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Energy Tidbits

Dan Tsubouchi

Principal, Chief Market Strategist

[email protected]

Aaron Bunting

Principal, COO, CFO

[email protected]

Ryan Dunfield

Principal, CEO [email protected]

Ryan Haughn

Principal, Energy

[email protected]

HP Forecasts US Wells Drilled Down 14% in 2020, Significant

Given Surplus DUCs Are Being Depleted

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 on Sunday.

This week’s memo highlights:

1. Helmerich & Payne forecasts US wells drilled down 14% YoY in 2020, especially significant given surplus DUCs are being depleted. (Click Here)

2. Azerbaijan Energy Minister says no emergency OPEC+ meetings. (Click Here)

3. 2nd CP crude by rail tankcar derailment/fire near Guernsey in 2 month, has to increase risk of earlier phase out of

DOT-117R and Jacketed CPC-1232 tank cars. (Click Here)

4. TMX cost estimate up ~70% to $12.6 billion. (Click Here)

5. Libya oil production is off >1 mmb/d and lost revenues now over $1 billion. (Click Here)

6. 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.

7. 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

Feb 9, 2020

https://twitter.com/Energy_Tidbits

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


2

Energy Tidbits

Table of Contents Natural Gas – Natural gas withdraw of 137 bcf, storage now +609 bcf YoY surplus ...............................................5

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

Natural Gas – NOAA reminds Jan was near record warm temperatures ................................................................5

Figure 2: NOAA: Statewide Average Temperature Ranks ...............................................................................5

Natural Gas – More signs pointing to US gas plateau in 2020, Cabot lowers guidance ..........................................6

Natural Gas – Construction of Nord Stream 2 not expected to resume soon ..........................................................6

Natural Gas – China Dec LNG imports +2.7% YoY or +0.83 bcf/d ..........................................................................6

Figure 3: China LNG imports ............................................................................................................................7

Natural Gas – Total rejects China declaring force majeure on LNG deliveries ........................................................7

Natural Gas – Bloomberg Global LNG Coronavirus adds to an uneasy LNG market..............................................7

Figure 4: LNG Prices ........................................................................................................................................8

Bloomberg: “The case for US LNG shut-ins to curb the supply glut is growing” ......................................................8

Figure 5: Europe Storage Utilization .................................................................................................................9

Figure 6: Atlantic LNG Netbacks ......................................................................................................................9

Natural Gas – Baker Hughes reminds low gas prices means focus is on brownfield ........................................... 10

Natural Gas – UK saw the 6th warmest Jan since 1884 ........................................................................................ 10

Oil – US oil rigs up 1 to 676 oil rigs ....................................................................................................................... 10

Figure 7: Baker Hughes Total US Oil Rigs .................................................................................................... 10

Oil – Total Cdn rigs up 10 to 257 total rigs ............................................................................................................ 11

Figure 8: Baker Hughes Total Canadian Oil Rigs ......................................................................................... 11

Oil – US oil production down 100,000 b/d 12.9 mmb/d ......................................................................................... 11

Figure 9: EIA’s Estimated Weekly US Oil Production ................................................................................... 11

Figure 10: US Weekly Oil Production ............................................................................................................ 12

Figure 11: YoY Change in US Weekly Oil Production ................................................................................... 12

Oil – Helmerich & Payne forecasts US wells drilled down 14% in 2020 ............................................................... 12

Less wells drilled in 2020 is significant as surplus DUCs are being depleted ....................................................... 13

Figure 12: US Oil Rigs, MoM Changes In DUCs, Completions and Oil Production ...................................... 13

Oil – Conoco reminds US “oil” plays produce NGLs and associated natural gas ................................................. 13

Oil – Plains forecasts Permian +400,000 b/d exit 2020 vs exit 2019 .................................................................... 14

Oil – Patterson UTI: “sudden” “major oil company” stoppage in a basin ............................................................... 14

Oil – Near term risk to WCS diffs with China oil demand -3.0 mmb/d due to Coronavirus ................................... 15


3

Energy Tidbits

Figure 13: China Imports by Country (Thousand b/d) ................................................................................... 15

Oil – Federal Court dismisses challenges to Trans Mountain expansion ............................................................. 15

Oil – TMX capital costs increased by ~70% to $12.6b will increase tolls .............................................................. 16

Oil – Enbridge clears last major hurdles in Minnesota .......................................................................................... 16

Oil – Sounds like Liberals planning for plan b on Teck Frontier oil sands ............................................................. 16

Oil – Kenney says CBR to average 500,000 b/d in 2020 ...................................................................................... 17

Oil – Crude by rail insights from CN ...................................................................................................................... 17

Figure 14: CN Crude Oil By Rail .................................................................................................................... 18

Oil – 2nd CP oil tankcar derailment/fire near Guernsey, Sask ............................................................................... 18

Dec 9 incident was a Class 3 Occurrence ie likely new safety lessons identified ................................................. 18

Nothing specific in Garneau’s recent new mandate letter on oil tank cars ............................................................ 19

Risk to earlier phase out of DOT-117R & jacketed CPC-1232 tank cars .............................................................. 19

Liberals first pointed to this risk on Sept 19, 2018 ................................................................................................. 19

All Garneau was doing in Sept 2018 was following BNSF’s July 2018 lead ......................................................... 20

Oil – Oil input into refineries up 48,000 b/d to 15.972 mmb/d ............................................................................... 20

Figure 15: US Refinery Crude Oil Inputs (thousand b/d) ............................................................................... 20

Oil – Not looking like any binding arbitration for Co-op refinery ............................................................................ 21

Oil – US “NET” oil imports up 50,000 b/d to 3.202 mmb/d .................................................................................... 21

Figure 16: US Weekly Preliminary Oil Imports By Major Countries .............................................................. 21

Oil – Sounds like no emergency OPEC+ meeting................................................................................................. 21

Figure17: OPEC and OPEC+ Ministers Meeting Schedule .......................................................................... 22

