Why Alberta Will Win The War Over Trans Mountain

[William Edwards + 708]

13 minutes ago, Jan van Eck said:

Responding to Mr. Edwards:    

Basically, I dunno.  You are much more in tune to oil markets than I am.  

As far as the shipping end of things goes, the industry has its innovators and market technology leaders, such as Maersk Lines, and it has the laggard followers, mostly found in Greece.  The technology leaders are building ships running on everything from batteries to natural gas.  The new LNG tankers are being built with engines that can take the boil-off during the voyage and pump it into the ship engine, basically cheap fuel that the shipper would otherwise lose.  The Greek crowd typically buys second-hand, or even older, ships, reducing their capital requirements and keeping their bank debt down (and they still routinely get into trouble).  A lot of how these shipowners react is a function of the wild swings in the charter fees they collect, which is dominated by the "Baltic Dry Bulk Index."  And that has varied from below the cost of running the ship (variable costs), to $15,000 a day. Figure a 1,000% spread in recent times.

The general consensus in the shipping industry is that the IMO will "blink" and the 2020 standards will take a pass.  And if enough shipping companies believe that, then it becomes a self-fulfilling prophecy. Is the IMO prepared to shut down the global shipping industry because they are unprepared?  Probably not.  And even if the IMO tries to be tough, how do they enforce the abstainment from HFO?  Even now, these ships run dual tanks, and come into port on light diesel, having shifted over some 20 miles out.  When they leave, the drill is to start up on diesel, and motor offshore, let the engine warm up, pump heat into the HFO tanks to get the stuff to flow, and then start to swing the valves. Does the IMO have the resources to go do inspections on what is inside the fuel tanks of every ship that comes into port?  No chance. Will there be ports that will sell HFO in defiance of the IMO?  Of course.  So the Greek owner with his old ships is still going to be able to get around these new regulations - until the new ships with scrubbers start to filter down into the ranks of the second-hand, a process that is typically ten years. 

The wild card are the European politicians - who are in large measure driven by the ideologue greens in their constituencies.  If IMO on paper sets forth a 0.5% limit, then it is entirely predictable that European ports will enforce that, and will not allow bunkering of HFO - which will be banned from the ports.  But is that going to be the case in Nigeria?  In Karachi?  In Bombay?  Probably not.  Those guys are likely to bunker HFO to any ship passing by that can pay for it, and given the amounts of money involved (a doubling of the fuel bill with diesel), you already know that bootleg HFO will be out there.  You are going to see some pressure on HFO by insurers; whether or not that tips the scales is anybody's guess.  

The big hit on HFO will come if exports from China take a hit.  Nothing like a trade war to collapse the shipping industry.  And that is another wild card. 

My guess is that IMO will attempt to put some kind of limit in 2020, for political reasons.  As shipping consumes some 5% of oil use, and all of the crud, your analysis of a collapse of demand for Canada Heavy crude is more likely to come to pass in 2020 than not, for the costing reasons you elaborated on at length. But ships are going to continue to suck up HFO and IFO, rules or no rules, so it will not be the across-the-board collapse that you predict.  These guys will cheat. It will be a ten-year turnaround until there is enough shipping out there to use HFO with scrubbers, at which point Canada is back in the game with a vengeance.  I predict that nobody is going to blow the $2.75 mill to retrofit a scrubber; they will cheat instead.  And the more respectable part of the industry will use methanol, until new ships arrive (and then methanol will die out, except for ships in local coastal trade through sensitive areas).  These are just my guesses. 

Incidentally another aspect that is not much reflected on is that those ships burning 3.5% HFO contribute a large layer of SO2 into the upper atmosphere, which is reflecting the solar heat off the planet.  So we are about to embark on a new planetary experiment; when the HFO finally is banned and 0.5% is in place, the additional solar input will raise the earth's temp by about 0.5 degrees C. And that part, nobody is talking about.  Oh, well. 

I join you in realizing that there is a lot of uncertainty in the situation. But I might point out that the price impact that I forsee does not require a million barrels a day to be shut in. Probably fifty thousand barrels a day will crater prices, as recent Canadian experience has demonstrated. I suppose that I am strongly convinced that there will be great pain in the heavy oil producing family, but the depth, duration and detailed fall-out are beyond my scope. I am willing to provide "guesses", however.

