Life in the petroleum sector used to be exhilarating – earning a living in an incredibly dynamic business, providing the fuel that the world needs to maintain its standard of living, and working with energetic, motivated people.
Today, producers no longer feel quite so enthused; in fact they feel like 60-year-old former NFL linemen trying to get out of bed. Watching the news is like seeing your face pop up on the nation’s most wanted list for some unspeakable act committed to a dying orphan’s kitten. Outraged school children mouth indoctrinated platitudes to a voracious media, their earnest desire for the annihilation of the entire fossil fuel complex spreading across the globe in endless waves of demented moronic angst.
The worst part for Canadian producers though is that they can’t even tell who their friends are.
It’s obvious who the enemies are, mainly; groups trying to kill the fossil fuel industry despite the resulting threat to their own mortality. Others are trying to strangle producers by limiting market access, thwarting new pipeline construction in any way possible. Between these two factions, life has become very difficult indeed.
But it gets much worse, because for the past few years producers’ biggest enemy may well have been the export pipeline companies themselves, and the pain they cause spreads to every citizen of the province and, ultimately, the country.
There are massive problems in the petroleum industry caused by a lack of proper market access for oil and gas. We all know that. What we don’t all know is how this critical issue can be mishandled by indifferent, fee-collecting legacy businesses that don’t seem to care beyond their payout ratio. And, like a giant oaf sitting on a baby, they don’t quite understand what all the fuss is about because this sofa is quite comfortable indeed.
On the natural gas side, the inability to get product out of the province is old news, and has helped devastate both provincial treasuries and industry. The inability of TC Energy, the dominant transporter, to debottleneck its system (plus debilitating requirements for producers to sign on for long-term take-or-pay service) has led to severely discounted Alberta natural gas prices. TC Energy, facing an uproar from producers more than a year ago, calmly told everyone: settle down, we’re spending billions to address the issue. In due course. Unfortunately, we’re also spending a bunch to bring more gas into the province from NE BC, and yes, we know that’s both awkward and dumb to bring more into a province that can’t get natural gas out, but, on the positive side, we’d direct your attention to our IR presentation which shows just how much money we make.
It’s not just producers that see a huge problem here. A massively useful analysis of Alberta’s natural gas sector, co-written by a former CEO of TC Energy, flagged many problems including that “Currently, producers receive 29 to 49 per cent of revenue and transporters and marketers receive 36 to 57 per cent depending upon the market.” The report also noted how important it was to help smaller producers unable to commit to long-term pipeline commitments, and that greater system flexibility and responsiveness were critical for all producers.
Anyone who wants to know how TC’s strategy plays out can ask a Trident Exploration employee, if they can find one. On May 1, the natural gas producer locked its doors, laid off employees, and walked away from 450 billion cubic feet of proved reserves due to a brutalized AECO gas price that was nowhere near covering operating costs. Trident handed 4,700 wells over to the regulator, and a fully-plumbed, well-delineated, perfectly able set of properties is now a huge problem for the whole province, slated for abandonment because the NGTL system has not been debottlenecked.
This was almost two years after TC Energy executives shrugged off concerns about the impact of their inability to debottleneck the system, musing in a conference call that “we don’t know yet how low the price can go and then still recover your full cycle decent returns on investment”, and, to rub salt in the wound, further noted “The creditworthiness of these counterparties is improving.” Since then, AECO prices have been gutted, sometimes going negative, and the creditworthiness of all but a few is in tatters. Mr. TC Energy executive, did Trident’s experience help with your understanding of just how low prices can go without inflicting damage?
As if that wasn’t bad enough, Enbridge is now planning a similar scheme, whereby the currently open-access pipeline system (representing 70 percent of Canadian exports) is about to be turned into an entirely different beast where only 10 percent of space will be available on the spot market. The other 90 percent will be under long-term take or pay contracts.
Like the natural gas fiasco, this is a recipe for disaster. There is a reason that Canada’s largest producers are howling with outrage over this scheme. Southern refiners and marketing companies are very adept at purchasing space and using it for their own advantage, as documented above where these groups take home more revenue than producers. In a bidding contest to get onto a pipeline, desperation to get product to market will mean a downward-spiraling bidding war, and refineries (and whoever controls the space) will scoop up ultra-cheap product in Canada, sell it for market rates in the US, and pocket the very handsome difference. The people of Alberta, owners of the resource, will be screwed in the process. Few producers have the wherewithal to meet those long-term requirements, and will therefore be left at the mercy of a very cagey pack of wolves.
With sadly familiar arrogance, an Enbridge spokesperson downplays the significance of concerns, based on how few are complaining: “…there have been, I don’t know, three or four complaints here, but we’ve been dealing with in excess of 40 different shippers negotiating this package so it’s still a relatively small number, a small subset.” In another article, Enbridge says “…we have significant support for the open season offering.”
Hmm, well, maybe the support comes from entities that could benefit massively from a system they can game, who won’t even have to endure the publicly-visible apportionment mechanism. Maybe they make a fortune by commandeering most space on the pipeline and having producers bid for it, which has the effect of driving down prices in the producing market, and allowing some magician to make an absolute killing by selling the product in the market at the other end of the line. Don’t take my word for it, ask any Midwest US refiner how much money they made in Q4 2018’s peak apportionment crisis, if they happened to have oil transportation space out of Canada. You can find their comments yourself in 2018/Q4 MD&As if you don’t mind, because I don’t want to meet their lawyers.
Those that do not own pipelines do not find this amusing. Spiraling government debt due to reduced royalties is not amusing. And if this same fiasco happens in the oil market, Alberta’s hole will become substantially deeper.
I don’t give a crap who objects, but it remains true that the Alberta Government solved the problem in a quick and effective manner, by curtailing production to solve the problem of over-nominations. Even though some parties in Canada that own refining capacity objected, it was the right move for the province overall – the ridiculously high discounts on Canadian oil that happened in December 2018 disappeared in days. The proposed Enbridge solution is no solution at all; it will be a staggeringly large blow for an industry already on its knees.
For a province fighting to be heard, fighting for a vital industry, fighting to balance budgets, should not this issue be at the very top of the agenda? Should a province running massive deficits stand idly by, watching as these operational policies further cripple the main economic engine of the province, particularly with foes around the world more than willing to help with that cause?
As Mr. Kvisle, the former TC Energy CEO, pointed out in January, ““The province needs to really seriously look at prorationing of gas coming into the system just as they’ve done for crude oil…” He made this comment because Alberta’s prorationing worked so well to raise oil prices. Now, incredibly, Enbridge wants to introduce a system to the oil markets that is similar to the one that devastated the natural gas one.
If Enbridge succeeds, we can expect intra-Alberta oil prices to fall, provincial royalties to fall, producer bankruptcies to proliferate, more oilfield service companies to go under, and the number of orphaned wells to skyrocket.
Our government should be outraged, as should every taxpayer.
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