Oil – Libya oil production now down 1.038 mmb/d, lost revenue now $1.04b ...................................................... 22

Still sounds like major issues are unresolved ................................................................................................ 22

Oil – Coronavirus oil demand hit, BP 300 – 500,000 b/d, COP 100 – 200,000 b/d .............................................. 23

Oil and Natural Gas – sector/play/market insights from Q4 calls .......................................................................... 23

BP – Reserve replacement of 67% in 2019, lower 48 production going lower ..................................................... 24

Conoco – “Still participating” in LNG ............................................................................................................. 25

FirstEnergy – “Manufacturing recession continuing on in 2020” ................................................................... 25

Helmerich & Payne – AI for autosteering in horizontal legs is “disruptive” .................................................... 26

Patterson UTI – Moving rigs from Eagle Ford, SCOOP/STACK and Marcellus ................................................... 26

Plains – Producer sentiment is not much different than in Nov ..................................................................... 27

Capital Markets – Pope Francis calls for wealth redistribution/debt relief ............................................................. 28

Capital Markets – WSJ “the Mormon Church amassed $100 billion” .................................................................... 28


4

Energy Tidbits

Climate Change – No surprise less snowfall than in 1970 .................................................................................... 29

Figure 18: Percentage of Stations With Decreasing Snow by Region (1970-2019) ..................................... 29

Climate Change – Antarctica sets new record high temperature .......................................................................... 29

Twitter – Look for our first comments on energy items on Twitter every day ........................................................ 29

Energy Tidbits – Sign up on our email distribution for tidbits and blogs ................................................................ 30

LinkedIn – Look for quick energy items from me on LinkedIn ............................................................................... 30

Misc Facts and Figures.......................................................................................................................................... 30


5

Energy Tidbits

Natural Gas – Natural gas withdraw of 137 bcf, storage now +609 bcf YoY surplus

The EIA reported a 137 bcf natural gas draw, which was higher than expectations of a 130 bcf draw, but below the 5-yr average draw of 143 bcf. This brings storage to 2.609 tcf as of Jan 31. This is a widening of the YoY surplus to 609 bcf vs 524 bcf surplus last week, with storage now 193 bcf above the 5 yr average. Despite the slightly bigger draw compared to expectations, it didn’t make a difference to gas prices, with HH closing flat at $1.86 on Thurs. The continued negative to HH is milder US temperatures and the expectation for total gas withdrawals to fall below the 5 yr average over the withdrawal period, which combined with higher YoY production, is keeping HH below $2. 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 – NOAA reminds Jan was near record warm temperatures

On Thurs, NOAA issued its recap of Jan weather [LINK]. Everyone knows it was warm with all the general news coverage and also because HH gas prices are ~$1.85. NOAA’s Jan temperature recap shows there was no weather help to natural gas prices from the near record warm temperatures with it being the 5th warmest for the US in the last 126 years, and near record warm temperatures in the NE, Great Lakes, and East. . Figure 2: NOAA: Statewide Average Temperature Ranks

Source: NOAA

YoY storage at

609 bcf YoY

surplus

Jan was near

record warm

temperatures

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

https://www.ncdc.noaa.gov/temp-and-precip/us-maps/1/202001#us-maps-select


6

Energy Tidbits

Natural Gas – More signs pointing to US gas plateau in 2020, Cabot lowers guidance

We saw more signs to support the narrative that lower than expected natural gas prices are leading to a correction in capex and production. And that US natural gas production should reach a plateau later in 2020. On Tues, Cabot, a major Marcellus player, issued “updated” 2020 guidance. Cabot’s 2020 capex is $575 mm, which is down 27% YoY. And its updated production guidance is for 2020 production of 2.4 bcfe/d, which compares to Q4/19 production of 2.457 bcfe/d. Cabot is using a $2.25 average HH price for tis updated 2020 guidance, whereas it used $2.50 in the original 2020 guidance. Note the current 2020 strip is $2.08 so there is still the risk that there could be more changes if HH goes lower. Cabot said “We are encouraged by the reduction in horizontal rig counts across the Marcellus, Utica and Haynesville—which are collectively down 39 percent since their recent peaks in the second quarter of 2019—and are hopeful that market forces will continue to move natural gas supply and demand toward a more sustainable balance; however, we will continue to evaluate the potential for additional capital reductions if prices erode further," stated Dan O. Dinges, Chairman, President and Chief Executive Officer.” Our Supplemental Documents package includes the Cabot release.

Natural Gas – Construction of Nord Stream 2 not expected to resume soon

The one relief for LNG in 2020 is that completion of the 5.3 bcf/d Nord Stream 2 gas pipeline from Russia to Germany will be delayed by >1 year due to Allseas (the Switzerland based underwater pipe laying company) suspending its Nord Stream 2 work due to the US sanctions. Our Jan 11, 2020 tweet [LINK] noted the TASS reporting of Putin’s comments on the 5.3 bcf/d Nord Stream 2 new gas pipeline from Russia to Germany being delayed. Putin indicated that they would be able to complete the construction of Nord Stream 2 but that the timing would be later than expected. Putin said “Yes, we will definitely be able to finish the construction [of the pipeline] by ourselves," "The question is about the timeframe. It is the only question raised in this context”, and "I hope that by the end of the current year or in the first quarter of next year, the work will be over and the gas pipeline will be put into operation”. The original in service date was yr end 2019. Not surprisingly, Austria’s OMV (investor in Nord Stream 2) announced this week that construction on the pipeline would not resume any time soon [LINK]. OMV CEO said “The project’s operator Nord Stream 2 is working on a plan, but they are not ready to present the plan yet. We do not think that construction of the pipeline will resume in the short term”. There isn’t much construction work to be completed once they restart, maybe a few months. So the big question is when does construction restart, but the general working assumption (including Putin’s views) is in early 2021, which means construction likely has to start around the beginning of Q4/20. The delay is a relief for LNG in 2020 (or at least doesn’t make things worse) but our concern remains that the start up of Gazprom’s 3.6 bcf/d capacity Power of Siberia pipeline to China on Dec 1, 2019 and the ultimate start up of the 5.3 bcf/d capacity Nord Stream 2 pipeline to Germany will be key factors for weak LNG prices in 2020 and 2021. We have been highlighting these two pipelines since our March 30, 2019 blog “LNG Price Pressures 2020/2021 With Gazprom Adding ~8.9 bcf/d Export Gas Pipeline Capacity Into Europe And China” [LINK].

