Illustration Graham Roumieu
After the events of the last few years, Alberta’s energy sector is accustomed – or, at least, has grown accustomed – to its share of turbulence and volatility. But even those with an elevated degree of tolerance for churn and change probably found 2014 to be a challenging year. Megaprojects were halted, critics cited new reports that connected oil sands development to increased cancer levels in nearby communities and government grappled with the implementation of oil-by-rail safety regulations.
But it wasn’t all bad news. The differential between West Texas Intermediate and Western Canadian Select slimmed substantially compared to 2013 levels, while natural gas prices were markedly higher than they were a year ago. Big deals were done, billions in debt and equity capital were raised and the market even witnessed a few successful IPOs. Here, we look back at the events that shaped the last 12 months in Canadian energy – both for better and for worse.
New Pecking Order?
Canadian Natural Resources buys $3.1-billion worth of Devon Energy assets
In February, after weeks of below average temperatures in Central Canada and the northeastern U.S. helped lift Henry Hub natural gas prices to $6 per million British thermal units, Canadian Natural Resources Ltd. struck the largest energy deal of the year.
Moreover, CNRL’s $3.1-billion acquisition of Devon Energy Corp.’s Canadian conventional oil and gas properties marked one of the largest natural-gas weighted transactions in recent years. CNRL acquired production of 86,600 barrels of oil equivalent per day, of which oil production accounted for only 10,800 bpd. The remaining production was natural gas, including 12,000 bpd of natural gas liquids. The acquisition, which bucks a wider trend of natural gas divestment in Canada, also gave CNRL additional processing capacity in the form of six major natural gas plants.
In contrast to CNRL, Canada’s other major natural gas producers, Encana Corp. and Talisman Energy Inc., spent 2014 refocusing their business and adding oil-weighted production. CNRL is Canada’s third-largest natural gas producer, and if it continues to ramp up gas production while Encana and Talisman pull back, it could soon pass both of them by. That trend was clearly underscored by the US$7.1-billion acquisition of oil-weighted Athlon Energy Inc. by Encana in late September, a move that effectively ends its days as a company defined by its exposure to natural gas.
Stop and Go
Total shelves its $11-billion Joslyn oil sands mine
Total E&P Canada Ltd.’s announcement that it was suspending the development of its Joslyn oil sands project in May 2014 was something of an about-face for the company. Just a year earlier, CEO and chairman of parent company Total SA Christophe de Margerie was pressing executives at its joint venture partner Suncor Energy Inc. to start work on another oil sands project “as quickly as possible.”
In June 2013, de Margerie said that Total, Suncor and joint venture partner Teck Resources Ltd. “need to stop delaying” the $13.5-billion Fort Hills oil sands project, which will produce 160,000 barrels of oil per day once the first phase is complete. He added that he wanted a final investment decision on the project by the end of 2013, and he got it. Then, in the second quarter of 2014, Total announced it would cut 150 jobs and delay its own $11-billion Joslyn oil sands mine, which was also expected to produce 160,000 bpd. Suncor, Occidental Petroleum Corp. and Inpex Canada Ltd. were also partnered with Total on the Joslyn project.
Analysts covering Total and Suncor pointed to the inflationary impact Joslyn and Fort Hills would exert on one another, should they both proceed at the same time. Before delaying Joslyn, the project’s construction start date would have begun before Fort Hills achieved first production. Therefore, both projects would have competed against each other for skilled labor and supplies.
Landmark Ruling
The Supreme Court of Canada rules in favor of the Tsilhqot’in Nation
Chief Roger William, right, of the Xeni Gwet’in First Nation, is flanked by chiefs and other officials after the Supreme Court of Canada ruling
CPimages
In what was deemed a landmark ruling for aboriginals in Canada, the Supreme Court in June unanimously ruled that a First Nations group would gain title over a small swath of its ancestral land. The decision was a culmination of preceding rulings that involved the Tsilhqot’in Nation, whose traditional lands near Williams Lake, B.C., stretch across a 440,000-hectare valley. Aboriginal groups suggested the ruling had set a positive precedent that would eventually give First Nations equal footing in negotiations over industrial infrastructure projects.
Whether the ruling was actually of high significance was disputed by some. In a conversation with Alberta Oil, Max Faille, a partner with Gowling Lafleur Henderson LLP, said the ruling applies to around five per cent of the Tsilhqot’in Nation’s traditional lands. Moreover, the decision doesn’t necessarily suggest other aboriginal groups will automatically be granted similar rights.
Currently, the law allows government to “intrude” on aboriginal lands in the name of public interest, which can include the building of infrastructure projects such as mines, refineries and oil export pipelines. Enbridge Inc.’s Northern Gateway pipeline proposal, for example, is often seen as the token lightning rod issue between aboriginals and Canada’s oil and gas industry. In order to reach tidewater, the company must pass through the lands of numerous aboriginal groups, some of which have vowed to take their opposition to the pipeline to the highest court.