[OilSandGeo + 3]

On ‎5‎/‎16‎/‎2018 at 5:02 PM, William Edwards said:

Alberta will lose this war. They may throw billions of dollars into building a pipeline, but having that line will not guarantee a customer. With the IMO sulfur reduction and the prospect of the global industry having to shut in two million barres a day of heavy, high sulfur resid, Canada has real disposition problems, and pipeline capacity is not among those.

William Edwards, I am sorry, but you are not familiar with the subject. Pipline is required for transportation of Syntetic Crude Oil that is produced by 3 main plants in Alberta, operated by CNRL, Suncore and Syncrude. Characteristics of SCO, including viscosity and sulphur content, provided in the link below.

http://www.crudemonitor.ca/tools/Quick_Reference_Guide.pdf

You would agree, that synthetic crude cahracteristics do not fall in the catogory of  " heavy, high sulfur resid".  The trhee mines produce more than 500K bbl/d of SCO, which is a major portion of Alberta exports compared to heavy crude oil or bitumen.

[xposure + 13]

The major oil sands producers are hesitant to invest more money than what they have due to the continual pipeline issues. They are having to compete with farmers for rail transportation (which they can outbid - but it looks bad from a PR point especially in Alberta) and looking at the ever increasing downstream costs they need pipelines to keep their transportation costs low.

 

The Alberta Provincial government and Canadian Federal government better not screw this up. Investment dollars are being held tight right now, but can easily be spent elsewhere.

[William Edwards + 708]

20 minutes ago, Rodent said:

Thanks to all, for the conversations and insights that take interestingly differing opinions. Can we dumb this down a bit into a reader's digest version? To answer @William Edwards earlier question, I suspect our readers vary in their oil price/oil industry knowledge, ranging anywhere from would-be traders to industry analysts. We hope to be all-inclusive, from those wanting to glean new insights and those who want to share their well-thought out insights, and everything in between. We appreciate everyone's patience with those who see things differently. A trying task indeed for everyone on both sides.

Can everyone who has a position break it down into three bullet points or fewer? Like a bullet stating your conclusion, and one or two stating your assumptions that led to the conclusion? Is it possible to summarize it in this way? There is a lot of great information flowing here and I don't want to miss any of it.

Also, one question. Is Kinder Morgan stalling on Trans Mountain, as it has professed, because it is leery of getting stymied by the hostile political landscape, or is it worried about the viability and usefulness of this massive project? Pre-buyer's remorse?

There is such a disparity of knowledge bases and perspective that it is probably impossible to describe one's position in each case. A sense of the participant's level and scope will become apartent with continued participation. But there is something that we can all apply. Respect and courtesy, even when the other party does not.I know that that all be difficult, but it will lubricate the wheels of discussion.

 

11 hours ago, EXXMobil said:

Hello Mr. Edwards,

I sense that you are frustrated with answers recently received or should I say, lack of..?

As for everyone posting for / or against your opinions, maybe the links within will help many understand what is going on moving forward. 

Everyone is entitled to their opinions but when opinions become hostile, it is not good for anyone. 

If anyone wants to spend $4500 for a report...here you go...

https://www.reportlinker.com/p02070081/Global-Asphaltene-and-Paraffin-Inhibitors-Industry.html

The report / slide show (link) below is free.

http://www.spe.org/dl/docs/2012/stankiewicz.pdf

Here is another free report. 

https://www.omicsonline.org/asphaltene-stability-in-crude-oil-during-production-process-2157-7463.1000142.pdf

Another report from 1997

https://www.onepetro.org/conference-paper/SPE-37251-MS

A 25 Page paper on the problem.

http://cdn.intechopen.com/pdfs/29875/InTech-Asphaltenes_problems_and_solutions_in_e_p_of_brazilian_crude_oils.pdf

I am simply trying to quell the situation within this subject. Hopefully one of the links I supplied within will help many understand, if not, let me know exactly what you are looking for and I will again try to help. 