Natural Gas – China Dec LNG imports +2.7% YoY or +0.83 bcf/d

This week, Bloomberg updated its China LNG import data for Dec based on the China General Administration of Customs monthly statistics. LNG imports for Dec were 10.01 bcf/d, up 2.7% YoY or +0.83 bcf/d compared to Dec 2018. The negative is that markets were expecting a pre new year surge in Dec this year with Chinese New Year being on Jan 25, whereas last year it was Feb 5, however +2.7% is far from a surge in YoY import growth, especially considering Dec was -0.41 bcf/d MoM from Nov. This puts LNG markets in a very weak spot in 2020, and even more so with Bloomberg tanker tracking data calling for China

Cabot’s 2020

gas production

vs Q4/19

China Dec LNG

imports +2.7% YoY

Nord Stream 2

construction not

expected soon

https://twitter.com/Energy_Tidbits/status/1216170985788854274

http://www.1prime.biz/news/0/%7BFF39C958-5D10-421D-BD81-CC711ECDA90F%7D.uif



7

Energy Tidbits

LNG imports to be down 5% YoY in January. Also note, on Friday, Bloomberg Terminal reported that China is delaying the release of Jan trade data, and will publish the Jan statistics together with the Feb release. Below is our running table of China LNG imports.

Figure 3: China LNG imports

Source: Bloomberg, LNG World News

Natural Gas – Total rejects China declaring force majeure on LNG deliveries

On Thurs, Bloomberg reported on Total’s response to the reports that CNOOC had declared force majeure on some long term LNG contracts. Bloomberg wrote “Some Chinese customers, at least one, are trying to use the coronavirus to say I have force majeure," Philippe Sauquet, head of Total's gas, renewables and power segment, said on Thursday. “We have received one force majeure that we have rejected." Sauquet did not disclose the name of the buyer. Total has about 10 LNG cargoes due to land in China this month and at risk of force majeure, according to a person familiar with the matter.” Total’s rejection of the force majeure doesn’t mean there will be more LNG deliveries to China, but it would serve to protect the contractual obligations at the contractual prices. Total did not name the Chinese company, but it was widely reported that the party was CNOOC. Our Supplemental Documents package includes the Bloomberg story naming CNOOC.

Natural Gas – Bloomberg Global LNG Coronavirus adds to an uneasy LNG market

Bloomberg posted its Global LNG Monthly report this week and the title “Global LNG Monthly: Coronavirus Creates Unease in an Already Uneasy Market” reminds that the near term outlook for LNG is weak, but was already a weak outlook for Feb/Mar prior to Coronavirus impact. For those with a Bloomberg terminal, we recommend adding to reference libraries as it has an excellent recap of global LNG markets. (i) Our overall recap/analysis of the winter LNG market is unchanged. Peak demand for natural gas, or in this case, LNG is winter with temperature being the big swing factor. We started the winter fully supplied, and even more so than prior years. This meant we needed a good start of cold weather from the get go, particularly in Dec to reduce some of the oversupply. But that didn’t happen, which made Jan and Feb more important, and that hasn’t or isn’t expected to happen. This makes it impossible to catch up post winter, and the only answer is a major supply disruption ie. Strait of Hormuz stopping Qatar LNG exports. The Bloomberg report notes Jan was an okay month, but we are still in oversupply, making 2020 look very weak for LNG and links back to HH as it will push back on growing US LNG exports into an oversupplied LNG market. (ii) January LNG imports were okay at +8.3% YoY or +4.03 bcf/d, but nowhere near high enough to be a positive to LNG. China was down 1.08 bcf/d YoY, which was expected due to timing of Lunar New Year. South Korea +1.08 bcf/d YoY, this was due to the coal slowdown this

