Energy Tidbits - SAF Group · and point out implications therefrom. The best example is our review of investor days, conferences and earnings calls focusing on sector developments

The Disclaimer: Energy Tidbits is intended to provide general information only and is written for an institutional or sophisticated investor audience. It is not a recommendation of, or solicitation for the purchase of securities, an offer of securities, or intended as investment research or advice. The information presented, while obtained from sources we believe reliable as of the publishing date, is not guaranteed against errors or omissions and no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This publication is proprietary and intended for the sole use of direct recipients from Dan Tsubouchi and SAF Group. Energy Tidbits are not to be copied, transmitted, or forwarded without the prior written permission Dan Tsubouchi and SAF Group. Please advise if you have received Energy Tidbits from a source other than Dan Tsubouchi and SAF Group.

Energy Tidbits

Dan Tsubouchi

Principal, Chief Market Strategist

[email protected]

Aaron Bunting

Principal, COO, CFO

[email protected]

Ryan Dunfield

Principal, CEO [email protected]

Alan Cooper

Vice President

[email protected]

Ryan Haughn

Principal, Energy

[email protected]

Post Election, Trudeau Clearly Says “We Will Be Continuing With

The Trans Mountain Expansion”

Welcome to new Energy Tidbits memo readers. We are continuing to add new readers to our Energy Tidbits

memo and energy blogs. The focus and concept for the memo was set in 1999 with input from PMs, who were

looking for research (both positive and negative items) that helped them shape their investment thesis to the energy

space, and not focusing on day to day trading. Our priority was and still is to not just report on events, but interpret

and point out implications therefrom. The best example is our review of investor days, conferences and earnings calls

focusing on sector developments that are relevant to the sector and not just a specific company results/guidance.

Our target is to write on 48 to 50 weekends per year and to send out by noon mountain time.

This week’s memo highlights:

1. Post election, Trudeau was clear in his response that “we will be continuing with the Trans Mountain expansion”.

(Click here)

2. TMX aside, a strong Liberal minority that has to make some concessions to Bloc/NDP will be less attractive to

capital providers than the prior strong Liberal majority. (Click here)

3. Increasing sell side analyst forecasts and oil sector comments calling for lower than expected US oil growth in

2020. (Click here)

4. Denmark approves a natural gas pipeline thru its territorial waters is positive to a Nord Stream 2 approval soon

after Russia/Ukraine agree on a transit deal for 2020. (Click here)

5. SAF’s blog “Finally, Some Visibility That India Is Moving Towards Its Target For Natural Gas To Be 15% Of Its

Energy Mix By 2030”. (Click here)

6. Trump on Syria oil, plans to “keep the oil”, get US co’s like Exxon to go in to fix (increase) oil production. (Click

here)

7. Please follow us on Twitter at [LINK] for breaking news that ultimately ends up in the weekly Energy Tidbits memo

that doesn’t get posted until Sunday noon MT.

8. For new readers to our Energy Tidbits and our blogs, you will need to sign up at our blog sign up to receive future

Energy Tidbits memos. The sign up is available at [LINK].

Produced by: Dan Tsubouchi

Oct 27, 2019

https://twitter.com/Energy_Tidbits

http://www.safgroup.ca/research/trends-in-the-market/


2

Energy Tidbits

Table of Contents Natural Gas – Natural gas injection of 87 bcf, storage now +519 bcf YoY surplus ..................................................5

Figure 1: US Natural Gas Storage ....................................................................................................................5

Natural Gas – Good graph storage vs 5 yr average plotted against HH prices .......................................................5

Figure 2: Gas Storage Vs 5 Yr Average And HH Prices ..................................................................................5

Natural Gas – China Sept LNG imports +16.7% YoY or +1.2 bcf/d YoY .................................................................6

Figure 3: China LNG imports ............................................................................................................................6

Natural Gas – India not a factor in 2019 LNG markets, Sept imports +0.15 bcf/d YoY ...........................................6

Natural Gas – Visibility of India moving to natural gas 15% of energy mix by 2030 ................................................6

Figure 4: India’s Projected Natural Gas Consumption @15% Of Energy Mix (bcf/d) ......................................7

Natural Gas – Europe gas storage is basically full at 97.8% utilization ...................................................................7

Figure 5: Europe Gas Storage Utilization .................................................................................................................8

Natural Gas – LNG tankers floating slowly around the world to find a home ...........................................................8

Figure 6: LNG Cargoes Floating Around, Looking For A Home .......................................................................8

Figure 7: Amount Of LNG On Water For At Least 20 Days .............................................................................9

Natural Gas – A colder than normal temp forecast to start Nov ...............................................................................9

Figure 8: Weather.com Oct 26 temperature forecast .......................................................................................9

Natural Gas – Will Denmark approve Nord Stream 2 after Russia/Ukraine transit deal? ........................................9

Figure 9: Baltic Pipe Map ............................................................................................................................... 10

Figure 10: Nord Stream 2 Alternative Pipeline Routes In Danish Territorial Waters ..................................... 11

Oil – US oil rigs down 17 to 696 oil rigs ................................................................................................................. 11

Figure 11: Baker Hughes Total US Oil Rigs .................................................................................................. 11

Oil – Total Cdn rigs +4 to 147 total rigs ................................................................................................................. 11

Figure 12: Baker Hughes Total Canadian Oil Rigs ....................................................................................... 12

Oil – US oil production unchanged at 12.6 mmb/d, matching the all time high ..................................................... 12

Figure 13: Weekly US Oil Production ............................................................................................................ 12

Figure 14: US Weekly Oil Production ............................................................................................................ 13

Figure 15: YoY Change in US Weekly Oil Production ................................................................................... 13

Oil – Expect operational delays in Oct for Bakken ................................................................................................ 13

Figure 16: North Dakota Accumulated Snowfall As Of Oct 13 ...................................................................... 14


3

Energy Tidbits

Oil – More pointing to lower US oil growth in 2020 ............................................................................................... 14

Analysts are mostly now lowering US oil growth forecasts ........................................................................... 14

Figure 17: US Oil Production Growth Forecasts From Major Sell Side Firms .............................................. 15

Core Labs expects US oil growth to be less than +0.7 mmb/d in 2020 ......................................................... 15

Halliburton sees “deceleration of incremental US production growth” .......................................................... 15

Novak sees lower US oil growth rates, US oil peaking in the next few years ............................................... 16

Phillips 66 sees lower US oil growth rates in 2020 ........................................................................................ 16

Precision’s international growth may involve deploying idle NA rigs ............................................................. 16

Oil – Core Labs says refracking is working in Eagle Ford and Bakken ................................................................. 16

Figure 18: Conoco Eagle Ford Refrack ......................................................................................................... 17

Oil – TMX, Trudeau clearly says continuing with TMX .......................................................................................... 17

Figure 19: Trans Mountain Expansion ........................................................................................................... 18

Oil – TMX’s construction update by area is at “Construction in all Communities”................................................. 18

Oil – Cdn crude by rail exports down 3,137 b/d MoM to 310,146 b/d in August ................................................... 18

Figure 20: CBR monthly exports vs WCS Diff ............................................................................................... 19

Oil – Cdn crude by rail insights from CN and CP Q3 calls .................................................................................... 19

Figure 21: CN Crude Oil By Rail .................................................................................................................... 20

Oil – Crude by rail remains the bright spot in North American rail traffic .............................................................. 21

Figure 22: US Rail Traffic For Oct 19, 2019 Week ........................................................................................ 22

Oil – Oil input into refineries up 429,000 b/d to 15.865 mmb/d ............................................................................. 22

Figure 23: US Refinery Crude Oil Inputs (thousand b/d) ............................................................................... 22

Oil – Potential for Canada to implement national clean fuel standards ................................................................. 22

Oil – US “NET” oil imports down 873,000 b/d to 2.174 mmb/d ............................................................................. 23

Figure 24: US Weekly Preliminary Oil Imports By Major Countries .............................................................. 23

Oil – Will OPEC+ announce cuts at Dec meetings?.............................................................................................. 23

Figure 25: World Oil Demand Forecasts From Major Forecasters ................................................................ 24

Oil – Saudi Arabia should crash oil? ...................................................................................................................... 24

Oil – US extends Chevron’s license to continue Venezuela operations for 3 months .......................................... 24

Oil – Ecuador lifts force majeure on oil exports ..................................................................................................... 25

Oil – Russia defense ministry says Syria oil production is ~26,000 b/d ................................................................ 25

Trump wants to “keep the oil” in Syria and increase oil production therefrom .............................................. 25

Figure 26: Energy Production in Syria Map ................................................................................................... 26

Oil – Saudi Arabia and Japan extend Okinawa oil storage deal ........................................................................... 26


4

Energy Tidbits

Oil – Rosneft transfers all oil export contracts to euros ......................................................................................... 26

Oil – India oil imports for Sept down 6% YoY, lowest level since Feb 2017 ......................................................... 27

Figure 27: India Oil Imports Vs Domestic Oil Production .............................................................................. 27

Oil – Good insights from Bloomberg IMO 2020 monthly update ........................................................................... 27

Figure 28: Marine Bunker Demand Outlook, 2019 – 2025 ............................................................................ 28

Oil – Brussels goes beyond EV sales, bans diesel cars by 2030, gasoline cars by 2030 .................................... 28

Oil and Natural Gas – sector/play/market insights from Q3 calls .......................................................................... 28

Arch Coal – Reminds US thermal coal is hurt by low gas prices .................................................................. 29

Core Labs – Lower US oil growth, lower non OPEC growth in 2021/2022 ................................................... 29

Eni – Offshore Egypt Zohr on track to hit 3.2 bcf/d at start of Jan ................................................................ 30

Halliburton – Lower Q4 drilling activity, cutting costs in the US ............................................................................ 30

Patterson UTI – Retiring part of its frack fleet, Delaware efficiencies leveling off ................................................. 31

Precision – Similar winter levels for Montney, Deep Basin and Heavy Oil ................................................... 31

Oil & Natural Gas – Liberal strong minority is a modest negative to Cdn oil and gas ........................................... 32

Oil and Natural Gas – Alberta budget was a positive to oil & gas ......................................................................... 32

Capital Markets – Argentina Presidential election today ....................................................................................... 33

Capital Markets – Bad month for equities funds flows from Cdn mutual funds, ETFs .......................................... 34

Demographics – 46.8 million millionaires in the world ........................................................................................... 34

Figure 29: Global Wealth Pyramid 2019 & Top Of The Pyramid 2019 ......................................................... 34

Demographics – “Jobs of the Future” outperform but aren’t immune from economy ........................................... 34

Figure 30: Cognizant Jobs of the Future Index, Q3 2016 to Q3 2019 .......................................................... 35

Energy Tidbits – Now on Twitter ............................................................................................................................ 35

Energy Tidbits – Sign up on our email distribution for tidbits and blogs ................................................................ 35

LinkedIn – Look for quick energy items from me on LinkedIn ............................................................................... 35

Misc Facts and Figures.......................................................................................................................................... 35

TESLA’s competitive advantage on range .................................................................................................... 35

Figure 31: TESLA Comparison For EPA Range In Miles .............................................................................. 36

Southwest Airlines says they don’t put cameras in lavatories ....................................................................... 36

Air Force One Flew at Mach 0.9 on 9/11 to get President Bush to Washington. .......................................... 36


5

Energy Tidbits

Natural Gas – Natural gas injection of 87 bcf, storage now +519 bcf YoY surplus

The EIA reported an 87 bcf natural gas injection, which was in line with expectations of a 88 bcf injection to bring storage to 3.606 as of Oct 18. This is a widening of the YoY surplus to 519 bcf vs 494 bcf surplus last week and storage is now 28 bcf above vs the 5 yr average. The continued expectation is for the YoY storage surplus to keep widening from higher YoY production which is holding HH prices around $2.25-$2.50. There are 2 weeks to get to Nov 1, the official start of the winter heating season. Below is the EIA’s storage table from its Weekly Natural Gas Storage Report. [LINK] Figure 1: US Natural Gas Storage

