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Derrick Digest for Jan. 27: After a two-year ‘hangover,’ Canada’s energy producers are making up for lost time

 

The Derrick Digest is a weekly collection of curated content, based on events from across the oil and gas industry, that caught our eye at Pennine Petroleum Corporation.

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Jan. 27, 2017

West Texas Intermediate is trading at around US$53 this week.

That’s about half of its value in mid-2014, when the bottom fell out of the global crude oil market.

And yet . . . in Western Canada, where the mercury has dropped to minus-30 Celsius or colder this month, the oilpatch continues to warm up to a revival.

“A lot of companies have started increasing capital budgets,” Amir Arif, a Calgary-based analyst at Cormark Securities Inc., tells Bloomberg. “They’re getting more comfortable in the $45 to $60 oil world. The stability in the oil price is a key factor.”

As Bloomberg notes, Canada’s energy producers are much more efficient. The Canadian federal government recently gave the green light to Kinder Morgan’s Trans-Mountain twinning and Enbridge’s Line 3 replacement projects.

Drilling activity has jumped nearly 40% from this point a year ago. As we’ve mentioned recently in this space, Western Canadian producers have announced they’ll be boosting production, and outfits like Precision Drilling and Stampede Drilling are making up for lost time after a nine-month dry spell.

The cherry on top? U.S. President Donald Trump’s approval on Tuesday of TransCanada’s Keystone XL pipeline—after years in Oval Office purgatory—which will add another 830,000 barrels a day of capacity.

Still, the legacy of this two-year-long recession won’t soon disappear, predicts Wood Mackenzie analyst Stephen Kallir.

“The aftershock and, for lack of a better word, hangover of the past two years is going to linger for quite a while in terms of how capital spending decisions are made,” says Kallir. “There is going to be a lot more prudent approach.”

 

Keystone XL approval: Calgary back in the saddle?

A “good moment for Alberta.” A much-needed boost for Calgary.

Tuesday’s approval of the Keystone XL pipeline by the Trump administration in the U.S. was hailed with optimism by federal cabinet ministers meeting in Calgary—even if it’s not clear at this point what Trump, an outspoken protectionist, meant when he said Tuesday that the U.S. would “renegotiate” certain terms of the deal.

“This is a very good moment for Alberta,” Canada’s Natural Resources Minister Jim Carr told reporters. “This decision will result in many, many jobs for Albertans . . . and it’s also a sign that there is a recognition by the new American administration that Canada can be a source of economic development and of job creation on both sides of the border.”

As for Calgary—the beating heart of Canada’s oil industry, whose unemployment rate recently hit 10.2%—Mayor Naheed Nenshi was buoyant about the news.

“When we have Calgary-based companies being able to do giant projects like this here and around the world, that is a huge benefit for our downtown economy,” he said, “because we need people to do the contracts, the law, the accounting, the HR on all of this stuff. And that is certainly a major driver of our economy.”

 

It’s a Canadian fact . . . pipelines battle inequality!

Safe? Check. Reliable? Check. Efficient? Check.

But did you know that pipelines have also narrowed the gap between rich and poor in Canada?

In a recent commentary published in the Financial Post, authors Jasmin Guenette and Karl-Javid Lalonde-Dhanji of the Montreal Economic Institute point to a 2015 study at UBC’s Vancouver School of Economics—which found that fiscal inequality declined in Alberta and Saskatchewan from 1999 through 2013.

The study also determined that “wages in Newfoundland, Saskatchewan and Alberta grew much faster than in other provinces” . . . and the authors of the study estimate that Canada’s energy industry boom accounts for two-thirds of the difference in wage growth between those three provinces and the rest of Canada.

 

Trump’s protectionist talk a ‘wake-up call’

He’s clearly America First . . . and Canada’s energy industry shouldn’t waste a second.

That’s the view of Tim McMillan, president of the Canadian Association of Petroleum Producers (CAPP), following Donald Trump’s strongly protectionist inaugural address on Jan. 20.

“I think it’s a bit of a wake-up call that we need to strengthen our relationships on energy with other countries,” McMillan tells the Canadian Press.

Canada is the largest exporter of crude oil to the U.S., moving 3.2 million barrels a day across the border. The International Energy Agency expects that America will import virtually no oil by 2040—and some fear that U.S. policy changes under Trump may hasten that long decline.

“For our industry, where we have an integrated system — we have energy going both north and south — I think we will be very conscious to ensuring that how our interests are aligned is clear with the new administration,” says McMillan.