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

Jan 3.84 5.35 39.3% 8.03 50.0% 10.20 27.1%

Feb 3.10 4.10 32.3% 6.84 66.9% 7.46 9.1%

Mar 2.60 3.06 17.7% 5.04 64.5% 6.28 24.8%

Apr 3.00 3.44 14.7% 5.43 57.8% 7.27 34.0%

May 2.20 4.50 104.5% 6.39 41.9% 6.87 7.6%

June 3.51 4.85 38.2% 6.31 30.1% 7.25 14.9%

July 2.46 4.80 95.1% 6.40 33.4% 7.56 18.1%

Aug 3.54 4.86 37.4% 7.26 49.2% 8.04 10.8%

Sept 4.05 5.54 36.8% 7.00 26.3% 8.16 16.7%

Oct 2.85 5.50 93.0% 7.13 29.6% 6.26 -12.2%

Nov 4.26 6.50 52.6% 9.59 47.5% 10.42 8.7%

Dec 5.80 7.80 34.5% 9.75 25.0% 10.01 2.7%

Full Year Avg. 3.43 5.03 46.3% 7.10 41.2% 7.98 12.5%

Bloomberg’s

recap of near

term global

LNG markets

Total rejects

China LNG force

majeure


8

Energy Tidbits

winter as they push on reducing emissions. India was +0.77 bcf/d YoY, likely due to cheap price. Europe was the big YoY increase at +2.48 bcf/d YoY, with UK +0.62 bcf/d YoY, Spain +0.93 bcf/d YoY and other Europe +0.93 bcf/d YoY. (iii) Warm weather forecast for Feb. Bloomberg put in its forecast for Feb HDDs on its graph, and it shows “cumulative HDDs versus normal” getting worse in Feb for all major Asia and Europe LNG markets, and note we have been highlighting near term warm weather forecasts for Japan and Europe. (iv) Forecast for Feb LNG imports of 46.4 bcf/d, which would be down 16% MoM vs 51.9 bcf/d in Jan 2020, but up YoY from 45.6 bcf/d in Feb 2019. Bloomberg wrote “Global LNG imports are expected to fall 16% to -28MMt in February 2020, partly due to the shorter month. Month on-month change in the same period last year was -14%. • The coronavirus threat is expected to reduce LNG demand in China, but the impact will be far less pronounced compared to the oil sector”. (v) Bloomberg noted the low March – May JKM futures prices, and wrote “Japan-Korea marker downward and currently trading between $3.70-$3.00/MMBtu.* Futures are at all-time lows due to oversupply. Previous lowest level of Plait's JKM assessment was $3.65/MMBtu on May-26, 2009. April JKM traded at a discount to Europe's TTF on Feb. 4.m • Coronavirus threat is set to lower LNG demand from China and further exacerbate the supply glut”. Our Supplemental Documents package includes excerpts from the Bloomberg Global LNG Monthly.

Figure 4: LNG Prices

Source: Bloomberg

Bloomberg: “The case for US LNG shut-ins to curb the supply glut is growing”

Our concern remains that the pushback on Asian LNG pushes back on Europe natural gas and inevitably pushes back on US LNG exports. If US LNG volumes get shut in, then it means more US natural gas staying within the US and looking for a home ie. storage, and therefore lower HH prices. On the Outlook slide in the new Bloomberg Global LNG monthly, they write “The case for U.S. LNG shut-ins to curb the supply glut is growing. Nevertheless, Europe is still expected to receive the lion share of Atlantic basin LNG until the end of winter”. This issue for US LNG shut ins is heightened with Bloomberg’s comment that netbacks for spot US LNG sales isn’t profitable to either Europe or Asia. This is the linkage of global prices whereby weak


9

Energy Tidbits

JKM prices sent more cargoes to Europe and ended up driving down TTF gas prices. Bloomberg wrote “Atlantic netbacks: Challenging outlook for U.S. LNG heading to Europe. Netbacks from the U.S. for spot sales to Japan and Europe are not profitable based on current futures price”. The other point that Bloomberg didn’t highlight, is high Europe storage utilization which is the key factor on driving its comments on US LNG exports. We have been highlighting since Sept 2017 how Europe gas storage is the key indicator for LNG markets as it is the primary dumping ground for surplus LNG cargoes. So, if there is less demand in Asia, the cargoes normally find their way to Europe. That is unless the LNG is so dirt cheap (like seeing now) that Asia buyers buy a little more. But Europe storage is having an increasing factor on LNG markets. Below is our updated Europe storage utilization graph that has storage at 69.44% full as of Feb 5, which compares to 49.51% full as of Feb 5, 2019. Europe storage didn’t reach 69.43% full until June 22, 2019. Also included below is the Bloomberg slide on Atlantic netbacks, and the challenging outlook for US LNG heading to Europe.

Figure 5: Europe Storage Utilization

Source: Bloomberg

Figure 6: Atlantic LNG Netbacks

Source: Bloomberg


10

Energy Tidbits

Natural Gas – Baker Hughes reminds low gas prices means focus is on brownfield

Baker Hughes has been one of the big LNG service contractor winners being involved in most every LNG project. So it should have leading edge insight in to LNG projects, This week, Baker Hughes CEO was on Bloomberg TV and Bloomberg reported on his comments. His comments are in line with our LNG views since last March as we moved to look to lower long term Asian LNG prices. He is saying that under the current low prices, the LNG project priorities will be for brownfield projects because of their low cost. Bloomberg wrote ““If the spot pricing does continue to be low, what you’ll see is a movement towards more of the brownfield projects,” Chief Executive Officer Lorenzo Simonelli said Sunday in an interview on Bloomberg TV. “They grow first because they have the foundations in place.” And therefore the challenges from greenfield that don’t have the benefit of any shared existing infrastructure. This brownfield concept is also why we see Phase 2 of LNG Canada and other projects (ie. Mozambique) have FID years earlier than expected. It is important to remember that the brownfield Phase 2 will have significantly higher returns than the Phase 1 due to the ability to take advantage of some existing infrastructure. Our Supplemental Documents package includes the Bloomberg reporting.

Natural Gas – UK saw the 6th warmest Jan since 1884

The UK Met Office (the UK equivalent to NOAA) also posted its Jan weather recap [LINK] and the UK weather recap is almost identical to the NOAA US Jan weather recap noted earlier in the memo. The Met Office wrote “The provisional UK mean temperature was 5.6 °C, which is 2.0 °C above the 1981-2010 long-term average, making it the 6th warmest January in a series from 1884. Mean maximum temperatures were generally around 2.0 °C above average and mean minimum temperatures were mostly 2.0 to 2.5 °C above average”. January in the UK was the 6th warmest since 1884 and the 5th warmest in the US since 1895.

Oil – US oil rigs up 1 to 676 oil rigs

Baker Hughes reported its weekly rig data on Friday which was basically neutral for WTI. US oil rigs were up 1 to 676 oil rigs as of Feb 7. Increase were in Others +3, and Ardmore Woodford +1. Decreases were in Cana Woodford -1, Eagle Ford -1, and Permian -1. Similar to our commentary last week, the main takeaway from the Baker Hughes data so far in 2020 is US oil rigs haven’t ramped up despite refreshed budgets like we have seen in prior years. The general expectation was for US drilling activity to increase with new budgets, but a pullback in US capex and WTI getting hammered in January has limited this from happening. Below is our graph of total US oil rigs.