Source: EIA

Natural Gas – Good graph storage vs 5 yr average plotted against HH prices

Natural gas storage is the data point that confirms the net impact of supply vs demand ie. the indicator to markets if the fundamentals are pointing to the better or worse. There was a good reminder graph in the EIA brief “Natural gas inventories surpass five-year average for the first time in two years” [LINK] that noted the strong inverse correlation between storage vs the 5 yr average plotted against HH gas prices. No surprise that when storage narrows vs the 5 yr average, HH gas prices strengthen. Conversely, when storage widens vs the 5 yr averate, HH gas prices weaken. Our Supplemental Documents package includes the full EIA brief. Figure 2: Gas Storage Vs 5 Yr Average And HH Prices

Source: EIA

Storage vs HH

prices

YoY storage at

519 bcf YoY

surplus

http://ir.eia.gov/ngs/ngs.html

https://www.eia.gov/todayinenergy/detail.php?id=41733


6

Energy Tidbits

Natural Gas – China Sept LNG imports +16.7% YoY or +1.2 bcf/d YoY

On Friday, China reported LNG import data for September. We tweeted [LINK] on the data “Key reason why #LNG weak in Sept. China Sept #LNG imports 8.2 bcf/d, +16.7% YoY & +1.2 bcf/d YoY. Relatively weak YoY growth vs China's big YoY % and bcf/d growth in 2018. Not enough to provide strong support to LNG prices given global LNG exports in Sept +5.0 bcf/d YoY”. Sept was better than Aug, but still relatively weak YoY growth vs Chin’s huge YoY growth in 2018. Also, not enough to provide any strong support to LNG price ahead of winter. Bloomberg estimates global LNG exports in Sept were +5.0 bcf/d YoY, which means that the reality of China LNG imports being +1.2 bcf/d YoY is not enough to provide strong support for LNG prices in non peak winter seasons and means there were a lot of surplus LNG cargos in Sept floating around slowing looking for a home or parked for offshore storage because Europe storage was almost full in Sept. Below is our table of monthly China LNG imports.

Figure 3: China LNG imports

Source: Bloomberg, LNG World News

Natural Gas – India not a factor in 2019 LNG markets, Sept imports +0.15 bcf/d YoY

We continue to highlight that India is not really a factor in 2019 LNG markets as it is still a year or two away from a significant ramp up in LNG imports. On Friday, LNG World News [LINK] reported on data from India’s oil ministry’s Planning and Analysis Cell that India LNG imports in Sept 2019 were 3.2 bcf/d, which is +4.9% YoY, or +0.15 bcf/d. This is more or less a rounding number compared to Bloomberg’s estimate that global LNG exports in Sept were +5.0 bcf/d YoY. But as noted below, India is soon to become a significant factor on LNG markets.

Natural Gas – Visibility of India moving to natural gas 15% of energy mix by 2030

It’s taken a year longer than we expected, but we are finally getting visibility that India is taking significant steps towards India’s goal to have natural gas be 15% of its energy mix by 2030. On Wednesday, we posted a SAF blog [LINK] “Finally, Some Visibility That India Is Moving Towards Its Target For Natural Gas To Be 15% Of Its Energy Mix By 2030”. The blog noted comments from earlier on Oct, when India Oil Minister Dharmendra Pradhan said that there are $60 billion of natural gas infrastructure and LNG import terminals that are “under execution”. He said “I am not talking about potential investment. This number relates to the project that are under execution”. In the blog, we said “Natural gas consumption in India is only now back to 2011 levels at 5.6 bcf/d and represents only 6.2% of its energy mix. If India hits its 15% target of its energy mix by 2030, it would add natural gas demand, on average, of >1.5 bcf/d per year. At the same time India’s domestic natural gas production peaked in 2010 at 4.6 bcf/d, but has been flat from 2014 thru 2018 at ~2.7 bcf/d, which means the big winner will be LNG. The most important factor driving this expectation for

bcf/d 2016 2017 17/16 2018 18/17 2019 19/18

Jan 3.8 5.4 39.3% 8.0 50.0% 10.2 27.1%

Feb 3.1 4.1 32.3% 6.8 66.9% 7.5 9.1%

Mar 2.6 3.1 17.7% 5.0 64.5% 6.3 24.8%

Apr 3.0 3.4 14.7% 5.4 57.8% 7.3 34.0%

May 2.2 4.5 104.5% 6.4 41.9% 6.9 7.6%

June 3.5 4.9 38.2% 6.3 30.1% 7.3 14.9%

July 2.5 4.8 95.1% 6.4 33.4% 7.6 18.1%

Aug 3.5 4.9 37.4% 7.3 49.2% 8.0 10.8%

Sept 4.1 5.5 36.8% 7.0 26.3% 8.2 16.7%

Oct 2.9 5.5 93.0% 7.1 29.6%

Nov 4.3 6.5 52.6% 9.6 47.5%

Dec 5.8 7.8 34.5% 9.7 25.0%

China Sept LNG

imports up 16.7%

YoY

India taking real

steps to increase

natural gas

India Sept LNG

imports +4.9% YoY

https://twitter.com/Energy_Tidbits/status/1187692537697325057

https://www.lngworldnews.com/indias-september-lng-imports-jump/

http://www.safgroup.ca/research/articles/finally-some-visibility-that-india-is-moving-towards-its-target-for-natural-gas-to-be-15-of-its-energy-mix-by-2030/


7

Energy Tidbits

natural gas consumption growth is likely price. Asian LNG landed prices are down about 50% YoY and, more significantly, the expectation is for future Asian LNG prices to be at lower levels than prior cycles. India, by itself, may not be a LNG global game changer, but it is another positive support for why we believe LNG markets will rebalance sooner than expected ie. in 2022/2023”. We projected how much India’s natural gas consumption would increase if it can hit its target of 15% of total energy mix in 2030. BP data shows India’s natural gas consumption in 2018 was 5.6 bcf/d and natural gas was only 6.2% of total energy mix. BP also estimates India’s total energy consumption grew at a rate of 5.2% per year for the 2007 – 2017 period, but energy consumption growth increased to +7.9% in 2018 YoY vs 2017 But if we only assume a 5% growth in total energy mix to 2030, then if natural gas is 15% of India’s energy mix, it would be 18.8 bcf/d in 2025 and 24.0 bcf/d in 2030 ie. growth of +13.2 bcf/d to 2025 and +18.4 bcf/d to 2030. India may not be a global LNG game changer by itself like China, but it does support the call that LNG markets rebalance sooner than expected. Our blog also includes our table of LNG projects for 2019 and 2020, which reinforce the potential for LNG growth post 2020. Below is our projection of India’s natural gas consumption @15% of Energy mix, and our Supplemental Documents package has our India blog.

Figure 4: India’s Projected Natural Gas Consumption @15% Of Energy Mix (bcf/d)

Source: BP, SAF

Natural Gas – Europe gas storage is basically full at 97.8% utilization

We continue to highlight the linkage between significantly higher than normal Europe storage levels and weak LNG prices. Our thesis is unchanged from our Sept 20, 2017 Energy Blog [LINK] titled “Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer” where we defined Europe LNG storage as the dumping ground for surplus LNG. As storage fills, LNG has to find another customer in non peak demand season, float around in storage, or LNG output gets held back. With European gas storage reaching max capacity, it means slower LNG flows into Europe and LNG cargoes looking for a home or slowly floating around the world waiting for a home (see item below for additional detail). It is also a reason why we are seeing the timing of LNG turnarounds – why not do turnarounds now in a weak LNG market with Europe storage essentially full. Europe storage is now at 97.8% utilization, whereas last year the highest level reached was 86.9% on Oct 28, 2018. Note, we checked the Europe storage data on Friday, which showed utilization had dropped 7% to ~90% utilization, and we figured someone at the reporting agency fat fingered a number, a 7% single day drop is

Europe gas

storage now

97.8% full

http://www.safgroup.ca/research/articles/shell-every-lng-cargo-that-could-technically-be-produced-in-this-world-has-been-produced-and-has-found-a-well-paying-customer/


8

Energy Tidbits

unprecedented. Sure enough, we checked the data on Sat and the error was fixed. Below is our graph of Europe gas storage utilization.

Figure 5: Europe Gas Storage Utilization

Source: Bloomberg

Natural Gas – LNG tankers floating slowly around the world to find a home

Linked to the above update on Europe gas storage being full is the thesis on LNG cargos looking for a home. On Friday, we tweeted [LINK] on a good Bloomberg Terminal story “Floating Storage for LNG Surges With More Ships From Qatar (1)”. The story illustrates our commentary for the past couple months on how China’s weaker LNG imports are forcing more tankers to slowly float around the world to find a home, especially with European gas storage being nearly full. Commenting on tankers floating more slowly, the story said “The most recent episode can be traced back to Qatar’s decision to send out more ships ahead of maintenance work on its facilities. The result is making it more expensive for traders to charter a vessel on the prompt market in the Atlantic basin, replicating a similar bout of floating storage in Asia last year”. Our tweet also included some great graphics from the Bloomberg story (see below) that showed how tankers are slowly moving towards potential customers and the clusters of floating LNG tankers off East Asia and Europe, as well as a cluster offshore Qatar fully loaded and waiting for instructions on where to go. Our Supplemental Documents package includes the Bloomberg terminal story.

Figure 6: LNG Cargoes Floating Around, Looking For A Home

Source: Bloomberg

LNG tankers

waiting to find a

home



9

Energy Tidbits

Figure 7: Amount Of LNG On Water For At Least 20 Days

Source: Bloomberg

Natural Gas – A colder than normal temp forecast to start Nov

Our Energy Tidbits have been noting the seasonal forecasts that are calling for a warmer than normal winter. However, earlier this week we tweeted [LINK] that at least there should be a colder than normal start to the winter natural gas withdraw season. At a minimum, it should help reduce gas injections. The weather updates yesterday still call for a colder than normal start to winter. Below is yesterday’s Weather.com update for Oct 31. [LINK]

Figure 8: Weather.com Oct 26 temperature forecast

Source: Weather.com

Natural Gas – Will Denmark approve Nord Stream 2 after Russia/Ukraine transit deal?

Yesterday morning, we tweeted [LINK] that Denmark is not anti natural gas pipelines running thru its territorial waters on the natural gas pipeline approval news from Denmark on Friday. It wasn’t the approval of the long delayed Gazprom’s 5.3 bcf/d Nord Stream 2 natural gas pipeline thru Danish territorial waters to Germany. Rather it was the Danish Energy Agency approval of Poland’s Baltic Pipe natural gas pipeline that runs thru Danish territorial waters to Poland. With respect to the Danish Energy Agency’s continual delay on approving Nord

Denmark

approves a gas

pipeline thru its

waters

Cold start to Nov


https://weather.com/forecast/regional/news/2019-10-26-arctic-cold-snow-west-rockies-plains-midwest



10

Energy Tidbits

Stream 2, we now know Denmark will approve natural gas pipelines thru its territorial waters. The other significant point is that Baltic Pipe runs right near the same territorial waters as Nord Stream 2, both just off the small Bornholm island. Bornholm is the small island in the eastern leg of Baltic Pipe in Denmark waters. The only difference is Baltic Pipe runs NW to SE thru the territorial waters off the west side of Bornholm, whereas Nord Stream 2’s various alternative routes run from NE to SW off either the north or south side of Bornholm. We recognize that the DEA has had a big stall on Nord Stream 2, we believe it is a stall (especially following the Baltic Pipe approval) and believe Nord Stream 2 gets approved in the next few months. You have to give Denmark some credit for because their stalling has forced a total change of Gazprom’s natural gas supply plans to Europe for 2020. Prior the stall, Gazprom had set the expiry of its major gas transit deal thru Ukraine for Dec 31, 2019 and that would be replaced by the start of Nord Stream 2 by Dec 31, 2019. This would have been a simple one for one swap. The stall has forced Gazprom/Russia to negotiate an extension to the Ukraine transit deal in order for Gazprom to fulfill its supply obligations to Europe for the winter. Gazprom has not yet been able to get that extension. Seeing the Baltic Pipe approval, we wonder if we will see a Nord Stream 2 approval shortly after there is an announcement of a transit deal with Ukraine? Now that we know Denmark will approve a natural gas pipeline thru its territorial waters, their strategy kind of reminds us of junior hockey games in the early 70’s, one team is losing and knows a loss is inevitable, but they do things to cost the winning team something such as go after the best player on the other team. More than ever, it looks like a Nord Stream 2 approval will come even if it costs Gazprom a little by not having the approval until it completes a Ukraine extension deal, Our Supplemental Documents package includes a GoogleTranslate version of the Danish Baltic Pipe approval [LINK] and the Copenhagen Post story thereon [LINK].

