North American pipelines come onstream is another matter! That’s all for the moment folks! Keep reading, keep it 'crude'!

© Gaurav Sharma 2012. Photo 1: Russian pump jacks © Lukoil. Photo 2: Red Square, Moscow, Russia © Gaurav Sharma 2004. Photo 3: Downtown Calgary, Alberta, Canada © Gaurav Sharma 2011.

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.

Keystone XL, politics & the King’s Speech

Even before the original Keystone cross-border pipeline project aimed at bringing Canadian crude oil to the doorstep of US refineries had been completed, calls were growing for an extension. The original pipeline which links Hardisty (Alberta, Canada) to Cushing (Oklahoma) and Patoka (Illinois) became operational in June 2010, just as another, albeit atypical US-Canadian tussle was brewing.

The extension project – Keystone XL first proposed in 2008, again starting from Hardisty but with a different route and an extension to Houston and Port Arthur (Texas) is still stuck in the quagmire of US politics, environmental reticence, planning laws and bituminous mix of the Canadian oil sands.

The need for extension is exactly what formed the basis of the original Keystone project – Canada is already the biggest supplier of crude oil to the US; and it is only logical that its share should rise and in all likelihood will rise. Keystone XL according to one of its sponsors – TransCanada – would have the capacity to raise the existing capacity by 591,000 barrels per day though the initial dispatch proposal is more likely to be in the range of 510,000 barrels.

Having visited both the proposed ends of the pipeline in Alberta and Texas, the Oilholic finds the sense of frustration only too palpable more so because infrastructural challenges and the merits (or otherwise) of the extension project are not being talked about. To begin with the project has a loud ‘fan’ club and an equally boisterous ‘ban’ club. Since it is a cross-border project, US secretary of State Hillary Clinton has to play the role of referee.

A pattern seems to be emerging. A group of 14 US senators here and 39 there with their counterparts across the border would write to her explaining the merits only for environmental groups, whom I found to be very well funded – rather than the little guys they claim to be – launching a counter representation. That has been the drill since Clinton took office.

One US senator told me, “If we can’t trust the Canadians in this geopolitical climate then who can we trust. Go examine it yourself.” On the other hand, an environmental group which tries to get tourists to boycott Alberta because of its oil sands business tried its best to convince me not to land in Calgary. I did so anyway, not being a tourist in any case.

Since 2008, TransCanada has held nearly 100 open houses and public meetings along the pipeline route; given hundreds of hours of testimony to local, state and federal officials and submitted thousands of pages of information to government agencies in response to questions. The environmentalists did not tell me, but no prizes for guessing who did and with proof. This is the kind of salvo being traded.

Send fools on a fool’s errand!

It is not that TransCanda, its partner ConocoPhillips and their American and Canadian support base know something we do not. It is a fact that for some years yet – and even in light of falling gasoline consumption levels – the US would remain the world’s largest importer of crude oil. China should surpass it, but this will not happen overnight.

The opponents of oil sands have gotten the narrative engrained in a wider debate on the environment and the energy mix. Going forward, they view Keystone XL and other incremental pipeline projects in the US as perpetuating reliance on crude oil and are opposing the project on that basis.

Given the current geopolitical climate, environmental groups in California and British Columbia impressed upon this blogger that stunting Alberta’s oil sands – hitherto the second largest proven oil reserve after Saudi Arabia’s Ghawar extraction zone – would somehow send American oilholics to an early bath and force a green age. This is a load of nonsense.

Au contraire, it will increase US dependency on Middle Eastern oil and spike the price. Agreed the connection is neither simple nor linear – but foreign supply will rise not fall. Keystone XL brings this crude foreign product from a friendly source.

Everyone in Alberta admits work needs to be done by the industry to meet environmental concerns. However, a 'wells to wheels' analysis of CO2 emissions, most notably by IHS CERA and many North American institutions has confirmed that oil sands crude is only 5 to 15 per cent ‘dirtier’ than US sweet crude mix.

The figure compares favourably with Nigerian, Mexican and Venezuelan crude which the US already imports. So branding Canadian crude as dirty and holding up Keystone XL on this basis is a bit rich coming from the US. Keystone XL increases US access to Canadian crude. Who would the Americans rather buy from Canada or Venezuela? Surveys suggest the former.

The pragmatists at CAPP

Over a meeting in Calgary, Dave Collyer, President of Canadian Association of Petroleum Producers (CAPP) told the Oilholic that they have always viewed Keystone XL as an opportunity to link up Western Canada to the US Gulf coast market, to replace production that would otherwise be imported by the US from overseas sources most notably Venezuela and Mexico where production is declining according to available data. There are also noticeable political impediments in case of the former.