Figure 7: Baker Hughes Total US Oil Rigs

Source: Baker Hughes

BHGE:

brownfield LNG

will be the focus

US oil rigs

were +1

this week

Jan the 6th

warmest in UK

since 1884

https://www.metoffice.gov.uk/research/climate/maps-and-data/summaries/index


11

Energy Tidbits

Oil – Total Cdn rigs up 10 to 257 total rigs

Baker Hughes reported total Cdn rigs were up 10 to 257 total rigs. Cdn oil rigs were up 10 to 167 oil rigs. Cdn gas rigs were flat at 90 gas rigs. It looks like Cdn drilling activity has reached, or is close to reaching a pre spring break up peak and Cdn drilling activity is fairly strong on a YoY basis. To put in perspective, a year ago, Cdn oil rigs were 158 and Cdn gas rigs were 82 for a total Cdn rigs of 240, meaning total Cdn rigs are +17 YoY. Below is our graph of total Cdn oil rigs.

Figure 8: Baker Hughes Total Canadian Oil Rigs

Source: Baker Hughes

Oil – US oil production down 100,000 b/d 12.9 mmb/d

This week, the EIA reported US oil production was down 100,000 b/d to 12.9 mmb/d for the Jan 31 week. Lower 48 was also down 100,000 b/d to 12.4 mmb/d. The new EIA STEO for Jan is forecasting Q1/20 US oil production to average 13.20 mmb/d, +300,000 b/d from current levels and means US oil production will need to ramp up to hit the EIA estimate. Below we pasted an excerpt from the EIA weekly oil production data. [LINK]

Figure 9: EIA’s Estimated Weekly US Oil Production

Source: EIA

US oil

production at

12.9 mmb/d

Total Cdn +10

this week

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


12

Energy Tidbits

Figure 10: US Weekly Oil Production

Source: EIA, SAF

Figure 11: YoY Change in US Weekly Oil Production

Source: EIA, SAF

Oil – Helmerich & Payne forecasts US wells drilled down 14% in 2020

There was a significant comment in the Helmerich & Payne Q4 call on Tues support the narrative that US oil production should plateau in H1/20. It is significant because we suspect that most, including us, had expected at least flat or slightly higher wells drilled in the Lower 48 in 2020 vs 2019. This is not what HP is forecasting. (i) US E&P spend down ~10% in 2020. HP had a similar view as other big service companies. Mgmt said “Looking ahead to the second quarter of fiscal 2020 for US Land, we exited the first quarter with 195 rigs working and currently, we have 197 rigs, turning to the right. Customer conversations lead us to believe that there will be a decrease of approximately 10% in CapEx spend in calendar 2020 compared to calendar 2019 levels”. (ii) US wells drilled down 14% YoY. Good comment as most assume, 10% down in capex means 10% down in wells drilled. Whereas HP has a different view. They followed the above comment saying “This implies that the number of wells drilled in 2020, it would decline by 2,300 from the 16,400 wells drilled during calendar year 2019, an approximate 14% decrease. To close some of this gap, we would expect to see a modest accretion to the exiting rig count at calendar year-end. With that caveat, we are also anticipating that our customers will spend budgeted rig CapEx in a more even rate throughout this calendar year”. (iii) Don’t expect to see US drilling to get back to prior levels, or likely grow too much from current levels. They didn’t say this specifically or say how much higher US rigs will ultimately go, but in the Q&A, their positive view on the Middle East unconventional also included “And it's early days, but we have 45 idle super-spec in United States that are great candidates to put to some of those opportunities when they come to fruition”.

HP forecasts US

wells drilled -14%

YoY


13

Energy Tidbits

Less wells drilled in 2020 is significant as surplus DUCs are being depleted

The HP forecast for 14% less wells drilled in 2020 is significant because we don’t believe it is what most are expecting. And it is even more significant in 2020 given the surplus DUCs are being depleted and US production growth will be more closely linked to wells drilled. Our Dec 8, 2019 Energy Tidbits noted our Dec 6, 2019 blog “Zero US Producer Equity Issues In Q4/19 + Surplus US DUCs Soon Depleted + Declining Oil Rigs = US Oil Production Plateau In H1/20?” [LINK]. At that time, we wrote “Refreshed capex budgets should lead to an immediate increase in US oil rigs in Jan but, with the lack of new equity, we don’t believe that rate and timing of US oil rig growth from refreshed capex budgets will be enough to offset the impact of the depletion of DUCs. It doesn’t mean US average oil production in 2020 won’t show YoY growth, but we believe it points to US oil production plateau in H1/20 and effectively zero YoY growth when looking at exit 2019 to exit 2020. The challenge for growth is that the big drawdown in DUCs since May gave a one time supply burst and likely accounted for almost all of the growth in US oil production in H2/19. We estimate that the depletion of surplus DUCs accounted for ~650,000 b/d of the growth in H2/19 vs total estimated US oil growth of ~800,000 b/d. Once the surplus (rainy day fund) of DUCs is gone, US oil growth will rely on drilling new wells with drilling levels dependent on cash flow given there have been zero equity issues in Q4/19. Refreshed capex budgets should see a steady increase in oil rigs, but our concern is that the increase in US oil rigs won’t be enough to maintain that DUC driven higher oil production level. Rather we also see the potential for a modest step down in US oil production levels, before returning to a period of sustained, but much lower oil growth based on increasing US oil rigs without the benefit of new equity capital. A US oil production plateau in H1/2020 will be big positive to oil as we move into H2/2020.” This is why we believe the HP forecast for 14% less wells drilled in the US is significant. Our Supplemental Documents package includes our Dec 6, 2019 blog.