Figure 9: Baltic Pipe Map

Source: Copenhagen Post

https://presse.ens.dk/pressreleases/tilladelser-til-baltic-pipe-projektet-er-udstedt-2936056

http://cphpost.dk/news/denmark-approves-baltic-pipeline-to-poland.html


11

Energy Tidbits

Figure 10: Nord Stream 2 Alternative Pipeline Routes In Danish Territorial Waters

Source: Nord Stream 2

Oil – US oil rigs down 17 to 696 oil rigs

Baker Hughes reported its weekly rig data on Friday which was bullish for WTI. US oil rigs were down big this week, with a decrease of 17 to 696 oil rigs as of Oct 25. Increases were in the Eagle Ford +3 and Mississippian +1. Decreases were in Others -10, Permian -5, Williston -2, Cana Woodford -2, Ardmore -1, and Granite Wash -1. Major US service companies have been reporting Q3 earnings this week (discussed in detail later in this memo), and the general consensus is for drilling activity to move lower and reach a bottom in Q4, and then modestly increase in Q1. Below is our graph of total US oil rigs.

Figure 11: Baker Hughes Total US Oil Rigs

Source: Baker Hughes

Oil – Total Cdn rigs +4 to 147 total rigs

Baker Hughes reported total Cdn rigs were +4 to 147 total rigs as of Oct 25. Cdn oil rigs were up 4 to 102 Cdn oil rigs. Cdn gas rigs were flat at 45 gas rigs. Alberta rigs were up 2, Sask rigs were up 3, and BC rigs were down 1. Cdn rigs are now +20 compared to where they

US oil rigs

were -17

this week

Total Cdn rigs +4

this week


12

Energy Tidbits

were a month ago at 127 total rigs. And it puts cdn rigs back close to where they should be at this time of year – normally relatively flat going into the winter drilling season. The feedback is unchanged – producers are going to be very careful with capex spending in Q4/19 given the continued weak share prices and no real access to equity. The expectation is that we will have an earlier and extended Xmas break for drilling compared to prior years.

Figure 12: Baker Hughes Total Canadian Oil Rigs

Source: Baker Hughes

Oil – US oil production unchanged at 12.6 mmb/d, matching the all time high

EIA reported US oil production was unchanged at the all time high of 12.6 mmb/d for the Oct 18 week. Lower 48 production was also unchanged at the all time high of 12.1 mmb/d. The higher production levels are expected with the new Permian egress that has come onstream in H2/19, and should continue ramping up in Q4 to the EIA’s forecast of 12.87 mmb/d which is 270,000 b/d above the current production level. Below we pasted an excerpt from the EIA weekly oil production data. [LINK]

Figure 13: Weekly US Oil Production

Source: EIA

US production

at 12.6 mmb/d

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W


13

Energy Tidbits

Figure 14: US Weekly Oil Production

Source: EIA, SAF

Figure 15: YoY Change in US Weekly Oil Production

Source: EIA, SAF

Oil – Expect operational delays in Oct for Bakken

Its been a wild first half of Oct for North Dakota weather due to historic snow storms which closed major highways, had farmers and ranchers bracing for crop and livestock issues, and activated the state’s emergency plan. It is inevitable that this massive snowfall has caused some operational delays in drilling, production, trucking and possibly rail transportation delays. For perspective, Bismarck showed 17.1 inches of accumulated snowfall in October as of Oct 13 [LINK], which is significantly more than during average winter months. It looks like Bismarck hasn’t received much snow since Oct 13, but we have pasted the accumulated snowfall map for North Dakota as of Oct. According to Current Results [LINK] average snowfall for Bismarck is 9.3 inches in Dec, 8.9 inches in Jan, and 8.1 inches in Feb. Luckily its not as cold as winter, so North Dakota didn’t receive the double whammy of really cold temperatures and heavy snowfall, but we should still be cautious of Bakken oil supply interruptions for October.

Expect

operational

delays for the

Bakken

https://weather.com/storms/winter/news/2019-10-14-record-snowiest-start-season-october-northern-rockies-plains

https://www.currentresults.com/Weather/North-Dakota/snowfall-december.php


14

Energy Tidbits

Figure 16: North Dakota Accumulated Snowfall As Of Oct 13

Source: The Weather Channel

Oil – More pointing to lower US oil growth in 2020

There were a number of comments/forecasts calling for a lowering of US oil growth in 2020. Some were specific (like US analysts) and some were just general comments (like Novak). Regardless, it seems like the momentum is clearly pointing to most believing that US oil growth will be less than expected. Although we should say the expected is quickly moving lower. We continue to believe one of the key changes to global oil fundamentals in 2020 will be lower than expected US oil growth. Although, we may not be able to say this soon with the movement for most to reduce US oil growth expectations. In our recent Oct 7, 2019 SAF Energy Outlook, we highlighted our view that the math says it is inevitable for agencies and analysts to lower their Permian growth forecasts and therefore their US oil growth forecasts for 2020. To be clear, we still see Permian growth, just at a lot lower rate. Anyone with a detailed model for estimating Permian oil growth has to include at least these basic inputs into their equation - Annual decline rates on the existing production base ie. how much production needs to be added to stay flat. how much capital is available, to fund drilling and completion of new wells, and for completion of the inventory of DUCs. to add production based on the well productivity rates. We think the math problem comes about because every input into this Permian oil growth equation is worse now. A big one is how capital available for producers is less. Its not just the lower well productivity rates, its all of these inputs into any model are worse so we think it is inevitable that Permian (and therefore total US) oil growth forecasts have to be lowered. And we believe a lowering of US oil growth forecast will be the key driver to a change in market sentiment to oil. Here are some of the views/forecasts calling for lower US oil growth in 2020.

Analysts are mostly now lowering US oil growth forecasts We are tracking, where possible, what the sell side analysts are forecasting for 2020 US oil growth. This week, we saw three of the large sell side shops out (i) One of the big oil stories this week was Goldman calling for US to grow by 1.1 mmb/d in 2019 and by 700,000 b/d in 2020 (300,000 b/d lower than Goldman’s prior 2020 estimate of 1.0 mmb/d growth). (ii) RBC is notably more bearish on 2020 US oil growth, as the firm is calling for 2019 growth of 1.13 mmb/d in 2019, 500,000 b/d in 2020 (200,000 b/d lower than Goldman forecast), and 450,000 b/d in 2021. (iii) On the flip side Citi Bank has a drastically different view for 2020, as the firm is forecasting 2019 growth of 1.2 mmb/d, and 1.1 mmb/d in 2020, which is 400,000 b/d

More calling for lower 2020 US oil growth


15

Energy Tidbits

higher vs Goldman, and +600,000 b/d compared to RBC. And they reminded that US oil has previously surprised to the upside. Below is a table of some current US oil production forecasts from the major banks.

Figure 17: US Oil Production Growth Forecasts From Major Sell Side Firms

Source: Sellside Research

Core Labs expects US oil growth to be less than +0.7 mmb/d in 2020 On Thursday, we tweeted [LINK] on Core Labs Q3 call that morning, where they looked to be making a bullish non-OPEC oil supply call that would obviously be related to its US oil growth view. It makes sense. At US oil growth at +0.7 mmb/d YoY in 2020, that’s about 0.8 mmb/d less than agency forecasts. Plus Core Labs is calling the under. It therefore makes sense that Core Labs has a very bullish non-OPEC oil supply growth in 2020 call. It sounds like they are saying non-OPEC oil supply growth in 2020 will only be +1.3 mmb/d YoY. This makes sense given their view on the US oil supply. But to put in perspective, the IEA OMR forecasts +2.3 mmb/d (incl US at +1.3 mmb/d) YoY in 2020, EIA STEO forecasts +2.19 mmb/d (incl US at +1.58 mmb/d) YoY in 2020, and OPEC MOMR forecasts +2.2 mmb/d (incl US at +1.54 mmb/d) YoY in 2020-. Mgmt said ““Non-OPEC and non-U.S. production is down for the 7th-year in a row, offsetting gains in Russian production, which fell by 50,000 barrels a day in September. OPEC production is right now, at an 8-year low at 38.9 million barrels of oil a day, down 750,000 barrels last month due to the disruption in Saudi production. Future supply growth will be limited to 4 countries. The U.S, which is estimated now to be up 700,000 barrels a day in 2020. By the way, we'll take the under on that. Norway, the Johan's Sverdrup is to introduce 440,000 barrels of new production in 2020. Guyana, the first oil from linked Liza is at 190,000 barrels a day early next year. There'll probably be another 200,000 barrels a day. So total new supply will be about 1.3 million barrels a day in 2020.” Halliburton sees “deceleration of incremental US production growth” On Monday morning, we tweeted [LINK] on the Halliburton Q3 call on Monday, where Halliburton called for lower US oil production growth. Halliburton’s view is the US’ incremental contribution to world oil growth is declining, unlike in 2018 where the US was a major contributor to world oil growth. In the prepared comments, mgmt. said “One more trend we are watching is the deceleration of incremental US production growth brought about by capital discipline. The record breaking 2018 growth will not be replicated in 2019. In fact, current projections for 2020 indicate a further decline in production from the current year estimates" And then mgmt. said, “Also with declining US incremental contribution to world production, non-US production will be required to fill the gap”.

Forecast US Oil Production Growth

mmb/d 2019 2020 2021

Citi Bank

(Oct 23) 1.2 1.1 n.a.

Goldman

(Oct 22) 1.1 0.7 n.a.

RBC

(Oct 21) 1.13 0.5 0.45

RJ

(Oct 14) 1.3 0.5 0.8




16

Energy Tidbits

Novak sees lower US oil growth rates, US oil peaking in the next few years This week, Reuters reported [LINK] on comments from Russia Energy Minister Novak stating his view of US oil production likely peaking in the next few years. Novak said, “We are seeing declining activity in U.S. shale oil production. Though there have been gains, these are lower than in previous years ... This is a trend … It is likely that in the near future, if the forecasts come to fruition, we will see a plateau in (U.S. oil) production within the next few years”. Phillips 66 sees lower US oil growth rates in 2020 Phillips 66 held its Q3 call on Friday and noted its view for lower US oil growth in 2020. In the Q&A, mgmt said ““Liberty are all backed by long-term customer commitments that extend well beyond the timeframe that you just mentioned, I think that, as I think about the US upstream industry. I think we're going to move into a period of slowing growth in US upstream actually think that's a good thing. I don't think we can continue to grow 1.6 million barrels a day in the US against the world demand going at 1.1. I don't think that's particularly healthy for the industry and for us, in all of our business segments. We need a strong, viable upstream business in the US. So just from a high-level standpoint, I don't view the slowing growth as negative in terms of the opportunity set” Precision’s international growth may involve deploying idle NA rigs Precision held its Q3 call on Thurs and they may not have suggested lower US oil growth in 2020, we believe they pointed to less mid term US oil growth. On Friday, we tweeted [LINK] “Precision Q3 call, growth in Persian Gulf and Latin America “may involve deploying idle North American rigs”. Not a vote of confidence for US #Oil rigs to go back to prior levels. May not be material # of rigs, but less rigs = less wells drilled = less oil potential. #OOTT “. Precision doesn’t necessarily say it, but they must believe they don’t see US activity getting back to prior levels, and not just in the next year or two. There is no specific comment on US oil growth potential, but they talk about how they are at scale now in the Persian Gulf and that as they grow internationally, they may redeploy North America rigs to the Gulf or Latin America In theory, it could include a redeployment out of Canada, but we highly doubt they would consider the logistics and much more expensive cost to move a rig from NE BC/NW Alberta to the Persian Gulf or Latin America as opposed to a simpler move from the Gulf Coast to the Persian Gulf. It may not reflect near term growth, but less rigs in a basin means less wells will ultimately drilled and less ultimate oil potential. On the call, mgmt. said “As Carey mentioned, things are progressing nicely with the six-rig in Kuwait operating for the fourth quarter. We've achieved our desired scale of Gulf region, and this will allow us to continue to grow top line and bottom line with minimal fixed cost impacts. Currently, we are seeing increased bidding activity in Kuwait, Saudi Arabia, Kurdistan and even Latin America. Some of these may be opportunities to activate our idle rigs in the region and others may involve deploying idle North American rigs”.