“We don’t see this pipeline extension as incremental supply into that orbit, rather a replacement of existing production through a relatively straightforward pipeline project, akin to many other pipeline projects and extensions that have been built into the US,” Collyer said.

Energy infrastructure players, market commentators and CAPP make another valid point – why are we not debating scope of the Keystone XL project and its economic impact and focussing on the crude stuff it would deliver across the border? CAPP for its part takes a very pragmatic line.

“Do we think there is legitimacy in the argument that is being made against Keystone? No (for the most part) but the reality is that there has to be due consideration in the US. I would assume the US State Department is in a position where it has no alternative but to employ an abundance of caution to ensure that all due processes are met. What frustrates Canadians and Americans alike is the length of time that it has taken. However, at the end of the day when we get that approval and it is a robust one which withstands a strict level of scrutiny then it’s a good thing,” Collyer said.

T I M B E R!

Canadians and Americans first started bickering about timber, another Canadian resource needed in the US, about taxation, ethics, alleged subsidies and all the rest of it way back in 1981. Thirty years later, not much has changed as they are still at it. But these days it barely makes the local news in Canada each time the Americans take some reactive action or the other against the timber industry. Reason – since 2003 there has been another buyer in town – China.

In 2010, timber sales from Canada to China (and Japan to a lesser extent) exceed those to the US. Over the last half-decade timber exports from the province of British Columbia alone to China rose 10 times over on an annualised basis. Moral of the story, the US is not the only player in town whatever the natural resource. Canadians feel a sense of frustration with the US, and rightly so according to Scott Rusty Miller, managing partner of Ogilvy Renault (soon to be part of Norton Rose) in Calgary.

“We are close to the US, we are secure and we have scruples. Our industry is more open to outside scrutiny and environmental standards than perhaps many or in fact any other country the US imports crude oil from – yet there are these legal impediments. Scrutiny is fine. It’s imperative in this business, but not to such an extent that it starts frustrating a project,” Miller noted.

Ask anyone at CAPP or any Toronto-based market analyst if Canada could look elsewhere – you would get an answer back with a smile; only the Americans probably would not join them. The Oilholic asked Collyer if Americans should fear such moves.

His reply was, “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.”

CAPP has noted increasing interest from Chinese, Korean and other Asian players when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Interest alone does not create a market – but backed up by infrastructure at both ends, it strengthens the relationship between markets Canadians have traditionally not looked at. All of this shifts emphasis on Canadian West coast exports.

“Is it going to be straightforward to get a pipeline to the West coast – we’ll all acknowledge that it’s not. For instance, Enbridge has its challenges with the Gateway pipeline. There is an interest in having an alternative market. There are drivers in trying to pursue that and I would say collectively this raises the “fear” you mention and with some factual basis. However, the US has been a great market and should continue to be a great market...while some caution is warranted,” he concluded.

The King’s speech

We’re not talking about Bertie, (King George VI of England) but Barack (The King of gasoline consumers and the US President). On March 30th, the King rose and told his audience at Georgetown University that he would be targeting a one-third reduction in US crude imports by 2025.

“I set this goal knowing that we’re still going to have to import some oil. And when it comes to the oil we import from other nations, obviously we have got to look at neighbours like Canada and Mexico that are stable, steady and reliable sources,” he added. While I am reliably informed that the speech was not picked up by Chinese state television, the Canadian press went into overdrive. The Globe and Mail, the country’s leading newspaper, declared “Obama signals new reliance on oil sands.”

Shares of Canadian oil and service companies rose the next day on the Toronto Exchange, even gas producers benefited and 'pro-Keystone XL' American senators queued up on networks to de facto say “We love you, we told you so.” Beyond the hyped response, there is a solid reason. Keystone XL bridges both markets – a friendly producer to a friendly consumer with wide ranging economic benefits.

According to Miller, “Refining capacity exists down south. Some refineries on the US Gulf coast could be upgraded at a much lower cost compared to building new infrastructure. There are economic opportunities for both sides courtesy this project – we are not just talking jobs, but an improvement of the regional macro scenario. Furthermore, however short or long, it could be a shot in the arm for the much beleaguered and low-margin haunted refining business.”

The pipeline could also help Canadians export surplus crude using US ports in the Gulf and tax benefits could accrue not just at the Texan end but along the route as well. That the oil sands are in Canada is a geological stroke of luck, given the unpredictability of OPEC and Russian supplies. The US State Department says it will conclude its review of Keystone XL later this year. Subjecting this project to scrutiny is imperative, but bludgeoning it with impediments would be ‘crudely’ unwise.

This post contains excerpts from an article written by the Oilholic for UK's Infrastructure Journal. While the author retains serial rights, the copyright is shared with the publication in question.

