Imperial Oil worries about competitiveness as it weighs next phase of oilsands growth

Imperial Oil Ltd., the Canadian subsidiary of Exxon Mobil Corp., isn’t joining the exodus of oil majors out of Canada.

But Canada’s longest-established oil company isn’t in a rush to expand either as it weighs whether to embark on a new phase of oilsands’ growth.

Chairman and CEO Rich Kruger said it needs the deposits, the “heavy hitters” of its Canadian portfolio, to be globally competitive in an environment of lower oil prices, which means the economic tests have “become more stringent than they might have been a few years ago,” he told reporters Friday after speaking to the company’s annual shareholders meeting in Calgary.

It’s a unique approach among Canada’s oilsands heavyweights to the sector’s restructuring over the last year, which has seen international companies retreat and Canadian operators expand.

But it’s another reminder that capital is mobile and that even deeply rooted companies like Imperial don’t have to accept the higher taxes and more regulation imposed by the Alberta and federal government, largely to meet international climate change commitments, if they are out of step with a world of opportunity.

“From a cost standpoint — whether it’s a carbon tax, whether its corporate income tax, municipal tax, revisions to royalties — we look at the cumulative effect and how it affects our competitiveness,” Kruger explained. “At the end of the day, it comes out of our pocket. What you call it doesn’t make much difference. It’s cash in and cash out.

“I do have concerns about the economic competitiveness of our resource base in Canada, in Alberta, and I think it’s really important that we not only look at ourselves, but how do we compare to other jurisdictions that are competing with us for investment.”

Canada has enjoyed more than its fair share of attention from the Exxon Mobil empire during the past couple of decades. Some would say it was regarded as its crown jewel.

A big push was made to build the Mackenzie pipeline, which would have monetized vast gas resources in the Arctic and was shelved because economic conditions changed following an absurdly long regulatory review.

Then there were years of aggressive spending in the oilsands to build the Kearl mining project and to expand the Cold Lake in-situ operation.

Those heavy investments are paying off with the recovery in oil prices. On Friday, Imperial posted a profit of $333 million for the first quarter, compared to a loss of $101 million in the same period a year ago. Production averaged 378,000 barrels of oil equivalent a day, down from 421,000 boe/d during the same period a year ago, due to a fire at the Syncrude facility in mid-March. Kearl contributed production of 129,000 b/d. Cold Lake contributed 158,000 b/d.

It’s really important that we not only look at ourselves, but how do we compare to other jurisdictions that are competing with us for investment

The company says it will increase its quarterly dividend in June by a penny to 16 cents per share

Most recently, Imperial has been getting ready the next tranche of projects, such as a further Cold Lake expansion and the Aspen project. Both would use technologies that would result in lower greenhouse gas emissions than existing projects.

“I think the jury is still out a bit on when” they could move forward,” Kruger said. They are still before regulators and “the real question is: When those approvals are in hand … (given the) economic quality and competitiveness of those projects in the business environment of the day, what do we see unfolding?”

Just as significantly, the company took a pass on oilsands acquisition opportunities nailed down by competitors Suncor Energy Inc., Canadian Natural Resources Ltd., and Cenovus Energy Inc.

For now, Kruger is spending more time talking to Canadian policy makers to ensure they are aware of the many advances being made and of the opportunities before them.

“As our industry has shown, we have an ability to make things better and better over time, so don’t bet against the Canadian oilsands. That is the overriding message,” he said. The question is whether governments are already too heavily invested in a transition to green energy to pay attention.

Financial Post

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‘Defies market realities’: Trump signs order to expand U.S. offshore drilling, despite low industry demand

WASHINGTON — U.S. President Donald Trump signed an executive order on Friday to extend offshore oil and gas drilling to areas that have been off limits, in a move to boost domestic production just as industry demand for the acreage nears the lowest in years.

The order could lead to a reversal of bans on drilling across swathes of the Atlantic, Pacific and Arctic oceans and the U.S. Gulf of Mexico that former President Barack Obama had sought to protect from development in the wake of the huge BP oil spill in the Gulf of Mexico in 2010.