Oil – Core Labs says refracking is working in Eagle Ford and Bakken

We were a little surprised that Core Labs Q3 call comments on refracking didn’t get any traction. Perhaps its because the impact of refracking success won’t really show up for years to come, But Core Labs had bullish comments on the industry refrack success in Eagle Ford and Bakken. We don’t expect refrack success will lead to growth in these plays, but it should reduce mid term declines by increasing rate and recovery on old 1st and likely 2nd

Refrack success

in Eagle Ford and

Bakken

https://in.reuters.com/article/oil-russia-usa/update-1-russias-novak-says-us-oil-output-to-peak-in-next-few-years-idINL5N27731M



17

Energy Tidbits

generation fracked wells. Mgmt said “Moving now to Production Enhancement. Core's Production Enhancement energetics team partnered with one of the world's largest independent E&P companies to develop a breakthrough perforating solution for their mechanically isolated recompletion programs in both the Eagle Ford and Bakken formations onshore U.S. This technology helped the operator minimize risk, improve recovery from existing wells and optimize their return on investment.” “The operator has reported the ability to complete double the number of stages per day over conventional perforating techniques. The E&P company has also seen consistent and reliable frac -- fracs from stage to stage and well to well along with encouraging production results. Core's refrac technology breathes new life into the large fleet of older existing wells that were originally under-stimulated. High-quality reservoir rock and the intervals between the original stages can now be tapped, increasing oil recovery and significantly without the expense of drilling and completing an additional well.” With respect to the significance to industry, it really doesn’t’ matter who is the company, But we believe the “one of the world's largest independent E&P companies” refers to ConocoPhillips. In theory, it could be big companies who in both plays like EOG Resources, Marathon Oil, but we think its Conoco even though Conoco has stated clearly Bakken is in plateau production and Eagle Ford is in late stage growth (see our Aug 4, 2019 Energy Tidbits on Conoco’s Q2 call). Conoco’s regular investor presentations do not mention refracking success, but Conoco held a Feb 19, 2019 “Shale Oil Technical Teach In” that had the below refrack Eagle Ford slide

Figure 18: Conoco Eagle Ford Refrack

Source: ConocoPhillips

Oil – TMX, Trudeau clearly says continuing with TMX

On Wed, we tweeted [LINK] on Trudeau’s post election press conference (replay at [LINK]. One of the first questions was on TMX as well an early second question. Even the oilpatch has to be satisfied that Trudeau spoke clearly on the Liberals position post election on TMX – the Liberals are going ahead on TMX. At the 1:40 mark, Trudeau was asked if the needed support of two parties strongly against TMX (the Bloc and NDP) had an impact on TMX. Trudeau was clear in his response that “we will be continuing with the Trans Mountain expansion”. Then at 8:30 mark, he was asked again on TMX and gave a longer but also a very clear answer that the Liberals are going ahead on TMX. Trudeau did not say when construction will start or if there was any impact on the planned in service date of mid-2022

Trudeau clearly

says continuing

on TMX


https://www.youtube.com/watch?v=7hO4cIl-suI


18

Energy Tidbits

TMX, but we wouldn’t have expected that level of detail. Regardless, we have to believe the oilpatch is pleased to at least see this clear Trudeau statement.

Figure 19: Trans Mountain Expansion

Source: Platts

Oil – TMX’s construction update by area is at “Construction in all Communities”

A good link to bookmark is Trans Mountain’s “Construction in all Communities” [LINK]. It opens up into construction updates/plans for each section of the TMX pipeline and facilities by area along the route. It is a good starting point, but we will need to see if they start putting more specific dates. We flipped thru most of the sections for the actual pipeline laying and its doesn’t seem to indicate that actual pipeline construction has started, rather it looks like the pipeline laying update is that “work will commence”.

Oil – Cdn crude by rail exports down 3,137 b/d MoM to 310,146 b/d in August

The Canadian Energy Regulator (successor to NEB) reported Canadian crude by rail exports were -3,137 b/d MoM in August to 310,146 b/d [LINK] vs 313,283 b/d in July. Aug was +75,948 b/d YoY vs Aug 2018 of 234,198 b/d. Although there was a small decrease, we would have expected a bigger reduction based on indications from Imperial slowing its crude by rail exports in Aug/Sept. Our Aug 4, 2019 Energy Tidbits [LINK] highlighted the Imperial Oil Q2 call on Aug 2 and in the Q&A, mgmt. clearly said it was ramping down its crude by rail to the PADD 3 Gulf Coast because the narrowing of the WCS/WTI differential didn’t provide the economic incentive to move the oil. Imperial mgmt. said “And I said before that we look for something that creates a sustainable rail incentive of like a differential or an arbitrage between the same barrel in two occasions of $15 to 1$12 a barrel. And we are not there”, and “But our outlook for August and September is will ramp down rail because it is not economic to move those barrels on rail.” The WCS-WTI differential averaged $12.16 in Aug but has recently moved above the $15 level. Below is our graph of Cdn crude by rail exports compared to the WCS – WTI differential.

Cdn crude by rail exports -3,137 b/d in Aug

TMX’s “Construction in all Communities”

https://www.transmountain.com/all-communities?b=49.408%2C-122.457%2C51.163%2C-118.815

https://www.neb-one.gc.ca/nrg/sttstc/crdlndptrlmprdct/stt/cndncrdlxprtsrl-eng.html

http://www.safgroup.ca/wp-content/uploads/2019/08/Energy-Tidbits-Aug-4-2019.pdf


19

Energy Tidbits

Figure 20: CBR monthly exports vs WCS Diff

Source: Canadian Energy Regulator, Bloomberg

Oil – Cdn crude by rail insights from CN and CP Q3 calls

This week was the first big week of Q3 reporting. This is our favorite time each time of each quarter as it is quarterly reporting and this is when we get the best insights into a range of oil and gas themes/trends, sectors and plays. This week, both CN and CP rail reported Q3 earnings, and provided great insights into crude by rail during their respective earnings calls.

CN Q3 Call – Lower Q4/19 YoY CBR comps, but ready to crank up CBR CN held its Q3 call on Tues which provided several good insights. (i) Reminder on the weaker economic outlook for North America, as mgmt. said “North American rail industry is dealing with slower growth in manufacturing, natural resource, energy and trade”. (ii) Crude by rail volumes being held back by a combination of curtailment, diffs and Alberta crude by rail deal. Several comments from mgmt. “On the crude side of things, a little more difficult, there was some government intervention that took place in that market segment and we build out capacity to move about 300,000 barrels a day of crude. In September we moved about 180,000 barrels a day, we still have that latent capacity available to move that crude, if fact it does become available”, “If you look at the comps from last year Q4 compared to Q4 of this year, we had an all-time record 232,000 barrels a day that we move in Q4 as we are getting to ramp up to take on this additional capacity and the government contracts that were coming into bear that didn't happen. And this year we're not going to see that level of shipment. We don't expect to see the same level of shipment that we saw net last year. So it's going to be very difficult comparison year-over-year basis.”. Yes I don't, it's unclear to us what might happen in 2020 as far as what crude is going to look like. It's really going to be dependent on if the -- the Alberta Government is successful in placing the contracts in private hands, and if they lift the curtailment on production. There is about 200,000 barrels a day of crude that is not moving. It's in the ground that wants to move if the production curtailments are lifted and if that does happen, we're ready willing and able to move that volume”. “Recall that in Q4 last year crude differentials were very high and we shipped on average about 230,000 barrels per day of crude by rail, so the year-over-year comps in Q4 will be challenging”. (iii) CN is ready, and has the locomotive capacity to crack up crude by rail. In the Q&A, mgmt. replied “we have the locomotive, the people and the track capacity to ramp it up now up to the 300,000 barrel that we talked about earlier in

Insights from CN and CP Q3 calls


20

Energy Tidbits

terms of what's may happening in the marketplace”. (iv) CN reminded that they want take or pay contracts for crude by rail. In the Q&A, mgmt. said “Yeah. When we got back into the crude by rail space. We were very clear to have these new contracts based on take-or-pay volume commitments so we always want to move, move the railcars, we always want to move the crude but if we don't these are take-or-pay contracts”. (v) Low European natural gas prices impacting US thermal coal exports due to lower coal to gas switching. CN didn’t say specifically it was related to Europe but that is where the US thermal coal cuts have been most impacted by the low natural gas prices. CN said “was partially offset by sluggish US thermal coal exports, down 38% as a result of low [ph]APIQ pricing. Looking forward, we will continue to see a sequential increase in run rate for Canadian Coal in Q4 and expect the same for US coal”. Our Supplemental Documents package includes excerpts from the CN Q3 call transcript and the Q3 call slide deck.

Figure 21: CN Crude Oil By Rail

Source: CN

CP Q3 Call – Crude by rail to increase in Q4 to ~190,000 b/d CP held its Q3 call on Wednesday afternoon, and there were a few good items to note. One notable difference between CN and CP, is CP seems generally more optimistic on a near term resolution on the transfer of the Gov CBR contracts, which in turn should help to widen WCS differentials and is a positive for crude by rail. (i) Like CN, they remind of the tough macro environment in North America which ultimately flows back as a negative to rail demand. (ii) Q3 rail volumes below expectations. In the Q2 call, they expected to be ~30,000 carloads (~190,000 b/d) but only got to >28,000 carloads (~177,000 b/d) using the 582 barrels per carload, which is roughly in line with what CP used in the Q2 call. (iii) Expect higher Q4 crude by rail due to expectations of a resolution on the Gov crude by rail deal, with CP expecting to reach ~30,000 carloads (~190,000 b/d). In prepared comments, CP said “I should also note, we are increasingly optimistic that the Alberta Government will come to a resolution on the transfer of our crude contract and we are supportive of the new mechanisms that allowed crude production to move via rail to count as an offset against the curtailment and anticipation of this, we've seen the spread begin to widen. And we are seeing growing interest with our shippers and expect volumes to


21

Energy Tidbits

increase sequentially into Q4”. In the Q&A, mgmt. highlighted the widening diff, and said “Yes. So it's interesting Fadi like right now. Spreads have moved up into that $16, $17 range and that's starting to hit the sweet spot. I think it is indicative of I think the momentum and I think people feeling more and more comfortable that these contracts are going to get resolved in that they're actually might be a what they're calling a SPA program as an offsetting insta a curtailment to move, barrels by rail. I just. I'm looking specifically at the our contracts. What we did in Q3 and what we have line of sight to with our customers here for Q4 and I expect that uptick two or 3000 additional load up to that 30,000 level to be be realistic it's been a dynamic that crude space has been a dynamic area, there is no doubt about it, we're not counting on it, but certainly I view more optimism right now then there not”. (iv) Rail capacity is about 15% above expected Q4 levels. In the Q&A, mgmt. was asked about excess capacity above the Q4 rate, and mgmt. more or less guided to 35,000 carloads (~224,000 b/d) but noted the 35,000 carload level is “not a slam dunk this we still have to get over some hurdles, but in terms of the capacity people the mobile resources to go to that level on a sustained rate. I think that's a pretty good number”. (v) CP still sees a 2-3 year window for crude by rail, as no incremental pipelines are on the horizon for that period. Mgmt. was asked if they still see a 2-3 year window for CBR, and replied “Yes and yes, we think it's 2 to 3, our best guess based on the probability of win pipelines might be built”. Our Supplemental Documents package includes excerpts from the CP Q3 call transcript.

