by Stockwatch Business Reporter
West Texas Intermediate crude for August delivery edged down one cent to $40.62 on the New York Merc, while Brent for September lost two cents to $43.08 (all figures in this para U.S.). Western Canadian Select traded at a discount of $8.34 to WTI, up from a discount of $8.88. Natural gas for August added five cents to $1.88. The TSX energy index lost 1.99 points to close at 75.26.
The surge of optimism did not last long. Mere days after TC Energy Corp. (TRP: $56.88) celebrated the start of construction on the Alberta leg of its Keystone XL pipeline, the U.S. Supreme Court has delivered a fresh setback to the southern leg. Yesterday after the close, the Supreme Court denied the Army Corps of Engineers' request to reinstate a key water crossing permit for the pipeline. This permit was revoked in April by a federal judge in Montana, who ruled that the Army Corps failed to adequately consider the effects on endangered species. TC Energy will need a valid permit for all future construction across the hundreds of rivers and streams along the pipeline's route. (To be clear, this would be one big, nationwide permit, not hundreds of individual mini-permits to cover each and every little trickle. TC Energy simply cannot build across the trickles until it gets the regulatory go-ahead.)
The ruling does not shut down construction in areas without water crossings. Even so, it is unclear how long the extra permitting will take, and even a short delay could set back construction for at least a year, given the seasonal nature of the work. A spokesman for TC Energy confirmed to The Associated Press that the ruling will cause delays but could not provide estimates on timing.
Scotia Capital analyst Robert Hope, for his part, wrote this morning that he sees "pressures on [the] 2020 construction schedule," but noted that TC Energy had already included "a lot of flex" in its proposed in-service date of 2023, precisely because of potential legal issues. He flagged the biggest risk to the project as the potential victory of Joe Biden in the pending U.S. presidential election. Separately, Mr. Hope noted that the Supreme Court's decision was not all bad news: The court reinstated a streamlined permitting process for other pipelines, removing a Keystone-XL-sized risk of delay to more than 70 other pipeline projects across the country. Mr. Hope concluded that the decision was "a minor positive for the pipeline industry ... but a negative for Keystone XL."
Minor positives aside, the dominant message to the pipeline industry lately is that pipeline battles are never truly over. No one is more aware of that right now than Enbridge Inc. (ENB: $40.78). On the heels of a brief but worrisome full-scale shutdown of its Line 5 operations -- which are still partially closed, but at least some oil is flowing -- now Enbridge must contend with the shutdown order issued yesterday for the Dakota Access pipeline. Ownership of this controversial pipeline is split between Energy Transfer (38 per cent), Phillips 66 (25 per cent), Enbridge (21 per cent) and Marathon Petroleum (9 per cent). They have been told to drain the pipeline for further environmental review. Although green groups and natives have vocally (and sometimes violently) opposed Dakota Access for years, once the pipeline was finally operating in 2017, the idea that it could be abruptly shut down was seen as unlikely. Yesterday's ruling came as an unpleasant surprise. Mike Sommers, president of the American Petroleum Institute, said in a statement that the ruling underscores the need for permitting reform. "Our nation's outdated and convoluted permitting rules are opening the door for a barrage of baseless, activist-led litigation," he said, adding, "The need to reform our broken permitting system has never been more urgent."
Against this backdrop, it is no surprise that pipelines have been a topic of discussion and dismay at this week's TD Securities 2020 Energy Conference, running virtually from July 6 to 8. One recent presenter was chief executive officer Mark Little of Suncor Energy Inc. (SU), down 60 cents to $22.31 on 5.32 million shares. Suncor owns refineries in Ontario and Quebec that rely on Enbridge's Line 5 for feedstock. Although Mr. Little told the conference that Suncor's refineries are operating normally despite Line 5's partial shutdown, he highlighted the legal vulnerability of the pipeline as a "huge potential threat." Having to use rail or ships instead of pipelines drives up costs and hurts consumers, explained Mr. Little. "It's a threat not just to the Canadian product markets in Ontario and Quebec, but it is in Michigan as well," he said (and other surrounding regions such as Ohio, come to that).
The conference was not all doom and gloom. Mr. Little also predicted a "downstream-led recovery" in the energy market, explaining that rising post-COVID-19 fuel demand will lead to higher refinery throughput, which in turn will lead to rising output from Suncor's upstream assets in the oil sands. Like many producers, Suncor had to shut in some of its production to cope with the downturn. Mr. Little did not specify whether this production is starting to return. Other presenters at the conference, however, were happy to confirm that they have started reversing their production cuts. For example, CEO Alex Pourbaix of Cenovus Energy Inc. (CVE), down 18 cents to $6.12 on 10.2 million shares, said Cenovus has restored about 30,000 of the 60,000 barrels a day that it cut in March. Cenovus is also making deals with other producers to increase its allowable production quota under Alberta's mandatory curtailment program, which will allow even more output to be restored. Meanwhile, chief financial officer Jeff Hart of Husky Energy Inc. (HSE), down 23 cents to $4.15 on 6.41 million shares, told the conference that Husky has restored about half of its previously shut-in volumes of 80,000 barrels a day. He cited increased demand for fuel products from its U.S. refineries.
Here in Canada, Darren Gee's gassy Peyto Exploration & Development Corp. (PEY) edged down five cents to $1.98 on 936,000 shares, giving back some of the 21 cents it added yesterday. Its president and CEO, Mr. Gee, published his monthly president's update on Peyto's website over the weekend. He provided an overview of the company's Alberta-based operations and production in June. Monthly output averaged 78,000 barrels of oil equivalent a day, bringing the second quarter average to 78,000 as well. These numbers are in line with analysts' predictions.
Mr. Gee spent most of the letter trying to dispel the myth that North America is "awash in gas forever." His phrasing might have tickled the memories of long-term investors with good powers of recall. "Awash in Gas Forever?" was the skeptical title of Mr. Gee's monthly update from August, 2018. At the time, an oversupply of gas relative to demand was keeping prices down, and there was a widespread belief that this would always be the case -- even though just a decade earlier, "we believed the exact opposite," wrote Mr. Gee in his 2018 missive. He pointed to studies from the mid-2000s showing sky-high projections for imports of LNG (liquefied natural gas) in order to meet rocketing demand. In the end, the proposed LNG import facilities did not get built and the prevailing wisdom underwent a complete reversal. Now it is more common to hear that North America is so full of gas that LNG export facilities are needed instead. (Of course, these have not managed to get built either, at least not in Canada.)
Mr. Gee was skeptical about long-term overabundance in 2018 and remains so now. In his new update, he noted that gas producers have scaled back activities significantly in response to the COVID-19 demand drop. Here in Canada, there are just nine gas rigs running across the entire Western Canadian sedimentary basin, according to Mr. Gee. He estimated that the basin needs at least 45 rigs running just to offset declines and keep production flat. A similar situation is unfolding in the United States, where a mere 75 gas rigs are at work. Mr. Gee pointed out that North America as a whole has the lowest proved reserve life (a measure of how long reserves will last at current production rates) of any producing jurisdiction in the world. While the Middle East has a gas reserve life of over a century, the former Soviet Union has one of nearly 80 years, and Central and South America combined have one of nearly 50 years, North America's gas reserve life is just 13 years.
Mr. Gee's conclusion is that Western Canadian gas supplies should ultimately tighten and lead to a rise in gas prices. As someone of a more cynical nature might point out, this just so happens to align exactly with what Mr. Gee, the CEO of a Western Canadian gas producer, would most like to see. There is a saying in the energy industry that no one has business working in this business if not, at heart, an optimist.