“We’re opening it up … Today we’re unleashing American energy and clearing the way for thousands and thousands of high-paying American energy jobs,” Trump said as he signed the order.

Trump had campaigned on a promise to do away with Obama-era environmental protections he said were hobbling energy development without providing tangible benefits, pleasing industry and enraging environmental advocates.

The order, called the America-First Offshore Energy Strategy, directs the U.S. Department of Interior to review and replace the Obama administration’s most recent five-year oil and gas development plan for the outer continental shelf, which includes federal waters off all U.S. coasts.

The Trump administration’s hasty move today toward expanding offshore oil drilling … defies market realities

But the executive order comes as low oil prices and soaring onshore production have pushed industry demand for offshore leases near its lowest since 2012, raising questions over its impact.

“The Trump administration’s hasty move today toward expanding offshore oil drilling … defies market realities and is as reckless as it is unnecessary,” said David Jenkins, president of Conservatives for Responsible Stewardship, a non-profit conservation group.

“Why on earth would someone choose to push drilling in the riskiest and most expensive places on the planet when the current oil glut will make such ventures unprofitable for the foreseeable future?” he said.

Canadian Press//AP/Evan Vucci

Canadian Press//AP/Evan VucciPresident Donald Trump shows his signature on an executive order

The amount of money that oil companies spent in the central Gulf of Mexico’s annual lease sale dropped more than 75 per cent between 2012 and 2017, according to government data. Dollars bid per acre and the percentage of acreage receiving bids both declined more than 50 per cent.

The figures were similar in the western Gulf of Mexico, the only other zone that got offers for leases during that period, according to the figures from the U.S. Bureau of Ocean Energy Management.

An official at trade group American Petroleum Institute did not respond to a request for comment about offshore lease demand.

But API President Jack Gerard welcomed the executive order. “We are pleased to see this administration prioritizing responsible U.S. energy development and recognizing the benefits it will bring to American consumers and businesses,” he said.

Weeks before leaving office, Obama banned new oil and gas drilling in federal waters in the Atlantic and Arctic oceans, protecting 115 million acres (46.5 million hectares) of waters off Alaska and 3.8 million acres in the Atlantic from New England to the Chesapeake Bay.

Legal battle looms

In addition to requiring a new five-year drilling plan, the order reverses Obama’s decision to place parts of the Arctic permanently off limits to drilling. It also requires Commerce Secretary Wilbur Ross to review previous presidents’ designations of marine national monuments and sanctuaries.

Jill McLeod, a partner at international law firm Dorsey & Whitney, said Trump’s order was a positive signal to the oil industry but was unlikely to trigger a surge in exploration in the near term given the costs.

“The lifting of the ban does not necessarily make drilling in the Arctic a compelling proposition,” she said.

Environmental groups, including Oceana and the Center for Biological Diversity, criticized the order and promised to fight it in court. Democratic senators also opposed the order, saying it could threaten the fishing and tourism industries.

Friday’s order came on the heels of a separate decree by Trump this week triggering a review of federally managed land to determine if they were improperly designated as national monuments by former presidents. The move is intended to expand federal areas available for development. (Editing by Richard Valdmanis and Jeffrey Benkoe)

© Thomson Reuters 2017

Imperial Oil reverses loss with $333 million quarterly earnings, will increase dividend

CALGARY — Imperial Oil (TSX:IMO) is reporting first-quarter earnings that reversed a loss in the same period of last year but fell short of analyst expectations.

The Calgary-based oil producer and refiner says net income was $333 million or 39 cents per share in the three months ended March 31, boosted by a gain of $151 million on the sale of former refinery lands in Mississauga, Ont., compared with a loss of $101 million or 12 cents in the year-earlier period.

It says operating earnings per share were 21 cents, versus an RBC forecast of 50 cents.

The company says it will increase its quarterly dividend in June by a penny to 16 cents per share.

Total revenue was up 37 per cent to $7.16 billion for the company, which is 69.6 per cent owned by American oil giant Exxon Mobil.