Off the rails
Transport Canada orders DOT-111 cars off the rail system
APimages
On April 23 the federal government announced that 5,000 of the infamous DOT-111 rail cars would be ordered off Canada’s rail system in a 30-day period. Another 65,000 rail cars, it said, would then be ordered off the tracks or forced to be retrofitted within three years. Along with the removal of the DOT-111 cars, which are said to be prone to leaks, Transport Canada set out a number of other regulations, including the implementation of speed limits and requirements for emergency response plans.
The emergency order was largely a response to the Lac-Mégantic, Quebec accident in the summer of 2013 that killed 47 people. Following the announcement, a report published by the Transportation Safety Board of Canada that researched the root causes of the disaster found inadequate safety regulation was likely to blame. Its findings pointed directly to the local railway operator and the Canadian government for the shortfalls. “Despite being aware of significant operational changes at Montreal, Maine & Atlantic Railway, Transport Canada did not provide adequate regulatory oversight to ensure the associated risks were addressed,” the report said.
Oil-by-rail has come under scrutiny in North America as increasing volumes of crude are shipped in rail cars as an alternative to pipelines. That likely will continue to be the case as the credibility of pipelines is challenged by environmental activists and ENGOs. According to the Energy Information Administration, rail deliveries of U.S. oil increased nine per cent in the first seven months of 2014 compared to the same period in 2013, particularly in North Dakota where pipelines are at full capacity.
Long Overdue
PetroChina finally pays Athabasca Oil for its stake in the Dover oil sands project
Athabasca Oil Corporation was kept on tenterhooks for months as it waited for a $1.32-billion payment from PetroChina, which was originally due on June 30. The money represented the final settlement for Athabasca’s 40 per cent stake of the 250,000 barrel-per-day Dover oil sands project. PetroChina was compelled to buy the stake after Athabasca exercised its put option subsequent to issuance of the Alberta Energy Regulator’s final regulatory approval for the project in April. On August 29, Athabasca finally received $600 million in cash. It was agreed that the balance would be paid in three smaller installments over the course of two years.
Uncertainty surrounding the Dover project deal had made it difficult for Athabasca to find a joint venture partner to share costs and risks in its early stage Alberta Duvernay shale play. Its development plans in the Deep Basin had also suffered from capital constraints during this time.
The original agreed upon amount of $1.32 billion was cut to $1.184 to account for so-called “closing adjustments.” In a press release, Athabasca chief executive Sveinung Svarte, who would step down a few weeks later, reassured shareholders that the belated payment would now enable the company to resume its planned capital spending plan at its conventional and unconventional oil and gas projects.
Rumors had circulated widely that an anti-corruption campaign at the highest levels in China’s Communist Party had reached all the way to the investment practices of China’s national oil companies in Canada. Those suspicions were exacerbated by the detention of several Chinese oil executives who had been involved in the deal’s negotiation.
Blue-Sky Outcome
Encana’s newly liberated royalty play sells – and soars
A little over a month before Encana Corp. completed its IPO of PrairieSky Royalty Ltd., reporters were saying the company expected to raise at least $700 million from the deal. It far surpassed that goal. By the time the offering was completed, a total of 59.8 million common shares had been sold at $28 per share, raking in $1.67 billion for the parent company and making it the largest Canadian IPO in 14 years. Just over three months later, Encana sold its remaining 54-per-cent interest in PrairieSky, which holds a few million hectares of royalty lands in Alberta, bringing the amount of cash raised by Encana up to $2.6 billion.
The IPO was part of a broader (and ongoing) attempt to turn around Encana’s fortunes as the company struggles to shore up its balance sheet amid a long period of low natural gas prices. But it also seemed to set the tone for a wider trend taking place in Canada’s energy space. Canadian Natural Resources Ltd. was considering spinning off its royalty assets for the better part of 2014, and is expected to announce its decision by the end of the year. If and when that happens, the size of the spinoff, or separate royalty trust, is expected to eclipse that of the Encana deal. Due to their long record of operations in Alberta, both CNRL and Encana happen to be well endowed with royalty lands in the province.
Empty Approval
The National Energy Board gives Northern Gateway the green light
Photograph Joey Podlubny
Even after the federal government announced its acceptance of the National Energy Board’s Joint Review Panel recommendation to approve Enbridge Inc.’s Northern Gateway project, the fate of the pipeline project to the West Coast remains unknown.
When Ottawa announced in June that Northern Gateway construction could proceed – subject to the 209 conditions imposed by the NEB – Enbridge CEO Al Monaco said in a press conference that his company would not commit to the project indefinitely. He also said that the company hadn’t come up with a revised cost estimate for the project’s construction, which was pegged at $7.9 billion before the imposition of the 209 conditions on the project’s development and is expected to rise.