Oil – Crude by rail remains the bright spot in North American rail traffic

As highlighted above, both CN and CP commented on the weaker macro outlook in North America, and the resulting headwinds from slower global growth. However, the crude by rail remains the bright spot in North American rail traffic. This week, the Association of American Railroads (AAR) provided data to support these comments, as the AAR posted the 42nd straight week of US traffic downturn for the week ended Oct 19 [LINK]. Total carloads for the week were 245,002 carloads, which is 7.8% lower YoY, and intermodal volume was 262,379 containers and trailers, down 9.3% YoY. Crude continues to be one of only two positive sectors YoY, while the major decreases came from coal, metallic ores/metals, and motor vehicles and parts. Railway Age [LINK] commented on the data, saying “It’s time to call it out: U.S. Class I rail freight is in a recession” and warned of railroad executives cutting capex budgets “The typical response of executives who have watched railroads lose market share for decades is to cut back on peripheral expenses and cut capex budgets for the coming month or year, and to find ways to aggressively cut variable expenses per train start”. Below is the AAR rail traffic data for the Oct 19 week.

CBR is bright

spot in NA rail

traffic

https://www.aar.org/news/rail-traffic-for-the-week-ending-october-19-2019/

https://www.railwayage.com/freight/class-i/u-s-rail-traffic-continues-slide/?RAchannel=news


22

Energy Tidbits

Figure 22: US Rail Traffic For Oct 19, 2019 Week

Source: AAR

Oil – Oil input into refineries up 429,000 b/d to 15.865 mmb/d

For the Oct 18 week, EIA estimates crude oil inputs to refineries were up 429,000 b/d to 15.865 mmb/d. Overall crude inputs are now 403,000 b/d lower YoY, which is largely driven by PADD 3 refinery maintenance, along with the closure of the PES Philadelphia refinery complex (335,000 b/d) following the Q2 fire, and with refiners undergoing heavy maintenance in preparation for IMO 2020. We would expect to see increasing crude oil inputs into refineries as we move into year end. Refinery utilization was up 2.1% this week to 85.2%. Below is our graph of the EIA weekly crude oil input to refineries.

Figure 23: US Refinery Crude Oil Inputs (thousand b/d)

Source: EIA, SAF

Oil – Potential for Canada to implement national clean fuel standards

One post election energy item is the potential for Canada to move towards some sort of national clean fuel standards ie. including more ethanol. In Valero Energy’s Q3 call this week, mgmt. discussed renewable diesel in the US and said “And then the recent elections in Canada would tell us, we're probably going to see a national standard in Canada, too. And then you've got New York State. So we think the future demand for renewable. So this looks very strong”. Our understanding is they are referring to more ethanol into gasoline. In addition, the National Post wrote [LINK] “Other parts of the Liberal climate policy include a clean-fuel standard, incentives to get people to buy more electric cars, and regulations to curb methane emissions from Canada’s oil and gas sector”. We re-checked the Liberal Party platform and there were no specifics on a new clean fuel standard, so it may just be a

Oil input into

refineries up

429,000 b/d

Canadian

national clean

fuel standards

https://nationalpost.com/pmn/news-pmn/canada-news-pmn/federal-election-results-give-carbon-tax-a-chance-to-continue-with-liberal-govt


23

Energy Tidbits

campaign announcement that wasn’t included in the 80+ page platform. Note, Quebec recently proposed clean fuel standards [LINK] whereby the Gov proposed set blending thresholds of 10% renewable fuel in gasoline and 2% in diesel fuel by 2021, with the target increasing to 15% in gasoline and 4% in diesel by 2025. It may not be a big factor to oil demand, but we should expect to see some sort of national clean fuel standards in Canada.

Oil – US “NET” oil imports down 873,000 b/d to 2.174 mmb/d

US “NET” imports were down 873,000 b/d to 2.174 mmb/d this week. US imports were down 438,000 b/d to 5.857 mmb/d and US exports were up 435,000 b/d to 3.683 mmb/d. Some items to note on the by country data. (i) Canada was up 193,000 b/d to 3.276 mmb/d for the Oct 18 week, which may be supported by the WTI-WCS differential sitting above $15 for last two weeks. (ii) Saudi Arabia was up 62,000 b/d to 452,000 b/d for the Oct 18 week, which puts the country closer to its 2019 average of 520,000 b/d. (iii) Colombia was down 464,000 b/d to 74,000 b/d, which comes after last week where the country was +466,000 b/d. (iv) Iraq was +100,000 b/d to 281,000 b/d. (v) Venezuela remained at 0 due to US sanctions. (vi) Mexico was -258,000 b/d to 264,000 b/d this week, this is not unusual as Mexico seems to follow a pattern of up big one week, and down big the next. (vii) Nigeria was down 70,000 b/d to 82,000 b/d b/d. Below is our table of US imports by country.

Figure 24: US Weekly Preliminary Oil Imports By Major Countries

Source: EIA, SAF

Oil – Will OPEC+ announce cuts at Dec meetings?

The theme for oil in 2019 has been weakening global economies driving lower demand growth, which is why we have been highlighting the need for OPEC+ to at least extend the production cuts into 2020. This week, Bloomberg Terminal story “Oil Advances on Report OPEC, Allies to Discuss Deepening Cuts” reported that OPEC+ will discuss deepening supply cuts next month, as the member countries are concerned about the demand outlook in 2020. In response to these reports, Reuters reported [LINK] on Russia Energy Minister Novak seemingly downplaying the rumors, as Novak said “There have been no formal proposals from anyone about changing the agreement”, and he said a deal could be changed, but to accomplish this “A good forecast is needed. We will monitor, make forecasts”. Note, although these comments were viewed as Russia throwing a wet towel on the reports of momentum for a deeper cut proposal, we don’t see Novak’s comments as a denial, as he said there are no “formal” proposals, but member countries are likely working behind the scenes on a legitimate proposal. We are of the view that OPEC+ is most likely to do something at the Dec meeting, especially given that we are moving into the seasonally low oil demand period in Q1 of every year, which supports our Wednesday tweet [LINK] “Why OPEC+ must, at a minimum, extend the cuts at Dec meeting? Q1/20 oil demand is seasonally lower QoQ vs Q4/19: EIA -0.58 mmb/d, IEA -1.40 mmb/d, OPEC -1.21 mmb/d.

Aug 23/19 Aug 30/19 Sept 6/19 Sept 13/19 Sept 20/19 Sept 27/19 Oct 4/19 Oct 11/19 Oct 18/19 WoW

Canada 3,201 3,648 3,404 3,483 3,438 3,306 3,405 3,276 3,469 193

Saudi Arabia 531 349 271 451 631 470 350 390 452 62

Venezuela 0 0 0 0 0 0 0 0 0 0

Mexico 531 577 717 429 826 331 524 522 264 -258

Colombia 283 214 111 643 71 213 72 538 74 -464

Iraq 205 209 547 358 190 286 519 181 281 100

Ecuador 248 218 266 306 122 243 221 98 137 39

Nigeria 57 617 326 223 0 180 411 152 82 -70

Kuwait 47 50 0 0 0 0 0 0 0 0

Angola 0 0 0 0 0 0 0 70 48 -22

Top 10 5,103 5,882 5,642 5,893 5,278 5,029 5,502 5,227 4,807 -420

Others 825 1,022 1,083 1,157 1,100 1,262 722 1,068 1,050 -18

Total US 5,928 6,904 6,725 7,050 6,378 6,291 6,224 6,295 5,857 -438

Source: EIA

US NET oil

imports down

873,000 b/d

Further OPEC+

cuts in Dec?

https://www.newswire.ca/news-releases/greenfield-global-takes-next-steps-to-expand-production-at-its-varennes-biorefinery-following-draft-regulation-on-the-minimum-renewable-fuel-volumes-in-quebec-803285964.html

https://uk.reuters.com/article/uk-oil-russia-opec-cuts/russias-novak-says-no-formal-calls-to-change-global-oil-supply-deal-idUKKBN1X20VL



24

Energy Tidbits

Need markets to look thru typical OECD early yr inventory builds especially with weaker economic outlooks”. Below is our table showing world oil demand forecasts from the major forecasters.

Figure 25: World Oil Demand Forecasts From Major Forecasters

Source: EIA, IEA, OPEC

Oil – Saudi Arabia should crash oil?

Last Sunday, Bloomberg posted a great piece “Saudi Arabia's Best Bet Is to Crash the Oil Price: Julian Lee” [LINK] . On Monday, we tweeted [LINK] “Good food for thought @JLeeEnergy piece "Saudi Arabia’s Best Bet Is to Crash the Price of Oil" ie. like done in prior cycles, crank up volumes like 1986 or 2015, regain market share to hit others harder. Concludes he doubts they do so ...” and [LINK] “... agree because Saudi has different view today than when cranked up oil volumes in 2015 to crash US shale. Al Falih on CNBC July 3 said Permian plateau is "in a year or two years or four years" ie. US growth will end naturally. see SAF July 3 blog”. We addressed this very situation (Saudi cranks up production to crash oil prices) in our July 3 blog “A Big Plus To Post 2020 Oil If Saudi Is Even Directionally Right That Permian Plateau Is “In A Year Or Two Years or Four Years”. What Bloomberg doesn’t mention is the Al Falih comments that drove that blog and were why we said they are taking a different strategy this time than the normal crank up volumes. Al Falih, then Saudi Energy Minister, said “There will be a plateau for these unconventional resources in the US, the Permian being one of them. is it in a year, or two years or four years, I don’t know but certainly its not indefinitely.” If anything, we would think, based on the US oil growth questions over the past few months, Saudi knows that they have to stay the course to figure out if that call is right. They should feel better about that call today than when al Falih said it. Our Supplemental Documents package includes the Bloomberg story and our July 3 blog.

Oil – US extends Chevron’s license to continue Venezuela operations for 3 months

Chevron’s operations in Venezuela have been in limbo for the past several months due to uncertainty on whether the US would extend the special waiver allowing the company to operate, which was set to expire on Oct 25. Back in September, Bloomberg Terminal story “(BN) Chevron Lays Groundwork for Venezuela Exit Before Waiver Expires” noted Chevron was updating some contracts with Venezuelan partners to allow for early termination in the

EIA STEO Oct 2019 IEA OMR Oct 2019 OPEC MOMR Oct 2019

Total mmb/d YoY mmb/d Total mmb/d YoY mmb/d Total mmb/d YoY mmb/d

Q1.18 99.28 98.60 97.93

Q2/18 99.64 98.90 98.18

Q3/18 100.57 100.00 99.48

Q4/18 100.42 99.50 99.72

2018 99.98 99.30 98.82

Q1/19 99.82 0.54 99.10 0.50 98.65 0.72

Q2/19 100.30 0.66 99.40 0.50 98.93 0.75

Q3/19 101.40 0.83 101.30 1.30 100.70 1.13

Q4/19 101.71 1.29 101.40 1.90 100.89 1.17

2019 100.82 0.84 100.30 1.00 99.80 0.98

Q1/20 101.13 1.31 100.00 0.90 99.68 1.03

Q2/20 101.56 1.26 100.80 1.40 99.95 1.02

Q3/20 102.71 1.31 102.60 1.30 101.78 1.08

Q4/20 103.07 1.36 102.70 1.30 102.06 1.17

2020 102.12 1.30 101.50 1.20 100.88 1.08

US extends

Chevron licence

in Venezuela

Should Saudi

crash the price of

oil?

https://www.washingtonpost.com/business/energy/saudi-arabias-best-bet-is-to-crash-theprice-of-oil/2019/10/20/0a77a830-f308-11e9-bb7e-d2026ee0c199_story.html




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Energy Tidbits

event of a US decision to not extend the special permit. This week, Chevron received some relief as the US Treasury Department renewed the license for 3 months to Jan 22 [LINK]. Under the license, Chevron, along with Halliburton, Schlumberger, Baker Hughes and Weatherford International may continue Venezuelan operations, but are still banned from exporting diluents to Venezuela. This special waiver has been a point of contention for the US Gov., as on one hand, oil production from Chevron and its JV partners helps to keep maduro in power by providing revenues to pay down Russian debt and support the military. But on the other hand, keeping a US producer in Venezuela could be a huge positive for a recovery in Venezuelan oil production in the event of a Maduro ouster. Ultimately, increasing Venezuelan oil production and removing sanctions is a negative to Cdn heavy oil as it would increase Venezuelan heavy/medium imports into the Gulf Coast ie. hurt Cdn diffs.