Thank you

X

Thank you for adding some base understanding of asphaltene characteristics to those willing to enhance their knowledge. If the readers look into the subject matter they will better realize that oil sands production, with its 15% asphaltene content, is not "normal crude" that can be processed in "normal refineries". Special processing, costing billions of dollars, is necessary to upgrade this oil into usable product. Such processing facilities require 5-10 years lead time before they are available to run oil. The year 2020 is not that far away.

[William Edwards + 708]

13 minutes ago, OilSandGeo said:

William Edwards, I am sorry, but you are not familiar with the subject. Pipline is required for transportation of Syntetic Crude Oil that is produced by 3 main plants in Alberta, operated by CNRL, Suncore and Syncrude. Characteristics of SCO, including viscosity and sulphur content, provided in the link below.

http://www.crudemonitor.ca/tools/Quick_Reference_Guide.pdf

You would agree, that synthetic crude cahracteristics do not fall in the catogory of  " heavy, high sulfur resid".  The trhee mines produce more than 500K bbl/d of SCO, which is a major portion of Alberta exports compared to heavy crude oil or bitumen.

Your erroneous assertion that I am not familiar with the subject stems, not from my lack of knowledge, but, instead, from your limited perspective. Please raise your head up from the oil sands pit and look outward at the rest of the world. Now ask yourself the question "If I build a pipeline to transport my oil, who will purchase it at a the other end of the pipe?" Without a satisfactory answer as to how it will be processed, you may decide not to spend the money for the pipeline. You might even decide not to spend the money to produce the oil. In my humble opinion, to properly assess the outlook for Canadian oil sands production one must adopt a global perspective.

[William Edwards + 708]

18 minutes ago, xposure said:

The major oil sands producers are hesitant to invest more money than what they have due to the continual pipeline issues. They are having to compete with farmers for rail transportation (which they can outbid - but it looks bad from a PR point especially in Alberta) and looking at the ever increasing downstream costs they need pipelines to keep their transportation costs low.

 

The Alberta Provincial government and Canadian Federal government better not screw this up. Investment dollars are being held tight right now, but can easily be spent elsewhere.

The way that the Alberta Provincial Government is screwing this up has nothing to do with pipelines. If the quality and location of Canadian oil prices it out of the market, then Alberta will not need even the pipeline capacity that it already has. The first step for the intelligent manager is to determine the competitiveness of your proposed production. "Head in the sand" won't work.

[Ja’Nako Bezze + 36]

6 minutes ago, William Edwards said:

The way that the Alberta Provincial Government is screwing this up has nothing to do with pipelines. If the quality and location of Canadian oil prices it out of the market, then Alberta will not need even the pipeline capacity that it already has. The first step for the intelligent manager is to determine the competitiveness of your proposed production. "Head in the sand" won't work.

Sir William, imal na belegiju ista?

[xposure + 13]

3 minutes ago, William Edwards said:

The way that the Alberta Provincial Government is screwing this up has nothing to do with pipelines. If the quality and location of Canadian oil prices it out of the market, then Alberta will not need even the pipeline capacity that it already has. The first step for the intelligent manager is to determine the competitiveness of your proposed production. "Head in the sand" won't work.

 

Oil sands may in the short term price itself out of the market, but the development of that particular area is a long term investment. While I agree with many things you say around here, I think you are way off the mark on this one.

 

Only time will tell, and if you are indeed correct I will be the first to acknowledge it. With that being said, I do dearly hope that I am right as I hold some investments in Alberta energy companies.

[William Edwards + 708]

1 minute ago, xposure said:

 

Oil sands may in the short term price itself out of the market, but the development of that particular area is a long term investment. While I agree with many things you say around here, I think you are way off the mark on this one.

 

Only time will tell, and if you are indeed correct I will be the first to acknowledge it. With that being said, I do dearly hope that I am right as I hold some investments in Alberta energy companies.

Vested interest often distorts rational thinking. Thus the "Head in the sand" approach.

[William Edwards + 708]

8 minutes ago, Ja’Nako Bezze said:

Sir William, imal na belegiju ista?

Sorry. I could not translate that language.