Further clouding Northern Gateway’s future was the fact that a group of First Nations along the pipeline route released a joint statement saying that they would “immediately go to court to vigorously pursue all lawful means to stop the Enbridge project.” Most of the pipeline route passes through land claimed by B.C. First Nations groups, but which has not been ceded in a formal treaty. As a result, the legal means at the disposal of aboriginal groups to oppose the project pose a major obstacle to Enbridge.
One Step Forward
CNOOC and BG partner on giant LNG project
A BG LNG ship off the coast of Singapore
Photograph courtesy BG International Ltd.
A subsidiary of China’s CNOOC Ltd. signed a memorandum of understanding in April to partner on the proposed Prince Rupert LNG terminal developed by BG International Ltd., a unit of U.K.-based BG Group PLC. Last year, BG had filed plans with the National Energy Board for a $16-billion, 21.6-million-ton-per-year natural gas export terminal at Ridley Island in the vicinity of Prince Rupert, British Columbia. The company is working with Vancouver-based Spectra Energy Corp. on a pipeline to the coast.
CNOOC already has a working relationship with BG, as it paid US$1.93 billion in 2013 to acquire interests in BG’s Queensland Curtis LNG project in Australia. Under the new arrangement in British Columbia, the two firms are committing to a facility with a potential total export capacity of up to 29 million tons per year.
It remains unclear whether the joint venture would merge or continue to compete with a 24-million-ton-per-year Aurora LNG facility proposed by CNOOC-owned Nexen Energy ULC in concert with Japan’s Inpex Corp. and JGC Corp. In the event of an operational merger, it is also unclear whether the terminal location would remain on Ridley Island or move to Grassy Point.
Several other proposed LNG projects are also actively seeking partnerships in order to both secure markets, predominantly in Asia, and to offset the enormous high capital costs such as Petronas’s Pacific Northwest $36-billion LNG project and Shell Canada’s $14.4-billion-plus LNG Canada project.
Despite the risks associated with building large-scale infrastructure projects in remote, high-cost locations, the British Columbian Ministry of Natural Gas Development reports there are now 21 LNG projects on the West Coast at various stages of development.
Fear and Loathing in the Oil Futures Market
Plunging oil prices create all kinds of theories – and worries
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.” Yes, that’s how Charles Dickens’s A Tale of Two Cities begins. But it’s also a pretty apt description of 2014 as far as some in the energy sector are concerned. After all, the first three quarters were some of the best it had seen since before the 2007/08 recession. Share prices were on the rise, production was growing and the capital markets were opening up in a way the sector hadn’t seen in a long time. After attracting $15.9 billion in debt and equity capital in all of 2013, Alberta’s energy companies raised $18.4 billion in just the first nine months of 2014.
Then, of course, the bottom fell out. After closing at $94.57 a barrel on September 29, WTI crashed all the way down to $81.78 in the span of two weeks, breaking through all sorts of technical support levels and pushing crude into a bear market for the first time since the summer of 2012. Speculation on what caused the tumble in oil prices ranged from a Saudi play for greater market share to the growing flood of tight oil production from the United States to an attempt by NATO to push crude prices down in order to apply pressure to Russia. But regardless of why it happened, the fact remains that it did just as oil producers across North America were setting their capital budgets for 2015. With their key commodity trading at $80 and change, those decisions were a lot more complicated than they looked like they’d be just a few weeks earlier.
Conflicting Results
Toxicology reports weigh oil sands cancer risks differently
Dr. James Talbot, Alberta’s chief medical officer, published statistics in March indicating slightly higher rates of three specific types of cancer in Fort Chipewyan, a hamlet on the Athabasca River downstream from oil sands development in the Fort McMurray area. The overall cancer rate in the community was nevertheless deemed “not signif- icantly higher than expected.” For his part, Mikisew Cree First Nation Chief Steve Courtoreille called the statistics in the Alberta Health Services report “a valuable summary of numbers,” but that it left too many questions unanswered.
A December 2010 Royal Society of Canada report had come to the conclusion that there was no credible evidence of environmental contaminant exposures from the oil sands reaching Fort Chipewyan at levels expected to cause elevated cancer rates. The society’s seven-member panel did not argue, however, that the case was closed, and it called for more monitoring and toxicological studies.
Frustrated with a perceived lack of progress in this area, the Athabasca Chipewyan First Nation and the Mikisew Cree First Nation collaborated with University of Manitoba researchers to release their own report, Environmental and Human Health Implications of Athabasca Oil Sands, on July 7, 2014. They claimed their study “integrates scientific research methods and local knowledge” and directed considerable blame at oil sands development for an alleged decline in community health in Fort Chipewyan and the presence of higher levels of heavy metals in wildlife.
Well-known activists like James Cameron, Neil Young, Leonardo DiCaprio and Bishop Desmond Tutu have publicly pointed to the oil sands as a cause of elevated cancer rates in downstream communities, but they have yet been unable to provide robust, supporting scientific evidence of this claim.
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