Production averaged 378,000 barrels of oil equivalent per day, compared to 421,000 boe/d in the same period of 2016, due in part to a fire at the Syncrude Mildred Lake upgrader in mid-March which affected production. Imperial owns 25 per cent of Syncrude.

The Canadian Press

Next battleground: Enbridge’s aging Great Lakes pipeline stirs new protest in Michigan

The growing protest movement against U.S. oil and gas pipelines has so far focused on stopping or delaying new construction, with some high-profile successes.

Now, in Michigan, a broad coalition of opponents is entering a new frontier: Pushing to rip out and reroute an existing pipeline — Enbridge Inc.’s aging Line 5, which crosses the Straits of Mackinac.

They fear the pipeline will leak into the Great Lakes, which contain about a fifth of the world’s fresh water and sustain the state’s second- and third-largest industries, agriculture and tourism.

Those concerns — which are shared by two likely candidates for governor — also have far-reaching implications for energy firms and consumers.

Spanning 645 miles, Line 5 carries 540,000 barrels per day of light Canadian crude and refined products between Wisconsin and Ontario, making it a key link in Enbridge’s network transporting western Canadian oil to eastern refineries. It also delivers about half the propane used to heat Michigan homes.

Moving the pipeline, built in 1953, would cost Enbridge US$4.2 million per mile — or about US$2.7 billion total, according to an estimate from IHS Markit analyst Phil Hopkins.

Enbridge spokesman Ryan Duffy said that the line is structurally sound and constantly monitored, tested and inspected to prevent leaks. The firm plans to add 18 additional supports in the Straits this summer, he said.

The unprecedented demands to move an existing pipeline present steep political and regulatory challenges, said Dirk Lever, an analyst with AltaCorp Capital in Calgary.

“Move it? The question is where,” he said. “And good luck with building a new pipeline.”

The Michigan controversy is only the latest pipeline fight.

Postmedia

PostmediaA sign at the confluence of Talmadge Creek and the Kalamazoo River warns residents of Marshall, Michigan.

Last year, protests by North Dakota’s Standing Rock Sioux, a Native American tribe, garnered national attention and delayed the opening of Energy Transfer Partners’ Dakota Access Pipeline, which finally won approval in February.

Another ETP pipeline proposed in Louisiana has drawn protests from flood protection advocates and commercial fishermen.

The Keystone XL pipeline, planned by TransCanada Corp , now faces a political showdown over route approval in Nebraska amid protests from farmers and ranchers.

AP Photo/Michigan Technological University, Guy Meadows

AP Photo/Michigan Technological University, Guy MeadowsThis undated photo proved by Michigan Technological University shows an Iver 3 Autonomous Underwater Vehicle purchased by Enbridge Energy Partners for Michigan Technological University in Houghton, Mich. Michigan Tech's Great Lakes Research Center will use the device to conduct sonar inspections of Enbridge oil pipelines beneath the Straits of Mackinac. Some consider the pipes, laid in 1953, a symbol of the dangers lurking in the U.S.'s sprawling web of buried oil and natural gas pipelines.

“Move it? The question is where”

In Michigan, pipeline opponents include regional businesses and churches, as well as local and national environmental groups.

State officials have ordered two independent reports, expected in June – one on the pipeline’s reliability and another on potential alternatives if the state moves to revoke easements that allow Line 5 to operate. The reports could fuel a debate that is expected to intensify in the 2018 governor’s race.

Many opponents argue the 64-year-old Enbridge pipeline has already outlived its predicted life span. They cite a 2015 interview with an engineer on the original project, Bruce Trudgen, who said that, at the time of construction, the pipeline was expected to last 50 years.

“Common sense dictates that a pipeline which is already 28 per cent past its viable life will eventually be decommissioned,” said Gretchen Whitmer, a former Michigan senator now campaigning for the Democratic nomination for governor. “Government would be wise to plan for that proactively — before disaster strikes.”

Michigan Attorney General Bill Schuette, widely expected to run for governor as a Republican, has also expressed concerns about pipeline.

Enbridge, which operates more than 17,000 miles (28,000 kilometers) of oil and gas pipeline across North America, disputes the assertion that Line 5 has any specific life expectancy.