Oil – Ecuador lifts force majeure on oil exports

We have been following the protests in Ecuador over the controversial austerity package that led to several deaths, halted oil production by nearly 90,000 b/d and led to force majeure on oil exports in the country. In our Energy Tidbits memo last week, we noted that crude oil production was expected to be restored and normalized within 15 days, due to a cancellation of the austerity package. This week, Ecuador’s national oil company EP Petroecuador announced (using Google Translate) [LINK] the lifting of force majeure as of Oct 20, and thus resumed crude oil exports. The announcement said, “All exports that were suspended will be rescheduled in the coming days to thereby comply with all the obligations that the public company maintains”. Note, Ecuador’s major oil export market in the US is the PADD 5 West Coast, and not PADD 3 Gulf Coast. Below is a graph from the EIA’s current monthly oil imports from Ecuador into PADD 5.

Oil – Russia defense ministry says Syria oil production is ~26,000 b/d

Yesterday, we tweeted [LINK] on the TASS story “US smuggles Syrian oil to other countries - Russian Defense Ministry”. It wasn’t so much because of the Russian accusation, TASS wrote “The United States smuggles Syrian oil to other countries, the convoys are guarded by US private military companies and special operations forces, Russian Defense Ministry Spokesman Igor Konashenkov said.”. Rather, it was for the data on Syria oil production included in the story. TASS wrote “According to the Defense Ministry, given that the cost of one barrel of oil smuggled from Syria is $38, the monthly revenue of that "private business" exceeds $30 mln.” The math says that Syria’s oil production is ~26,000 b/d, which is right in line with what most use and what we had in our Oct 13, 2019 Energy Tidbits, when we wrote “Prior to the civil war, Syria’s oil production was ~380,000 b/d and its oil exports ~150,000 b/d. But its oil production is widely believed to be about 25,000 b/d.” Our tweet yesterday and our prior comments remind that Syria oil production, by itself, does not really impact oil prices. Our Supplemental Documents package includes the TASS story. [LINK[]

Trump wants to “keep the oil” in Syria and increase oil production therefrom It will be interesting to see how the control of Syria oil plays out. It may not be an immediate impact on oil because, as noted above, Syria’s oil production is only about ~26,000 b/d. But Trump’s comments this morning on his wanting to “keep the oil” imply an extended presence in Northern Syria, or at least we would assume that by his comments on increasing Syria oil production. We are signing off our drafting at 8am MT and the Trump press conference on the al Baghdadi killing is still in progress. There isn’t a transcript as of yet. But Trump made a point of highlighting his views on the US mistake going into Iraq was that the US didn’t “keep the oil”. And he repeated this “keep the oil” theme multiple times with respect to the Syria oil and US operations. He also mentioned about the below ground potential vs above

Force majeure

lifted in Ecuador

Syria production

is ~26,000 b/d

https://www.ft.com/content/43e6619a-f44a-11e9-b018-3ef8794b17c6

https://www.eppetroecuador.ec/?p=7697


https://tass.com/defense/1085449


26

Energy Tidbits

ground ie limited production. He didn’t spell this out, but he is clearly referring to how Syria was producing ~380,000 b/d prior to the civil war. And he clearly wants to get Syria oil production to higher levels or at least that is the inference. said that he wants to get US companies like “ExxonMobil” to go in to fix the Syria oil. We will see how this plays out but, in his press conference comments up to 8am MT, he is very clearly saying he wants to “keep the oil” and that he wants US companies to go and increase Syria oil production.

Figure 26: Energy Production in Syria Map

Source: Washington Institute

Oil – Saudi Arabia and Japan extend Okinawa oil storage deal

The big question following the Saudi infrastructure attacks in September, was the potential impact on Saudi oil inventories if the country’s oil production was to be impacted for a longer than expected period. At the time, Saudi Aramco was quick to respond, saying that a release of oil stocks would help compensate for lost production. The important item to note, is that outside of domestic storage facilities, Aramco also stores oil in strategic locations such as Rotterdam, Sidi Kerir, and Okinawa. This week, Bloomberg Terminal story “Saudi Arabia, Japan Extend Okinawa Oil Storage Deal by 3 Years” reported on Japan agreeing to extend the oil storage deal whereby Japan pays Aramco to lease ~8 mmb of crude oil storage capacity in Okinawa. The extension was expected, as the arrangement provides Aramco with nimble access to key Easy Asian customers, and Japan benefits by securing prioritized supply in emergency circumstances.

Oil – Rosneft transfers all oil export contracts to euros

Rosneft announced this week it wold transfer all of its oil export contracts to Euro based deals and not US$. Bloomberg terminal wrote “Rosneft Transferred All Oil-Export Contracts to Euros: Sechin” and that Rosneft has finished transferring all of its oil export contracts to

Saudi/Japan

extend oil

storage deal

Rosneft switches

export contracts

to euros


27

Energy Tidbits

euros. The company’s CEO said, “All our export contracts are in euros, and the potential for working with the European currency is very big”. Based on Rosneft 2017 disclosure, Rosneft sold 2.56 mmb/d to neighbouring and far abroad countries. [LINK] Rosneft wrote “The volume of oil sales to the neighboring and far-abroad countries amounted to 121.8 million tons in 2017. Among the export directions of oil sales, the eastern direction is the most economically attractive for the Company - deliveries via the pipeline to China, sales in the ports of Kozmino and De Kastri. The volume of supplies to the East in 2017 amounted to 47.7 million tons, which is 10.7% more than over the same period last year. In addition, the Company sold 65.7 million tons of oil to the North-West, Central and Eastern Europe, to the Mediterranean countries and other destinations of the far abroad. Exports to the CIS totaled 8.4 million tons.” One ton is 7.33 barrels.

Oil – India oil imports for Sept down 6% YoY, lowest level since Feb 2017

This week, Economic Times (India) reported [LINK] on Fitch cutting its India’s GDP growth forecast this year to 5.5%, down from its 6.6% forecast in June. Its probably therefore no surprise to see the Bloomberg terminal story this week “India’s Sept. Oil Imports Lowest in 2.5 Years as Demand Shrinks” reported that India oil imports were 4.11 mmb/d in Oct, down 6% YoY from 4.380 mmb/d in Oct of 2018, which is lowest level since Feb 2017. The lower India oil imports is not because of increasing domestic oil production, which has been on a steady slow decline. Notwithstanding the pause in oil imports, India is expected to be one of the major oil demand growth countries for the next decade.

Figure 27: India Oil Imports Vs Domestic Oil Production

Source: Bloomberg, India Ministry of Petroleum and Natural Resources

Oil – Good insights from Bloomberg IMO 2020 monthly update

This week, Bloomberg released its IMO 2020 monthly for October, which provided some good insights, and a recap of IMO 2020 status. We recommend this monthly report for those with access to Bloomberg terminals. (i) Slowing in orders for scrubber installations. Bloomberg said “new orders in October have fallen to almost zero. This is due to many shipping firms having already placed their orders and high tanker rates discouraging vessel owners from pulling ships out of service. We expect just under 3,00 scrubbers will be installed by year end”. (ii) Widening differentials between HSFO and crude/lighter products, the report said “High-sulfur fuel oil (HSFO) prices in Northwest Europe (Amsterdam-Rotterdam-Antwerp marker) have declined by over a fifth since the start of October, while crude and lighter product prices have risen or remained relatively flat”. Bloomberg also commented on the

India oil imports

down 6% YoY

Bloomberg IMO

2020 monthly

https://www.rosneft.com/business/Downstream/crude_oil_sales/crude_oil_exports/

https://economictimes.indiatimes.com/news/economy/indicators/fitch-cuts-indias-fy20-gdp-growth-forecast-to-5-5/articleshow/71737537.cms


28

Energy Tidbits

collapse in fuel oil crack spreads due to an expected decline in demand for HSFO, as the NW European fuel oil crack for Nov has fallen to $30/bbl which is in line with forward HSFO crack spreads for early 2020 that price in IMO 2020. (iii) The scrubber installation order book is sitting at 3,750, with around 3,000 expected to be installed across the fleet by YE 2019. Bloomberg said, “Scrubbers are being installed mainly on larger ships. According to Clarksons, around 25% of the ~700 active very large crude carriers (VLCC) will have scrubbers installed by the end of the year”. (iv) Widening fuel oil cracks are causing refining margins for less complex refineries in NW Europe to go negative, as IMO 2020 reduces demand for HSFO fuel oil. Bloomberg said “Several months of negative forward prices threaten runs at less complex refineries that face the prospect of losing money processing crude oil based on the forward prices today. Most at risk are coastal refineries unable to produce marine fuels compliant with IMO regulations, or those that produce less middle distillates such as diesel that are likely to benefit from IMO 2020”. We have pasted the Bloomberg forecast below that calls for scrubbers to hit 1 mmb/d in 2023, and our Supplemental Documents package includes excerpts from the Bloomberg IMO monthly update.

Figure 28: Marine Bunker Demand Outlook, 2019 – 2025

Source: Bloomberg

Oil – Brussels goes beyond EV sales, bans diesel cars by 2030, gasoline cars by 2030

There is no question that the shift to more EVs is inevitable. Its happening. It isn’t like the old days when consumers looking at renewable energy may have done a cost payback calculation. Rather it continues to be driven by governments, We try to stay on top of new govt policy changes in this push because any new policy inevitably has followers. On Friday, The Brussels Times reported [LINK] reported on the Brussels Climate Plan approved on Thurs. Brussels is going beyond other many other countries that have plans to ban the sales of ICE cars after a certain time ie. after 2030. Brussels takes it step further and says it will outright ban diesel cars by 2030 and gasoline/LPT fueled cars by 2035. This is an outright ban.

Oil and Natural Gas – sector/play/market insights from Q3 calls

This is our favorite time each time of each quarter as it is quarterly reporting and this is when we get the best insights into a range of oil and gas themes/trends, sectors and plays. As a reminder, our Energy Tidbits memo does not get into the quarterly results, forecasts or valuation. Rather the purpose of highlighting a company is to note themes/trends and plays that will help shape a reader’s investment thesis to the energy sector. In the conference calls, we also tend to find the best insights from the Q&A portion as opposed to the prepared remarks. Plus we tend to get the best E&P sector insights from services, pipelines, refineries and utilities and that was the case again this week.

Sector insights

from Q3 calls

Brussels bans

conventional cars

by 2035

https://www.brusselstimes.com/brussels/75341/brussels-climate-plan-this-is-what-it-means-national-energy-climate-plan-2030-2050-2035-climate-neutrality-brussels-region-low-zero-emission-zone/


29

Energy Tidbits

Arch Coal – Reminds US thermal coal is hurt by low gas prices

A positive to natural gas demand is low prices are allowing continued switching from coal to natural gas. This was noted in the Arch Coal Q3 call on Tues. Our Energy Tidbits memos in 2019 have been highlighting how low Europe natural gas prices have been hurting US thermal coal exports to Europe. In mgmt’s prepared comments, they highlighted the “increasingly challenging thermal marketplace” and “reduced volume projections for our thermal segment will dampen our fourth quarter results”. And in the Q&A, mgmt. was asked about 2020 in a $2.25 gas environment and where power prices are etc.. Mgmt replied “I think first and foremost what we're competing against in the PRB is natural gas renewables. And a natural gas – this 225 rates appear to be is going to continue to drop in volume. And as you've seen in the past, we will make whatever adjustments we need to make”.

