This week, the North American oil rig count fell again after a pause, and oil prices continue to exhibit weakness. As below chart suggets, especially the Permian and Mississippian region have seen a decline in oil rigs.
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Chart of the Week
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• The map above depicts major Canadian natural gas pipelines, and some of their interconnections in the U.S.
• Canada exports 2.6 trillion cubic feet (Tcf) of natural gas to the U.S., almost entirely by pipeline (some LNG is delivered by truck to New England).
• Canada accounts for virtually all of U.S. imported gas, most of which comes from Alberta.
• But the shale gas revolution in the U.S. has slashed Canadian imported gas down from 3.2 Tcf in 2007.
• TransCanada (NYSE: TRP) is the largest gas pipeline owner in North America, operating 13 major pipeline systems. Related: Oil Jobs Lost: 250.000 And Counting, Texas Likely To See Massive Layoffs Soon
• Speaking of TransCanada, Canada’s National Energy Board issued a safety order last week to the pipeline operator, halting construction on a natural gas pipeline because one of its contractors apparently spilled drilling fluids into the Athabasca River. The company insists the spills are not harmful.
• Kinder Morgan (NYSE: KMI) says that its Trans Mountain Pipeline could cost as much as $6.8 billion, up from a previous cost estimate of $5.4 billion. The pipeline would allow Alberta oil to be exported from Canada’s Pacific Coast. Despite the inflated price tag, Kinder Morgan still says the pipeline makes economic sense.
• Glencore (LON: GLEN) says that it has secured a deal to buy half of the oil that Libya is exporting, or around 150,000 barrels per day. The oil will be exported from Libya’s Hariga port in the east. Fractured from war and port closures, Libya’s oil exports have plummeted to around 400,000 barrels per day from a pre-war tally of 1.6 mb/d.
• Royal Dutch Shell (NYSE: RDS.A) announced a discovery in the Gulf of Mexico. The kaikias field could hold 100 million barrels of oil. While the volume is not massive, the location is fortuitous. The discovery is located near several production facilities and subsea pipelines Shell already operates, which should reduce the cost of development.
We are now a week and a half away from the OPEC meeting in Vienna (December 4), and it was at this time last year that the oil cartel sent oil markets spiraling downwards when they decided to leave their production quota unchanged. This time around there probably will not be any surprise developments, most analysts foresee a status quo approach on the behalf of OPEC to maintain its strategy of pursuing market share and several OPEC officials have said as much.
On the other hand, Saudi oil minister Ali al-Naimi suggested that OPEC was working with other oil producers to stabilize oil markets, causing Saudi Arabia’s stock exchange to post big gains. “Saudi and U.A.E. officials speaking in support of OPEC strategy is giving comfort to the market,” Ramzi Sidani from Dubai-based Shuaa Capital PSC told Bloomberg in an interview. “We’re seeing a big recovery in the U.S. and Saudi Arabia is following the tracks.” It is hard to see Saudi Arabia doing an about-face at this point on its strategy. There have been murmurings in the past about Russia participating in some sort of coordinate production cut with OPEC, but that is a very remote possibility. At this point, Saudi Arabia is starting to encroach on Russia’s traditional market in Europe, fighting for market share. The competition leaves little room for compromise. In fact, Russia’s energy minister said on November 21 that oil prices are best balanced by the market.
But while it is unlikely that OPEC shifts tactics, Saudi Arabia may be considering a devaluation of its currency. Saudi Arabia has maintained a peg to the dollar for years, but low oil prices are putting a lot of pressure on the regime, depleting foreign exchange. To ease the burden on its reserves, Saudi Arabia may be forced to consider changing the peg if it deems the oil strategy as more important.
So, while all signs point to a stay-the-course strategy from OPEC coming out of Vienna, there is still plenty to pay attention to over the next couple of weeks. Related: Natural Gas Companies Slammed By Low Prices
Of course, Venezuela is not happy with OPEC. The South American nation is suffering worse than any of its OPEC members. Venezuela’s oil minister Eulogio Del Pino warned ahead of the meeting that the failure of OPEC to take action to stabilize the market (i.e. cut the oil production quota) could cause oil prices to drop as low as the mid-$20s per barrel. Venezuela has proposed that OPEC target an “equilibrium price” of $88 per barrel. “We cannot allow that the market continue controlling the price,” Del Pino said. “The principles of OPEC were to act on the price of the crude oil, and we need to go back to the principles of OPEC.”
Meanwhile, Iran is asking OPEC to make way for its return to the oil markets as international sanctions are expected to come off in the next few months. Iranian officials estimate that they can bring back 1 million barrels per day in oil exports within six months of the removal of sanctions. Still, Iran’s oil minister Bijan Namdar Zanganeh admits that OPEC probably won’t lay that out in terms of policy. “I don’t expect to receive any new agreement,” Zanganeh told reports in Tehran. “OPEC is producing more than its approved ceiling and I asked them to reduce production and to respect the ceiling, but it doesn’t mean we won’t produce more because it is our right to return to the market.”
The Canadian finance ministry released new data showing a much larger fiscal deficit than previously expected due to the slump in oil prices. Canada is now expected to run a CAD$3 billion ($2.3 billion) deficit, while the previous estimate projected a CAD$1.4 billion surplus. The news comes as the new Liberal government has called for significant deficit spending in order to juice the economy.
If Canada as a whole is hurting from low oil prices, one can imagine how concentrated the pain is in the province of Alberta. Nevertheless, the Alberta government has an eye on slashing its carbon pollution while also raising revenue. The government announced plans to impose an economy-wide carbon tax by 2017. The plan includes a complete phase out of coal-fired power plants within 15 years as well as a plan to cut methane emissions by half in ten years. The move comes ahead of the Paris climate talks set to take place in the next two weeks. It is also consistent with the Alberta government’s message that while oil pipeline access remains the industry’s biggest challenge, the ability to build new pipelines depends on convincing outside constituencies that it is taking climate change seriously. The revenues generated from the carbon tax will be reinvested in emissions-saving technologies.
By Tom Kool of Oilprice.com
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