Regardless of initial predictions, Duffy said, new technology developed since the 1950s can now keep pipelines in better condition for longer.

Michigan’s debate over whether Line 5’s age equates to a safety hazard could resonate across a nation crisscrossed with decades-old pipelines. More than half of U.S. pipelines were built in the 1950s or 1960s, according the U.S. Department of Transportation.

When the Enbridge line reaches the Straits of Mackinac, which connect lakes Huron and Michigan, it splits into twin 20-inch diameter steel pipes, hailed as a feat of modern engineering when they were installed in 1953.

Enbridge

EnbridgeThis undated photo provided by Enbridge Energy shows a high-speed skimmer, a device that removes spilled oil from waterways.

Now, opponents here view them as the product of an era in which the damage from oil spills was not well-understood.

Enbridge is still working to overcome public concern over the 2010 failure of its Line 6B pipeline, which leaked 20,000 barrels of crude into Michigan’s Kalamazoo River in one of the largest inland spills in U.S. history.

The Straits – five miles wide and 120 feet deep – swirl with strong currents that would disperse contaminants from an oil spill faster than anywhere else in the Great Lakes, according to the National Oceanic and Atmospheric Administration.

The line has never spilled under the Straits, but has leaked at least eight times at other points between 1980 and October 2015, according to the U.S. Pipeline and Hazardous Materials Safety Administration (PHMSA). None of the leaks were larger than 100 barrels.

The leak that raised the most concern was a February 2012 incident in central Michigan that environmentalists contend exposed a flaw in the original construction.

The leak of about 20 barrels was traced to a tear in the pipeline that was estimated to have originated at about the time the line was constructed, according to a PHMSA report on the spill. The tear later spread into a larger crack, causing the leak.

“The nature of the problem is a defect in the pipeline traced to the entire construction period in 1953, so that raised a lot of doubts,” said David Holtz, a member of environmental group Sierra Club.

Enbridge declined to comment on the leaks.

The pipeline’s age is only one factor in considering whether it poses an environmental hazard, said Jim Feather, a former president of the National Association of Corrosion Experts and a retired ExxonMobil Corp engineering advisor.

Line 5 has done well in its regular in-line inspections, he said, and has ample protections in place.

“Just because something is old does not mean it’s at much greater risk of failure,” Feather said.

© Thomson Reuters 2017

The economics of energy generation are changing; more metrics favor solar, wind

A solar thermal plant in the US.

It’s not always a simple task to compare the value of electricity generation resources. Coal, natural gas, solar, wind, and so on have different strengths and weaknesses, so when it comes time to build or replace energy capacity, economists look at the Levelized Cost of Energy (LCOE), which divides the total cost of an installation or plant by the kilowatt-hours it produces over its lifetime.

While private financial firms like Lazard calculate their own LCOE figures, the Energy Information Administration (EIA) also puts together an annual report projecting the LCOE for various generation resources. The report, released this month, looks at the cost of generation resources if they were to come online in 2019, 2022, and 2040.

The latest numbers seem to confirm trends that have borne out recently in energy markets—overall, some renewables are getting more attractive, others are struggling, and coal has definitely been unseated as king.

Read 24 remaining paragraphs | Comments

Oilsands Canadianization has aligned interests, says Suncor Energy CEO Steve Williams

One unforeseen advantage has emerged from the foreign exodus from the oilsands — there is a new alignment of interests between industry and Canadian governments to help them succeed.

That’s the view of Steve Williams, president and CEO of Suncor Energy Inc., Canada’s largest oil and gas company, who started the Canadian consolidation trend last year by acquiring a control position in competitor Syncrude Canada Ltd. Other major deals followed — including the purchase of Royal Dutch Shell PLC’s oilsands assets by Canadian Natural Resources Ltd., and the purchase of ConocoPhillips’ oilsands assets by Cenovus Energy Inc.

Canadian companies are now in charge of about 70 per cent of oilsands production, and some have become so large they are giants of the Canadian economy. (Among the producers, Suncor has a market value of about $70 billion and Canadian Natural of $50 billion; in the pipeline group, Enbridge Inc. has a market value of about $90 billion and TransCanada Corp. of about $55 billion).