Core Labs – Lower US oil growth, lower non OPEC growth in 2021/2022

Core Labs held its Q2 call on Thurs. (i) Earlier we noted CLB’s bullish view for oil on lower US oil growth and global oil growth than expectations. (ii) Earlier we noted CLB’s highlighting the refrack success in Bakken and Eagle Ford. (iii) See lower non-OPEC growth in 2021 and 2022. In speaking about growth from US, Norway, Guyana and Brazil, mgmt. said “It's also noted that significantly lower ads are targeted for 2021 and 2022. Remember that the decline curve always wins and it never sleeps”. (iv) No change to their view on Eagle Ford and Bakken maturity, same thing they said in prior quarters. Mgmt said “This is led by the Permian at 4.55 million barrels a day. Of note is the Eagle Ford is now in permanent decline and the Bakken nears its peak production. 3.35 million barrels are from conventional reservoirs, 1.8 million of this is from the Gulf of Mexico, which is also at a record production”. (v) Non-OPEC growth limited to 4 countries. “Non-OPEC and non-U.S. production is down for the 7th-year in a row, offsetting gains in Russian production, which fell by 50,000 barrels a day in September. OPEC production is right now, at an 8-year low at 38.9 million barrels of oil a day, down 750,000 barrels last month due to the disruption in Saudi production. Future supply growth will be limited to 4 countries. The U.S, which is estimated now to be up 700,000 barrels a day in 2020. By the way, we'll take the under on that. Norway, the Johan's Sverdrup is to introduce 440,000 barrels of new production in 2020. Guyana, the first oil from linked Liza is at 190,000 barrels a day early next year. There'll probably be another 200,000 barrels a day. So total new supply will be about 1.3 million barrels a day in 2020.” (vi) Not surprised by parent child problems and believes better analysis can help. In the Q&A, mgmt. replied “Yes. So two things on that. One is, I think the -- maybe -- sort of high-level, early-on misconception that they could come up with a specific footage optimum well spacing. I think that's -- people are broadly aware that's not going to happen now. And we've been aware of it for quite some time and our completion diagnostics are that, sort of, that thermometer, if you will, or that analytical device that allows the -- an operator to say for a given rock -- set of rock properties in a different -- in the specific set of reservoir conditions. So pressure, rock hardness, how brittle the rock is and then dialing in also the size of the frac, the intensity of the frac. What makes sense for that particular area around that well and the diagnostics are the way to validate if you've created well interference between the two. So I think the opportunity for more clients to adopt a measured approach using diagnostics bodes well for us. Secondly, more to come on this pretty soon. We're going to engage -- we're engaged with a number of companies right now, looking at taking a, sort of, multi-company approach to validating a process for finding out optimum well


30

Energy Tidbits

spacing.” Our Supplemental Documents package includes excerpts from the Core Labs Q3 call transcript.

Eni – Offshore Egypt Zohr on track to hit 3.2 bcf/d at start of Jan

Eni held its Q3 call on Friday. It was a short call. In the Q&A, mgmt. confirmed that ENI’s massive offshore Egypt natural gas discovery should reach 3.2 bcf/d capacity in the next few months. Mgmt said “production potential from Zohr is 2.7 Bcf per day, and by the end of the year. With the completion of the 14th and the 15th producer, well we reach a potential of around 3 billion standard per day in terms of potential and the beginning of 2020 we will then be ready to produce even 3.2 billion standard cubic feet per day.” Zohr has been a game changer for Egypt, taking it from a LNG importer to now being a net natural gas exporter. We do not normally highlight any specific international gas discovery but did so in the case of Zohr starting in our Sept 6, 2015 Energy Tidbits, wherein we highlighted ENI’s “supergiant” Zohr natural gas discovery offshore Egypt because it was believed to be huge and that it could have first production in a very quick time frame. Our warning has been that Zohr would have a significant impact on LNG markets due to its size and quick time to production. Eni’s update means that Zohr has gone from zero to 3.2 bcf/d in just over 4 years from discovery.

Halliburton – Lower Q4 drilling activity, cutting costs in the US

Earlier in the memo we commented on Halliburton’s view of lesser US oil growth, and there several other good insights in the Q3 call on drilling activity, cost cutting, and US shale. (i) Q4 drilling activity is going lower throughout all US basins. The reality is that Q1 activity will be higher, which effectively makes Q4 the bottom at least until we see how Q1 looks. Part of the equation for a bottoming in Q4 is the added seasonal decline due to Xmas break and budget exhaustion, so in theory activity in Q1 should be higher no matter what. (ii) Moving to more cost cutting in the US. They didn’t provide any specifics, but mgmt. comments clearly point to layoffs coming soon. They said “playbook, we plan to undertake further cost reductions by streamlining our operations and corporate functions. We're still finalizing our estimates, but expect to capture approximately $300 million in annualized cost savings over the next few quarters”. (iii) Interesting view of US shale. In the Q&A, mgmt. replied “I say all of that and I want to pivot to what I really think the future looks like which over the next few years, the dialog, I believe will be more around. Recovery factors in unconventionals and less about just pure speed and I think in that market some of the things we're doing with Prodigi and a host of things that I think will be quite impactful in the future scenario, which you know the future what a couple of years out.” When we hear this, we think the implication is that a focus is on increasing recovery factor infers not so much a US oil growth focus, rather more of reducing decline and maximizing return out of the existing developed acreage”. (iv) Lower US activity doesn’t seem to be a transient issue that will reverse. Halliburton didn’t provide any specifics, but why would they be announcing cost cutting in the US if they saw the dip down in activity as temporary? We believe the implication is that activity isn’t going back to what they had previously expected, and we view this as meaning they don’t see the same US oil potential as they saw a few months ago. Plus, they are also focusing on recovery factors, which, as noted above, infers less about oil growth and more about reducing declines/maximizing recovery. Our Supplemental Documents package includes excerpts from the Halliburton Q3 call transcript.


31

Energy Tidbits

Patterson UTI – Retiring part of its frack fleet, Delaware efficiencies leveling off

A couple good insights from the Patterson UTI Q3 call from Thurs. (i) Management is supportive that lower US oil growth is likely ahead. They didn’t specifically say this, but Patterson is permanently retiring <20% of its frack capacity, meaning there will be less frack capacity. Mgmt. said “During the third quarter, we undertook a thorough process to evaluate the economic opportunity for our fleet and decided to permanently retire 300,000 horsepower a pressure pumping equipment. We concluded that in the current market the cost to reactivate this equipment would be prohibitive and with oversupplied market conditions, the best course of action would be to rationalize this equipment”. (ii) They don’t see Delaware efficiencies increasing much, rather are leveling off, which fits the view of US oil growth being less than expected. Note, the Delaware is the less mature of the two key Permian basins (Delaware and Midland) and this means the drilling efficiencies aren’t enough to compensate for less rigs at work. Mgmt. said “So, I think efficiencies continue improve in the Delaware in terms how fast we're drilling the wells but the laterals also increase so I think we've been seeing a trend where we've had more operators set up more pads with longer laterals and things are kind of leveling off. It's hard to see the needle moving significantly over the next year or two to improve efficiencies from where they are we intend to try to do that with some of the technology that we're going to introduce but it's not just about improving how fast we drill and days per well, but also improving the quality of the well bore and repeatability, , when you get a good well you want to be able to do that over and over and not have the statistical tale where you sometimes get a slower well occasionally in your database. So, just thinking about the efficiencies, I think that the industry overall is done a great job to improve them and it's going to be a little bit more challenging to improve the needle over the next couple of years”. (iii) Similar to Halliburton, they expect drilling to bottom in Q4, and recover modestly in Q1. Note, the Q1 increase is not attributed to an improvement in producer mood to drill or producers changing from living within cash flow. Rather, Q4 is down from Q3 due to budget exhaustion and a longer than normal Xmas break, meaning Q1 should be up with the fresh budgets and being past the holiday season. Mgmt. said “But WTI in the low to mid-50s. Operator activity continues to be motivated by staying within budget and therefore operators that outspent their budget in the first half of the year are slowing activity in the back half of the year. Both drilling and pressure pumping activity are expected to decline further in the fourth quarter, but recent customer conversations suggest that our drilling rig activity will bottom in the fourth quarter and then a modest increase in late December and early January. At this point, there's limited visibility into how 2020 activity will shape up and we will know more later in the years operators work on their budgets”. Our Supplemental Documents package includes excerpts from the Patterson UTI Q3 call transcript.

Precision – Similar winter levels for Montney, Deep Basin and Heavy Oil

Precision held its Q3 call on Thurs. (i) Earlier we noted Precision may redeploy US rigs to the Persian Gulf. (ii) US rig activity was lower than expected in Q3, going lower in Q4 and then up in Q1 with new budgets . Similar view as other service companies that refreshed budgets and past the holiday season see a Q1 pickup. (iii) A reminder on how US producer capex is driven by investor sentiment by their comments on 2020 capex budgets. It sounds like their customers are hoping for a change in investor views on producers not out spending cash flow. But Precision’s comment is also a warning that their 2020 activity view could be impacted if there is another shift down in investor sentiment. Mgmt said “It's a good question, really


32

Energy Tidbits

good question. I would say capital market's reaction to Q3 disclosure by E&P companies could have an impact. If for whatever reason, the capital markets seller on the further on the E&P companies in Q3 that could be a negative driver in activity”. (iv) Expect US customers to smooth out drilling in 2020 and now like this year. (v) Recap of US regions. Mgmt said “As we look around the market, the Permian, the DJ Basin in the Marcellus are Precision strongest regions where we have 51 active rigs today. Our weakest regions or the SCOOP in the Bakken with one active rig each, and the balance of our activity is in Texas and Louisiana spread between the Haynesville, Eagle Ford and Gulf Coast areas with 12 rigs running.” (vi) Expect winter Canada drilling activity similar to last year for Montney/Deep Basin and Heavy Oil, but weak for shallower rigs in Cardium, Viking and Bakken. (vii) Believe end of curtailment will increase drilling activity. Mgmt said “So turning back to the issues impacting Canadian drilling activity. We firmly believe that the Alberta government must act immediately and remove the production curtailments entirely for all conventional oil producers. We think this is a critically important step for our customers and it should lead to stronger utilization and importantly jobs in the services industry. The emergency of this request cannot be overstated. As our customers are now in the throes of planning for 2020, the time to act is now.” (vii) Gave a shout out to TMX potential. Mgmt said “I'm also encouraged by the federal government's post election reaffirmation and commitment to proceed with the Trans Mountain pipeline expansion. This is certainly an encouraging stats following the heated election. Both of these regulatory actions proved constructed catalysts for our energy industry activity, and we will certainly encourage investment in industry absolutely encouraged the government of Alberta to act on the oil curtailment reduction and the federal government to proceed Trans Mountain.” Our Supplemental Documents package includes excerpts from the Precision Q3 call transcript.

Oil & Natural Gas – Liberal strong minority is a modest negative to Cdn oil and gas

Earlier we noted the positive Trudeau comments on TMX, which was a big relief to the Cdn oil and gas sector. This is a key positive from the election but we have two other major takeaways or concerns post the election. (i) After the election, we tweeted [LINK] “TMX aside, if a strong Liberal majority wasn’t attracting capital providers (debt, equity) to Cdn oil and gas, why would a strong minority that has to make some concessions to Bloc/NDP be viewed as more attractive to capital providers for Cdn oil and gas? It can’t.” Under the status quo of a Liberal majority, capital providers (debt and equity) were not attracted to the Cdn oil and gas sector. A Liberal minority (albeit a strong minority) means that the Liberals are likely to make some concessions to the Bloc and NDP (both are tougher on the oil and gas sector and climate change) that will inevitably have some modest added costs or impact on the oil and gas sector. If the status quo wasn’t attracting capital, how can a minority that will see some gives (even if modest) be viewed as more attractive – it can’t. (ii) The off script comment by the Liberal candidate (see our Oct 20, 2019 Energy Tidbits) that no new pipelines will be approved under Bill C-69 confirms what the oilpatch believes but no what the Liberals have had as an official line on Bill C-69. (iii) We had a number of other post election takeaways in our email to the SAF team post the election. Please remember that we wrote that email on election night and before Trudeau’s positive TMX comments. Our Supplemental Documents package includes our SAF email.