Figure 12: US Oil Rigs, MoM Changes In DUCs, Completions and Oil Production

Source: EIA, Baker Hughes, SAF

Oil – Conoco reminds US “oil” plays produce NGLs and associated natural gas

There were a few US “oil” insights from the Conoco Q4 call on Tues. (i) Increasing gas vs oil cut in Conoco’s Lower 48. This was a good example of the earnings call providing better

Higher natural

gas cut in

Permian vs Eagle

Ford



14

Energy Tidbits

insights. The Q4 supplemental data showed how there Conoco’s Lower 48 “natural gas” was increasing in a period of fairly flat “oil” production for the last 3 quarters. Conoco was asked about this issue of mix of oil, NGLs and natural gas. It turns out that it wasn’t the wells getting gassier (ie. more gas in the same well bore over time), but it was the mix of drilling among Eagle Ford vs Permian vs Bakken. The reality of oil wells producing associated gas is still there – they get gassier over time. But for the past quarters, the issue is that they are drilling more Permian, which they say is gassier than the Eagle Ford. Mgmt replied “And the Permian production is a bit gassier than the Eagle Ford production, so that's why there was that slight mix shift.” This is a good reminder that many of the key “oil” zones in the Permian are only 50% oil. In the Chevron Q4 call, mgmt. said its Permian was 50% oil of the total boe, saying “We're 50% oil in our portfolio right now, 25% NGLs, 25% gas.” (ii) Another to remind Permian oil growth is lumpy. This was the theme of the Exxon Q4 call. In the Conoco Q&A, mgmt. said “we did a very strong growth quarter-on-quarter in the Permian, it was about 23% growth. But that is, as you sort of complained, there's still lumpiness as we bring on new pads there. So we actually expect Permian to be relatively flat in the first quarter and then growth will resume again through the rest of the year. We had an unusually lumpy fourth quarter production.” (iii) Permian is still in learning phase. “Yeah. So what we laid out in November was we're running at about 2.5 rig pace. We will build over the next few years to about 6 rigs running in the Permian, but that will be a sort of measured growth rate as we get the confidence, the -- much like we did in the Eagle Ford and the Bakken and we're doing in the Montney to make sure that we're -- we get the right spacing and stacking and completion design. So we're still in a bit of a learning mode there and we'll ramp up the rigs to the optimum over the next two, three years. So there's significant growth coming in the Permian, but it will be at a pace that's consistent with the pace at which we're learning and the -- how to optimize the completion and spacing and stacking.

Oil – Plains forecasts Permian +400,000 b/d exit 2020 vs exit 2019

Plains held its Q4 call on Tues. In the call, Plains did not provide an estimate for total US oil growth, but did forecast Permian oil would be +400,000 b/d in exit 2020 vs exit 2019. We don’t think the Permian being +400,000 b/d exit to exit means that the US in total is up in the same period. Rather we think it points to flat at best. In the Q&A, mgmt. was asked “My first is just a clarification from some earlier questions. Jeremy, would you were talking about 400,000 barrels a day of oil growth in the Permian. Were you talking these 20 over DC 19 or are you made in calendar year '20 over calendar year 2019.” Mgmt replied “it was exit to exit”.

Oil – Patterson UTI: “sudden” “major oil company” stoppage in a basin

We always love a tease or a mystery so can’t help but note the comment in the Patterson UTI Q4 call on Thurs. In the Q4 call mgmt. noted the “sudden operational stoppage of a major oil company customer” for frack spreads, and then in the Q&A “So, yes, we called it out, because it is significant to that business for us. We have and had two spreads, working for a major oil company that stop working in a particular basin. And so we're working to reposition those spreads with other customers, maybe other basins”. This is interesting as they specifically says a “major” so that should discount most independents. We couldn’t find anywhere who, what basin, or why this happened. There could be a variety of reasons. But one that should logically be discounted is capex budget limitations as this is Q1 with refreshed budgets. Another that sounds out is M&A. Often a company will pull back on rigs if a deal is coming quickly, but that doesn’t seem to be the case the way it is described in the Q&A. It also doesn’t sound like the Permian. So if these aren’t the reasons, then the logical reason is that the economics of a basin have changed abruptly lower, which could be from disappointing results, changing type curves, very low natural gas or NGLs prices, no egress,

Plains est

Permian +400,000

b/d exit to exit

Patterson: major

oil co suddenly

calls off 2 frack

spread


15

Energy Tidbits

etc. We may not know the who, where or why, but it is certainly something to watch because, if this is play performance related, it has implications to other players in this unnamed basin. Maybe its nothing, but when we see Patterson says it is “significant to that business”, it gets out attention and is certainly worth noting it. We would love to hear if anyone has any real insight. Our Supplemental Documents package includes these two excerpts from the Q4 call.

Oil – Near term risk to WCS diffs with China oil demand -3.0 mmb/d due to Coronavirus

Last week, we commented on China taking less Latin America crude due to lower domestic demand from the coronavirus impact, and this week, Bloomberg terminal reported that China crude demand has dropped by about 3 mmb/d. Additionally, another Bloomberg Terminal story reported that crude exports from Venezuela are expected to fall in Feb due on lower Chinese demand. We recognize that Venezuela oil can’t come to the US, however the main takeaway is China is taking less Latin America heavy/medium, which forces more of this oil into the Gulf Coast. On Tues, we tweeted [LINK] “Reports that China's oil demand may have dropped 3 mmb/d re coronavirus. Some of this has to be from Latin America. Even apart from Venezuela, China imports >1.2 mmb/d heavy/medium crude oil from Latin America. This is a key near term risk to Cdn heavy diffs. #OOTT”. Between Venezuela, Brazil, Colombia, Mexico, and Ecuador, China imports >1.2 mmb/d of heavy/medium crude and our fear for WCS diff risk is these unsold cargoes will be sold to US Gulf Coast refiners, thereby increasing competition for Cdn heavy/medium crude and pushing back on Cdn differentials. Below is a table of China oil imports from Latin American countries. Our Supplemental Documents package has the Bloomberg Terminal story.