[Jan van Eck + 7,558]

Responding to Xposure, I would comment that the rationing of oil transport unit trains is not really a function of "out-bidding farmers." Rather, what is happening is that the two rail carriers, CN and CP, have a limited number of locomotives and train crews, and shipping during the winter was disrupted by trackage issues.  Now the rail companies know that the grain can only go by rail.  So they have been letting the grain sit in the elevators and not carrying the grain to the ship transfer points, Montreal and Vancouver, and using their resources to haul oil instead.  They figure they can haul the grain later; nobody is going to try to ship grain by truck to Montreal, or for that matter even to Thunder Bay. 

Where this goes wrong is the politics, as the farmers cannot get paid and are screaming at Ottawa - which in turn is now pressuring the rail operators to transfer locomotives and crews to hauling grain.  The rail companies are hiring more crews, and as they get trained the pressure will drop (assuming they can get more locomotives on stream). The mess comes from track washouts, that sort of thing, plus insufficient investment.  And you get that with privatized rail companies effectively operating in an oligopoly marketplace that they totally control. 

[Jan van Eck + 7,558]

4 minutes ago, William Edwards said:

Sorry. I could not translate that language.

Bosnian, I think.

[Ja’Nako Bezze + 36]

5 minutes ago, William Edwards said:

Sorry. I could not translate that language.

 

7 minutes ago, William Edwards said:

Sorry. I could not translate that language.

What do you think whether federal government  looked at Kinder Morgan order book before they announced an intention to financially support the company’s pipeline

[William Edwards + 708]

Just now, Ja’Nako Bezze said:

 

What do you think whether federal government  looked at Kinder Morgan order book before they announced an intention to financially support the company’s pipeline

Frankly speaking, I do not think that the Federal or the provincial governments have yet realized that a significant portion of their oil may be uneconomic in the world market. That is the beginning of the problem.

[Ja’Nako Bezze + 36]

2 minutes ago, William Edwards said:

Frankly speaking, I do not think that the Federal or the provincial governments have yet realized that a significant portion of their oil may be uneconomic in the world market. That is the beginning of the problem.

I agree. Todays barrel price is not driven by normal market demand but more likely by temporary geopolitical circumstances. Could be $40 again next week

[Ajan Bosnjacki + 27]

5 minutes ago, Ja’Nako Bezze said:

I agree. Todays barrel price is not driven by normal market demand but more likely by temporary geopolitical circumstances. Could be $40 again next week

 

10 minutes ago, William Edwards said:

Frankly speaking, I do not think that the Federal or the provincial governments have yet realized that a significant portion of their oil may be uneconomic in the world market. That is the beginning of the problem.

I think the government should form an independent body to provide the necessary cost due diligence on the business case for oil-sands oil over the next decades.

[Jan van Eck + 7,558]

Responding to Mr. Edwards, who said:

"I join you in realizing that there is a lot of uncertainty in the situation. But I might point out that the price impact that I forsee does not require a million barrels a day to be shut in. Probably fifty thousand barrels a day will crater prices, as recent Canadian experience has demonstrated. I suppose that I am strongly convinced that there will be great pain in the heavy oil producing family, but the depth, duration and detailed fall-out are beyond my scope. I am willing to provide "guesses", however. "

-------------------------------------------------

The problem that Canada faces, additional to the quality and pricing issues you have already identified, is that their tar sands crude is "locked in" within both Canada and the USA.  There is no bandit third-world country bordering Canada (OK, except Russia) where their stuff can be bootlegged out and sold to cheating shipowners.  If the IMO comes down hard and says:  "OK, fellas, no more HFO or IFO," then Ottawa is not going to let that oil get loaded aboard ship unless end-user certificates are in place.  And, although the USA is a bit murkier, I would anticipate that the same situation would develop.  Meanwhile, cheaper foreign crude will displace Canada's product at the Gulf refineries. 

So you can anticipate that, unless Canada can refine the stuff in situ and sell the output inside Canada, you will lose a lot more than the 50K bbl/day you cite.  Thus. logically, the Canadian sales price will collapse. 

On the other hand, if the IMO blinks, then a wild price swing is likely not to happen. 

Ultimately, Canada is going to have to refine their heavy crude in-country, to get out from underneath being displaced in the marketplace.