Oil and Natural Gas – Alberta budget was a positive to oil & gas

The Alberta government released its new budget on Thursday. (i) Our comments are only related to items linked to oil and gas. (ii) Overall, the oil and gas sector has to be pleased

Alberta budget is

positive to oil and

gas

Liberal strong

minority is a modest

negative



33

Energy Tidbits

with the budget. (iii) Lower corporate income tax, the budget said “Making Alberta the best place to do business through the Job Creation Tax Cut. The general corporate income tax (CIT) rate dropped from 12 per cent to 11 per cent on July 1, 2019, and will decrease three more times by a single percentage point on January 1 in each of the next three years till it reaches 8 per cent in 2022”. (iv) They are also implementing the enhanced capital cost allowance. “To further improve Alberta’s competitiveness and encourage investment, Alberta also paralleled federal measures to enhance the capital cost allowance (CCA) regime. These measures allow corporations to claim the costs of new capital assets more quickly for tax purposes, improving a company’s cash flow and making it more attractive for them to invest in new assets”. (v) They didn’t announce a crude by rail deal but commented on ending the program. The budget said “We are ending this costly, interventionist and unnecessary approach to market access. The fiscal plan reflects a provision of $1.5 billion in 2019-20 to extricate taxpayers from the crude-by-rail program hastily put in place in the final 30 days of the last government’s mandate”. (vi) Allocating money to their fight back awareness program. (vii) Continuing on the AER review and expected cost savings. (viii) Modest increases in assumed oil and gas capex every year, +4.5% in 2020 and +7.7% from 2021-2023. “Oil and gas investment is expected to turn a corner in 2020 and pick up over the medium term. It is forecast to rebound by 4.5 per cent in 2020 as producers slowly ramp up drilling and production ahead of Enbridge’s Line 3 coming online. As market access and prices improve, oil and gas investment is forecast to accelerate and grow at an average of 7.7 per cent from 2021 to 2023.” (ix) Alberta also ran a scenario of no new pipelines in the risks section. “The no market access scenario assumes all three pipeline projects are permanently cancelled. Without sufficient pipeline access, the light heavy differential remains above US$20/bbl, reflecting higher rail costs. Further, cancelling the TMX pipeline eliminates access to the U.S. West Coast and Asian markets. Under this scenario, production is expected to be 120,000 bpd lower between 2019 and 2023, and around 250,000 by 2025, compared with the baseline.” (xi) Oil and gas pipelines and differentials. The AB gov is forecasting oil pipeline debottlenecking and risking rail shipments to increase oil production by ~178,000 b/d, and forecasts the WCS differential to average US$17.10/bbl in 2022-2023 once incremental pipeline capacity comes online. For natural gas, the gov said “TC Energy’s expansion of its NGTL system. Abundant natural gas supply means prices in Alberta are expected to improve only modestly. The Alberta reference price for natural gas is forecast to rise gradually from $1.30/GJ in 2019-20 to $2.00/GJ in 2022-23, but remain low by historical norms”. Our Supplemental Documents package includes our SAF email on the budget.

Capital Markets – Argentina Presidential election today

The oil and gas sector and markets overall will be watching the Argentina President election today. The fear is always the roller coaster ride in Argentina, especially in this case, with the favored opposition candidate Fernandez general economic plans. Incumbent President Macri (viewed as the market friendly candidate) was well behind in the polls to opposition candidate Fernandez. Bloomberg terminal had a good recap this morning. On Fernandez, Bloomberg writes “Fernandez, 60, who has never served in senior office, could avoid a run-off if voters cast ballots in a similar breakdown to the primary. He has yet to provide specifics of his economic plans but he’s promised to boost salaries, make loans accessible and do away with austerity, on top of lowering interest rates and inflation -- without saying how he would fund it. He also suggested he would tackle Argentina’s debt problem by adopting a strategy similar to that of Uruguay, which successfully extended its bond maturities in 2003.” Bloomberg also raised one other Fernandez risk “If Fernandez wins it will raise questions about the role of his running mate Kirchner, who governed between 2007 and 2015. Her interventions in the economy included implementing price controls and printing money. Kirchner had taken over from her late husband Nestor Kirchner”. Our Supplemental

Sept outflows from

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Documents package includes the Bloomberg terminal story.

Capital Markets – Bad month for equities funds flows from Cdn mutual funds, ETFs

On Thurs, the Investment Funds Institute of Canada (IFIC) released its “IFIC Monthly Investment Fund Statistics – September 2019: Mutual Fund and Exchange-Traded Fund Assets and Sales”. [LINK] We don’t have access to the splits of flow from equities between Cdn equities and international equities but, no surprise, Canadian mutual funds equities continue to see net redemptions in Sept with $2.50b out of equities to bring YTD Sept 30 net redemptions of $9.75b. IFIC also reported on Canadian ETF equities for Sept that saw net redemptions of $1.07b to bring YTD Sept 30 net sales of $4.44b. Our Supplemental Documents package includes the IFIC data

Demographics – 46.8 million millionaires in the world

Credit Suisse released is annual Global Wealth Report 2019 [LINK] that estimates for mid-2019 there were 46.8 million millionaires worldwide, up 1.1 million YoY vs mid 2018. US leads the way with 18.61 million, China now #2 with 4.45 million, and Japan #3 at 3.03 million. Canada has 1.32 million, up YoY from 1.29 million. Given that being a millionaire doesn’t have the same exclusivity as it did 30 or 40 years ago, it is interesting to look at the top of the pyramid. The split of the 46.8 million millionaires by number and % of the global population of 7.7 billion is (i) 41.1 million (0.534%) from US$1 to $5 million, 3.7 million (0.048%) from US$5 to $10 million, 1.8 million (0.024%) from US$10 to $50 million, and then the top of the pyramid of 0.17 million (0.002%) over US$50 million.

Figure 29: Global Wealth Pyramid 2019 & Top Of The Pyramid 2019

Source: Credit Suisse

Demographics – “Jobs of the Future” outperform but aren’t immune from economy

This morning, Cognizant posted its Jobs of the Future quarterly update titled “Cognizant’s Jobs of the Future Index posts stronger Q3 growth after a relatively flat Q2”. For those that haven’t seen this before, its worth a quick read because jobs growth is really a sign of sector growth and ultimately capital allocation (either private or public) and ultimately potential returns. Cognizant wrote “The CJoF Index specifically tracks demand for 50 digitally enabled jobs of the future identified by Cognizant’s Center for the Future of Work, capturing the quarterly fluctuations in postings for these jobs. In the third quarter, the CJoF Index rose by a moderate 12.8 percent over the year, from an index figure of 1.47 in Q3 2018 to 1.65 in Q3 2019. This was a deceleration from the over-the-year rise of 37 percent recorded in the CJoF Index in Q3 2018 (from 1.07 in Q3 2017).” Cognizant then provides some comments of

46.8 million

millionaires in the

world

“Jobs of the Future”

outperform

Sept outflows from

equities in mutual

funds and ETFs

https://www.ific.ca/wp-content/uploads/2019/10/News-Release-September-Monthly-Statistics-Mutual-Funds-and-ETFs-October-24-2019.pdf/23476/

https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html


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areas within the headline “Healthcare, Work Culture, Environmental, and Algorithms, Automation, & AI families passed Fitness and Wellness family, as the families with the fastest growth, year on year”. Our Supplemental Documents package includes the Cognizant Q3 update. [LINK]

Figure 30: Cognizant Jobs of the Future Index, Q3 2016 to Q3 2019

Source: Cognizant, Axios

Energy Tidbits – Now on Twitter

For new followers to our Twitter, we are trying to tweet on breaking news or early views on energy items, most of which are followed up in detail in the Energy Tidbits memo or in separate blogs. Our Twitter handle is @Energy_Tidbits and can be followed at [LINK]. We wanted to use Energy Tidbits in our name since I have been writing Energy Tidbits memos for over 19 consecutive years. Please take a look thru our tweets and you can see we aren’t just retweeting other tweets. Rather we are trying to use Twitter for early views on energy items. Our Supplemental Documents package includes our tweets this week.

Energy Tidbits – Sign up on our email distribution for tidbits and blogs

Please note that we have set up our Energy Tidbits memo on our SAF website alongside our blogs. The distribution for the Energy Tidbits memo will be via the same notification system used for our blogs. To ensure you receive Energy Tidbits memos, please go to our blog sign up. We will be using the blog notification list for Energy Tidbits. The blog sign up is available at [LINK].

LinkedIn – Look for quick energy items from me on LinkedIn

I can also be reached on Linkedin and plan to use it as another forum to pass on energy items in addition to our weekly Energy Tidbits memo and our blogs that are posted on the SAF Energy website [LINK].

Misc Facts and Figures.

During our weekly review of items for Energy Tidbits, we come across a number of miscellaneous facts and figures that are more general in nature

TESLA’s competitive advantage on range TESLA shares had a good week being up 29% after the Q3 release. On the Q3 call, TESLA noted how software updates were extending range of the vehicles. And its Q3 call slide deck [LINK] noted “In addition to launching longer-range versions of the Model S and Model X in April, we have been able to increase the EPA range of the

Look for energy

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Energy Tidbits now

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https://www.cognizant.com/jobs-of-the-future-index

https://twitter.com/Energy_Tidbits

http://www.safgroup.ca/research/trends-in-the-market/

http://www.safgroup.ca/

https://ir.tesla.com/static-files/47313d21-3cac-4f69-9497-d161bce15da4


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Model 3 Standard Range Plus from 240 miles to 250 miles. We accomplished these improvements by more efficient energy use rather than a costly increase to the battery size. Our current shortest-range vehicle is on parity with the longest-range production EVs offered by other companies. Long-range models of each Model S, X and 3 continue to have 20-40% higher range than any other EV available” and included the below graph comparing EPA range in miles for the TESLA models vs the competitors.

Figure 31: TESLA Comparison For EPA Range In Miles

Source: TESLA

Southwest Airlines says they don’t put cameras in lavatories We are regular monthly flyers but never stopped to think there might be a camera in the airplane lavatory. However, AZcentral posted a Friday story “Southwest Airlines flight attendant: Pilots streamed airplane bathroom video to cockpit:” [LINK] that included “the suit alleges that 2½ hours into the flight, the pilot, Capt. Terry Graham, asked Steinaker to come to the cockpit so that he could leave to use the restroom. Southwest Airlines policy requires two crew members in the cockpit at all times, so Steinaker was asked to staff the cockpit with co-pilot Ryan Russell in Graham's absence. The suit states that when Steinaker entered the cockpit, she spotted an iPad mounted to the windshield to the left of the captain’s seat. On it, she reportedly could see a live stream of what appeared to be Graham in the bathroom. The filing states that Russell looked panicked and told her the cameras were a new top-secret security measure that had been installed in all Southwest Airlines planes, which Steinaker did not believe to be true”. Later the story says “In an emailed statement to the Arizona Republic, a representative for Southwest Airlines said. "The safety and security of our employees and customers is Southwest’s uncompromising priority. As such, Southwest does not place cameras in the lavatories of our aircraft. At this time, we have no other comment on the pending litigation." Air Force One Flew at Mach 0.9 on 9/11 to get President Bush to Washington. We had History Channel’s 9/11 Inside Air Force One on in the background yesterday morning. One soundbite caught our ear as they talked about President Bush rushing to get back from Nebraska to address the nation that night. And one of the White House staff on the plane that night said they were racing back at Mach 0.9 that night. That was 2001, but we should have realized, of course, Air Force One will faster than regular commercial planes. Today, regular commercial jets like the Airbus A320 fly at Mach 0.8 and Boeing 737 at just below Mach 0.8.

https://www.azcentral.com/story/news/local/arizona/2019/10/25/southwest-airlines-lawsuit-pilots-livestreamed-plane-bathroom-flight-attendant-claims/2458570001/