Gaurav Sharma 2011 © Gaurav Sharma and Infrastructure Journal 2011. Map: All proposals of Canadian & US Crude Oil Pipelines © CAPP (Click map to enlarge)

Glimpses of Fort Calgary, 1914 & all that!

The Oilholic paid a visit to Fort Calgary in between meetings; not far from Downtown Calgary (towards the east end of the city). There is no better place to soak in the city’s rich heritage. Founded in 1875, the then North West Mounted Police (NWMP) built this outpost at the convergence point of Bow and Elbow Rivers. In all fairness, say local historians, they laid the foundations of the modern city of Calgary.

For oilholics the world over, the 'crude' bits are very crucial and merit a detailed look. First gas and (as was often the case with hydrocarbon prospecting) then oil was found in May, 1914, just south of Calgary. After the first discovery, there was a long wait of some 33 years before the next meaningful discovery was made.

The rest, as they say, is all history and I am reading up on it thanks to some wonderful books obtained from stores recommended by Rusty Miller, Ogilvy Renault LLP’s managing partner here. He also spared time from his busy schedule to give me some valuable insight on intricacies of the energy business in this part of the world.

Uploaded above are some 'crude' snaps from the Fort, captioned as appropriate. If you happen to be in town – please do visit. For some strange reason, and locals scratch their heads too, this wonderful place does not receive any Federal funding! Even provincial support needs to be applied for and is not a given thing by any means according to an official. Local energy companies have been good though and long may that continue.

Finally, a few crude words on the price and differentials between both benchmarks – WTI & Brent. This weekend, using the Brent forward month (May) futures contract as a benchmark – the crude price is at its highest since August 2008. With the May contract at US$117.36 per barrel, that is an annualised price appreciation of nearly 24% and by my estimation – a week-over-week appreciation of nearly 2.4% plus. Price differential between Brent and WTI also averaged US$10 and shows no sign of narrowing!

The Libyan situation also shows no signs of a resolution. Both in Alberta and Texas – the overwhelming sentiment is that Libya is fast resembling a stand-off and that adds to the upside bias reflected in the risk premium. It seems that for the short term, the market will have to make do without Libyan crude.

Problem is if it becomes a medium term supply concern. Surely, a high price should please Texans and Albertans – but "only to a point" notes one. That tipping point could hurt both the global economy and the profit margins of those in the business.

© Gaurav Sharma 2011. Photos: (Top) Fort Calgary, (Clockwise) Signage charting the first discovery of oil on the exterior of the fort, Turner Valley & Leduc crudes on display, Model of an old Gas station (Click on images to enlarge) © Gaurav Sharma, March 2011

Goodbye Houston; first thoughts from Calgary

Instability or risk premium is not being reflected in the US Mid West as much as it is in Europe in light of the Libyan situation. Following accidents in San Bruno, CA and Michigan, MI – pipeline safety legislation is likely to be added to the pile of regulatory activity related to the energy business which followed BP’s Gulf of Mexico fiasco. In fact, a bill on pipeline safety is already making its way through the US senate.

There is also common conjecture that retirement of coal-fired power plants may assist in shifting established gas flow patterns (& prices). However, the Oilholic feels while this is likely to happen at some point, it will not happen in a meaningful way any time soon. Mid West’s problem is akin to that of Australia’s when it comes to power generation – a traditional dependence on coal which is hard to tackle. Gas prices, in any case, are likely to remain low as there are abundant supplies and storage levels are solid.

Given that the US overtook Russia as the leading gas producer courtesy of shale gas, it is not bravado to assume that it could meaningfully export to Europe or that US-bound LNG could well be diverted to Europe.

Moving on to refining, some local analysts are following the “things can only get better” logic for North American refiners – who they feel are well positioned to demonstrate a recovery (or some form of stabilisation) of their margins after six troubled quarters to end-2010. The speed of the economic recovery will have a big say in the state of affairs.

After leaving Houston, the Oilholic has now arrived in its sister Canadian city of Calgary – quite a switch from a sweltering 30 C on a Texan morning to about -4 C on an Albertan evening. While both cities do not share their climate – they do share the same sense of frustration about the delays associated with the expansion project of the Keystone pipeline.

It seems Alberta and Texas are quite keen on the expansion – it’s just that everyone in between is the problem. The politics associated with this pipeline, as with other projects of its ilk is deeply complicated. However, this one involves cross-border politics, some of which has turned ugly especially in relation to the “cleanness” of Canadian oil.

And by the way its “oil sands” not “tar sands” stupid, say the locals! I’ll have more from Calgary shortly when I soak in and refine the local commentators’ viewpoints.

© Gaurav Sharma 2011. Photo: Calgary Tower, Alberta, Canada © Gaurav Sharma, March 2011