That alignment means governments have to be more responsive about threats to their competitiveness, such as those coming from the United States, Williams said to reporters Thursday in Calgary after addressing the annual meeting of shareholders.

Suncor, Canada’s largest oilsands operator, had just reported a better-than-expected $1.3 billion profit for the first quarter, compared to $257 million in the same period a year ago, on higher crude prices, lower costs, and asset sales, re-enforcing that the sector has rebounded from the oil shock and can make money even at US$50-a-barrel oil.

The Canadianization of the oilsands “from where I stand it’s a good thing,” Williams said. “It aligns the Canadian interests. Now what we have (is) a Canadian resource, increasingly owned by Canadian corporations, working with Canadian provincial and federal governments to try and get the proper access with absolutely the right environmental standards to market. So you get a bit of a Canadian brand on that and I like that, (but there is a need to look) after the Canadian interests, because this is a very competitive world and we have to do some of that.”

Williams also likes that Canadian companies made “relatively good” deals, and that consolidation among a handful of companies for which production from the deposits is a core business means better supply chains, better connectivity, and more motivation to work co-operatively to make the business more efficient.

James MacDonald/Bloomberg

James MacDonald/BloombergSuncor Energy Inc. president and CEO Steve Williams

But with the administration of Donald Trump proposing major corporate tax cuts, rolling back regulations and threatening to pull out of NAFTA, the sector risks losing access to capital, he said, a message Suncor has been taking to governments.

“We compete internationally for our capital and that gets more difficult if there are other jurisdictions that are either more supportive around either regulation or taxation,” Williams said. “So, it’s really important that both at the provincial and federal level we retain our competitiveness.”

Even Canadian climate change plans, which Suncor supports, imply that Canada needs to be flexible to protect its competitive position, he said. Alberta’s carbon tax costs Suncor about 60 cents a barrel, Williams told shareholders.

While Trump’s tough talk has resulted in an overhang on Canadian stock prices, Williams doubts the U.S. administration will do anything to harm Canadian oil and gas.

Even with the surge in U.S. light oil supplies, refineries in the Gulf of Mexico still need heavy oil, which has been tougher to get due to declining production in Mexico and Venezuela.

“I am optimistic the right things will happen,” Williams said. “I think there will be some positioning, some posturing. Maybe the best indicator we have got is that after all of the discussion, one of the very first things that president Trump did was approve the Presidential Permit for Keystone XL” pipeline.

The company said its earnings were helped by an unrealized after-tax foreign exchange gain of $103 million on the revaluation of U.S. dollar denominated debt and after-tax gains of $437 million on the sale of its lubricants business and interest in the Cedar Point wind facility in Ontario. Its operating profit, which excludes one-time items, was $812 million, compared to a loss of $500 million, a year ago.

Suncor’s operating costs to produce a barrel of oil dropped to $22.45 from $24.50 during the quarter — or about US$17 a barrel — and the plan is to push those below $20 a barrel.

“We have permanently adjusted them down,” Williams shareholders. The CEO expects the international exodus to continue, as companies like BP PLC, Chevron Corp. and Total SA evaluate their positions, though Suncor doesn’t need to make another deal and its priority is to return cash to shareholders.

Financial Post

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Crescent Point’s first-quarter profit surprises as company rebuilds investor trust

CALGARY – Crescent Point Energy Corp. earned a profit in the first quarter as the light oil producer is trying to rebuild confidence in its stock following a sell-off at the end of last year.

Crescent Point has tried to charm investors and soothe concerns following a widely criticized equity raise in Sept. 2016, which surprised the market and triggered a more than 30 per cent decline in the company’s share price from $20.26 each to $13.34 at midday Thursday.

Scott Saxberg, Crescent Point president and CEO, said on an earnings call Thursday that his company would host a technical day next month to “enhance investor communication.”

“Our first quarter marked a great start to 2017,” Saxberg said, adding that he would revisit the company’s annual budget following the seasonal lull in second quarter oil and gas drilling.