Figure 13: China Imports by Country (Thousand b/d)

Source: Bloomberg

Oil – Federal Court dismisses challenges to Trans Mountain expansion

Up until the Friday disclosure of higher project capital costs, its been a pretty good month for the Trans Mountain expansion project. In mid Jan, the Supreme Court of Canada ruled unanimously to dismiss BC’s court of appeal of the Trans Mountain expansion, and this week, the Federal Court of Appeal dismissed challenges filed by several BC First Nations [LINK]. The court found no legal basis to interfere with the federal cabinet approval of the project, which means construction can keep moving forward. In response to the Federal Court decision, Trans Mountain CEO Ian Anderson said [LINK] “We are pleased with the Court’s decision to dismiss the Applicants’ challenges to the Federal Government’s approval of the Trans Mountain Expansion Project. After many years of consultation and review we are pleased to be able to continue moving forward and building the Project in respect of communities, and for the benefit of Canadians. The Government of Canada’s additional

Date Venezuela Brazil Colombia Mexico Ecuador

Jan-19 411 892 310 16 22

Feb-19 532 1,048 263 18 65

Mar-19 251 699 197 16 27

Apr-19 465 858 354 17 28

May-19 189 800 94 16 24

Jun-19 277 631 170 17 15

Jul-19 166 852 228 16 34

Aug-19 343 559 341 16 36

Sep-19 144 724 304 17 37

Oct-19 139 901 257 16 57

Nov-19 144 1,006 249 17 37

Dec-19 139 731 396 15 140

Note: China hasn’t reported imports from Venezeula since Sept/19

WCS diff risk with

Coronavirus

Federal Court

dismisses

challenges to

TMX


https://www.ctvnews.ca/politics/trans-mountain-federal-court-dismisses-appeal-challenging-pipeline-expansion-approval-1.4796231

https://www.transmountain.com/news/2020/trans-mountain-pleased-with-the-courts-decision-to-dismiss-challenges-to-the-federal-governments-approval-of-the-trans-mountain-expansion-project


16

Energy Tidbits

Indigenous consultation represented an immense undertaking by many parties. The Government was committed to a specific and focused dialogue with affected Indigenous communities to ensure Canada, and the Company heard their concerns and responded”.

Oil – TMX capital costs increased by ~70% to $12.6b will increase tolls

The big news on Friday were the reports that the Trans Mountain Expansion cost would be up ~70% to $12.6b. The other item to note is that the in service date is now expected to be Dec 2022. The headlines were primarily focused on the size of the cost overruns and most of the reporting didn’t include some key comments from Trans Mountain CEO Ian Anderson. The Calgary Herald [LINK] reported on the CEO comments and wrote “He remains convinced it’s commercially viable, has committed shippers and will generate at least $1.5 billion in EBITDA (earnings before interest, taxes, depreciation and amortization) in its first full year of operation. “The economics remains strong,” he said”. As producers and shippers know, the added capital costs has to flow thru to increased tolls. There is no estimate of the tolls under the $12.6b cost. The news broke on Friday after the markets so we haven’t seen the pipeline analysts estimate of new tolls. We do not have a TMX project tolling mode so do not have a modeled estimate of how the extra project costs translate into increase toll. So we do not know what besides the tolls on 590,000 b/d of extra volumes will provide the revenue that ultimately flows down to EBITDA of $1.5b. But the one thing we know is that the tolls on the 590,000 b/d will have to go up significantly for the additional >$5 billion capital costs. Our Supplemental Documents package includes the Calgary Herald reporting.

Oil – Enbridge clears last major hurdles in Minnesota

Enbridge’s Line 3 replacement project also received good news this week, as the Minnesota Public Utilities Commission accepted the revised environmental impact statement, approved the Certificate of Need and approved the route permit [LINK]. Although these approvals were expected, it is still a big positive for advancing the replacement project, and on Tues, we tweeted [LINK] “Good week for Cdn oil with Enbridge line 3 in Minnesota and now with Trans Mountain expansion. #OOTT”. In response to the Minnesota decision, Vern Yu, EVP of Liquids Pipelines at Enbridge said "After nearly five years of community engagement, environmental review, regulatory and legal review, it's good to see the Line 3 Replacement Project move forward … It is a $2.6 billion investment in the state's critical energy infrastructure, but from the start of the project has been about improving safety and reliability for communities and the environment. We now look forward to next steps on the project's remaining permits”.

Oil – Sounds like Liberals planning for plan b on Teck Frontier oil sands

It looks like the Federal government is positioning for a plan b on the 260,000 b/d Teck Frontier oil sands project. The Liberals have to make their decision on the project by the end of Feb, but this week, CBC reported [LINK] the government is preparing an aid package for Alberta, in the event they block the oilsands project. CBC wrote “Options being considered in the aid package, to be featured in the upcoming budget, include a cash injection to help clean up thousands of inactive oil and gas wells abandoned by bankrupt companies” and the other option is to expand the federal fiscal stabilization program to help the Alberta economy. The other potential is that they were floating a trial balloon. Well if so, it was shot down by the Alberta govt. A Kenney spokeswoman responded to these potential options from the Liberals, and said “Teck is not a political gift — it deserves to be approved on its merits" and "We do not view a decision on Frontier as something to be traded away". Our Supplemental Documents package includes the CBC story.