 

[Joanna + 68]

15 minutes ago, William Edwards said:

Frankly speaking, I do not think that the Federal or the provincial governments have yet realized that a significant portion of their oil may be uneconomic in the world market. That is the beginning of the problem.

we may need a Plan B for Alberta sooner rather than later. I am not willing to root for a team (KM) that doesn’t have the strategy to win the future game

[Jan van Eck + 7,558]

15 minutes ago, William Edwards said:

Frankly speaking, I do not think that the Federal or the provincial governments have yet realized that a significant portion of their oil may be uneconomic in the world market. That is the beginning of the problem.

That is a prescient observation.  

The Government of Canada is enamored of that tar-sands production, as they see nirvana on the horizon.  With the manufacturing base of Ontario pretty much wrecked as a result of the staggering increases in electricity prices, again a function of being enamored with industrial wind installations and feed-in tariffs, all Canada has left to pay their bills is the sale of oil and lumber. Lumber just went under a 22% tariff, so that leaves the oil. And idea that the oil is uneconomic to produce and sell is not one that anyone in Ottawa is prepared to countenance. 

[Jan van Eck + 7,558]

3 minutes ago, Joanna said:

we may need a Plan B for Alberta sooner rather than later. I am not willing to root for a team (KM) that doesn’t have the strategy to win the future game

Plan B is to refine it in-country.  Also to diversify the economy. 

[李伟王芳 + 77]

1 minute ago, Jan van Eck said:

Plan B is to refine it in-country.  Also to diversify the economy. 

Also, there are also significant changes on the demand side with the targeted refineries on the east coast of China recently benefiting from the improved economic relationship with Russia, while on the other hand environmental regulations have tightened. Both give Alberta oil a further disadvantage. Canada moves too slowly 

[William Edwards + 708]

9 minutes ago, Jan van Eck said:

Responding to Mr. Edwards, who said:

"I join you in realizing that there is a lot of uncertainty in the situation. But I might point out that the price impact that I forsee does not require a million barrels a day to be shut in. Probably fifty thousand barrels a day will crater prices, as recent Canadian experience has demonstrated. I suppose that I am strongly convinced that there will be great pain in the heavy oil producing family, but the depth, duration and detailed fall-out are beyond my scope. I am willing to provide "guesses", however. "

-------------------------------------------------

The problem that Canada faces, additional to the quality and pricing issues you have already identified, is that their tar sands crude is "locked in" within both Canada and the USA.  There is no bandit third-world country bordering Canada (OK, except Russia) where their stuff can be bootlegged out and sold to cheating shipowners.  If the IMO comes down hard and says:  "OK, fellas, no more HFO or IFO," then Ottawa is not going to let that oil get loaded aboard ship unless end-user certificates are in place.  And, although the USA is a bit murkier, I would anticipate that the same situation would develop.  Meanwhile, cheaper foreign crude will displace Canada's product at the Gulf refineries. 

So you can anticipate that, unless Canada can refine the stuff in situ and sell the output inside Canada, you will lose a lot more than the 50K bbl/day you cite.  Thus. logically, the Canadian sales price will collapse. 

On the other hand, if the IMO blinks, then a wild price swing is likely not to happen. 

Ultimately, Canada is going to have to refine their heavy crude in-country, to get out from underneath being displaced in the marketplace.

 

You say "Ultimately, Canada is going to have to refine their heavy crude in-country, to get out from underneath being displaced in the marketplace." You are correct. And, further, to do that, Canada must be able to process and deliver at a cost low enough to offset the built-in $20/B cost disadvantage for oil sands quality and location. Big challenge!

[Ja’Nako Bezze + 36]

The departure of all oil majors and many large financial institutions from the province of Alberta is also a sign that should be taken into account. I fear that this investment could turn into stranded asset

[xposure + 13]

6 minutes ago, Jan van Eck said:

Plan B is to refine it in-country.  Also to diversify the economy. 

Alberta and Canada will not be able to diversify with the current situations. Corporations will look at the KM debacle and say "KM followed all the rules and approval process and got the okay to proceed, yet are getting stopped." This is bad news for all industry, not just energy.

[William Edwards + 708]

22 minutes ago, Ajan Bosnjacki said:

 

I think the government should form an independent body to provide the necessary cost due diligence on the business case for oil-sands oil over the next decades.

Very good idea!