He announced the company had pulled in net earnings of $119 million in the first quarter, compared with an $87 million net loss at the same time a year earlier, as a result of lower costs and improved oil and gas prices.

The company fetched US$51.70 per barrel in the first quarter, which is 65 per cent higher than at the same time last year.

“Overall, (Crescent Point) is delivering per their communications with the investment community and we are of the view that each quarter will begin to rebuild investor trust with management,” AltaCorp Capital analyst Thomas Matthews said in a research note.

Matthews said he was “encouraged” that Crescent Point had showed some financial restraint by funding a $100-million acquisition in the first quarter in North Dakota with a $93-million disposition in Manitoba.

In addition, the company’s management circular shows Saxberg’s pay package was 50 per cent smaller this past year and Crescent Point directors took either a 16 per cent or 27 per cent pay cut following weak support for its executive compensation. “We heard you and we are responding,” the circular reads.

National Bank Financial analyst Travis Wood said in a note the company’s better-than-expected financial results and production had been “overshadowed by a history of over-equitized funding to support the dividend.”

Crescent Point was trading 2.5 per cent higher to $13.4 on Thursday in a broadly negative market.

The company produced 173,000 barrels of oil equivalent per day in the first quarter, above a consensus estimate of 170,000 boepd, but down slightly from 178,000 boepd in the first quarter of 2016.

Financial Post

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‘Misleading’: Saudi Aramco dismisses peak oil demand theory as IPO nears

The boss of Saudi Arabia’s state oil company defended petroleum as the mainstay of the global economy, countering theories that demand will peak within years with his own forecast that consumption will keep growing for decades.

“The global economy is forecast to double in size by 2050” so overall demand for energy will be higher, Saudi Arabian Oil Co. Chief Executive Officer Amin Nasser said at the International Oil Summit in Paris. The idea that oil demand is close to its maximum level is “equally as misleading” as now-discredited theories about peak oil supply, he said.

His comments contradict recent opinions from some of the world’s largest oil companies. The surge in battery-powered vehicles will cause demand for oil-based fuels to peak in the 2030s, Total SA’s Chief Energy Economist Joel Couse said this week. In November, Simon Henry, then the chief financial officer of Royal Dutch Shell Plc, said the high point in consumption could happen in as little as five years.

Nasser also has plenty of influential voices supporting his argument. The International Energy Agency, which advises developed economies on energy policy, doesn’t anticipate any peak in oil demand before 2040. Exxon Mobil Corp., the world’s largest oil company by market value, agrees that crude will remain the most important fuel for decades.

The state-run Saudi company, also known as Aramco, has good reason to push against the notion that the world’s ever-growing appetite for oil could soon be sated. It produces more than 10 percent of global crude supply and is preparing for what could be the largest-ever initial public offering. The long-term outlook for demand will be a key component in determining investor appetite and the company’s final valuation, which analysts are already saying could be below the kingdom’s $2 trillion target.

Nasser said preparations for Aramco’s share sale are in order and the IPO remains on track for the end of 2018.

Rather than being concerned about peak demand, the world should focus on the “grave threat” to oil supplies resulting from the cancellation or deferral of about $1 trillion of energy projects amid the slump in crude prices, he said.

The Aramco comments were echoed by the International Energy Agency which said global oil discoveries fell to a record low in 2016 as companies continued to cut spending and conventional oil projects sanctioned were at the lowest level in more than 70 years, warning that both trends could continue this year.

This sharp slowdown in activity in the conventional oil sector was the result of reduced investment spending driven by low oil prices. It brings an additional cause of concern for global energy security at a time of heightened geopolitical risks in some major producer countries, such as Venezuela, the IEA said.

“Every new piece of evidence points to a two-speed oil market, with new activity at a historic low on the conventional side contrasted by remarkable growth in U.S. shale production,” said Dr Fatih Birol, the IEA’s executive director. “The key question for the future of the oil market is for how long can a surge in U.S. shale supplies make up for the slow pace of growth elsewhere in the oil sector.”

Bloomberg News with files from Financial Post Staff