Enbridge clears

last major hurdles

in Minnesota

Liberal plan b for

Teck oil sands

project

TMX costs +70%

to $12.6b

https://calgaryherald.com/business/energy/varcoe-plenty-of-blame-to-go-around-for-massive-jump-in-12-6b-trans-mountain-price-tag

https://business.financialpost.com/commodities/energy/enbridge-line-3-oil-pipeline-clears-hurdle-minnesota-regulator-rules-environment-statement-adequate-2


https://www.cbc.ca/news/canada/calgary/teck-resources-ltd-christine-myatt-seamus-oilsands-alberta-1.5455426


17

Energy Tidbits

Oil – Kenney says CBR to average 500,000 b/d in 2020

We should note that Kenney’s comments and also CN’s crude by rail comments below both have the potential to be materially impacted by the potential fallout from CP Rail’s crude by rail tankcar derailment and fire by Guernsey, Sask. Premier Kenney was interviewed by S&P Platts this week, and there were some good insights on crude by rail and Alberta curtailment [LINK]. (i) In the interview, Kenney said he expects CBR to average 500,000 b/d in 2020, with capacity to hit 550,000 b/d by end of year. No question, CBR should be increasing with the Alberta gov now allowing companies to exceed oil production limits if they ship incremental production by rail, but we still wonder if CN and CP have the conductor and locomotive spare capacity to drive this increase, not to mention a cold snap in Feb/Mar can always cause interruptions and delays. Note, the highest recorded month for crude by rail shipments was 354,000 b/d in Dec 2018 according to CER data. (ii) On the timing for sale of the AB gov crude by rail deal, Kenney said he aims to wrap up the process within weeks and said the new contracts wouldn’t not cause lower CBR shipments. (iii) On curtailment, he said a full end of the production cap depends on start up timing for the Enbridge Line 3 replacement, and said he will not ease curtailment in the first quarter, but is willing to tighten curtailment "If the differentials blow out, but we don't see that happening right now" and said "Anything north of $30/b starts to become super painful for us". Our Supplemental Documents package includes the Platts story.

Oil – Crude by rail insights from CN

CN held its Q4 call on Tues Jan 28, and there were some good insights. (i) Crude by rail to exit Q1 at close to record run rate of 250,000 b/d. In their prepared comments, mgmt. said “Let's start with crude. For the full year 2019, we grew crude carloads by 20%. We expect significant year-over-year growth in crude carloads for the balance of Q1 and crude will continue to be a growth driver in 2020 with about one-third of our volume being heavy undiluted crude, which is less dependent on price spreads and diluted bitumen.”. But in the Q&A, mgmt. gave more color and replied “Yeah, carload growth is positive. If you think about crude by rail we expect to exit the first quarter March at a run rate close to our record run rate of 250,000 barrels a day. So a very positive for the first quarter. A little bit of unknown coming into the second and third quarter, it's really going to tender where the differentials lie. So we're not planning on big break out volume in Q2 and Q3. Q4 again I think is going to be extremely strong. Our volume for crude by rail, again this is a seasonal piece of the business where you see the differentials widen out as pipe capacity gets constrained with additional diluent being added to the (inaudible) blend in order to make sure that the product can flow in the pipelines”. (ii) As we expected, crude by rail would have been higher in Jan if not for cold weather impact. Mgmt didn’t specifically say crude by rail, but in the Q&A, replied “You saw that for the industry, including CN December run rate was not great. So obviously, the month of January is also going to be challenging. We had the cold snap very cold snap in Western Canada of about seven days where those of you who follow our carload really saw the big dip for the seven days and we're at right now -- right now we're not quite current on the Canadian West Coast, we hope to be current by next few days”. (iii) On frack sand, CN said they “may see a mild rebound” in coming months. In the prepared comments, mgmt. said “In Q4 2019, we introduced new frac sand services, designed to smooth out demand and protect rail share versus truck. We finished December strong with 44% year-over-year revenue growth. Increased January rig count in Western Canada is a positive indication that we may see a mild rebound in frac sand carloads in the coming months. As we move into the second wave of the energy renaissance in Western Canada, spurred on by new drilling to support LNG exports, frac sand will be the first rail commodity to ramp up and we are well positioned with our unique unit train service that directly connect desirable Wisconsin sand with end markets in Alberta and BC”. (iv) For propane, in the prepared comments, mgmt. said “Propane

Crude by rail

insights from CN

CBR to average

500,000 b/d in

2020?

https://www.spglobal.com/platts/en/market-insights/latest-news/oil/020720-interview-alberta-premier-aims-to-end-oil-supply-cuts-this-year-as-rail-volumes-rise


18

Energy Tidbits

volume was up 17% in 2019. We will continue to see growth in CN's unique propane export services in 2020 with the commissioning of the second Canadian West Coast propane export facility to be built by Pembina at Watson Island scheduled to start off Q4 this year and the full year impact of the first Canadian West Coast export facility built by AltaGas at Prince Rupert that started our Q2 of last year. Our efficient single line service seamlessly connects propane production with export facility in Prince Rupert creating superior product for our customers and a long-term structural advantage that simply cannot be replicated”. Our Supplemental Documents package includes excerpts from the CN Q4 call transcript. Figure 14: CN Crude Oil By Rail

Source: CN

Oil – 2nd CP oil tankcar derailment/fire near Guernsey, Sask

This is almost a repeat from of the item from our Dec 15, 2019 Energy Tidbits as there was the 2nd CP crude by rail tankcar derailment and fire on the same tracks near Guernsey, Sask. Thankfully again, no one was hurt in Thursday’s crude by rail CP train derailment and fire east of Saskatoon in a relatively unpopulated area. Similar to Dec, the story hasn’t had the sustained national news coverage. On Thurs, Transport Minister Garneau announced an immediate order to slow trains carrying crude on federally regulated tracks, is seeing similarities to other recent rail accidents and he has asked officials to determine if additional safety measures required, says he “will not hesitate to take further swift action as is necessary”. As of our news cut off at 8am MT, the rail line was reopened on Friday night, but there is still no confirmation of what types of rail tankcars were involved in the derailment and fire. Our Supplemental Documents package includes a good CBC reporting on the incident and the Morneau tweets.

Dec 9 incident was a Class 3 Occurrence ie likely new safety lessons identified

For over a year, we have noted our surprise that the Liberals have not yet made any move for an earlier phase out of the DOT-117R Retrofits and Jacketed CPC-1232 tank cars. This is especially so following the Dec 9, 2019 CP oil tankcar derailment/fire. Our surprise is because the Dec 9 incident was noted by the TSB as a Class 3 Occurrence, a classification that the TSB sees “It is quite likely that new safety lessons will be identified and that transportation safety will be advanced by reducing risks to persons, property, or the environment”. Here is the Class 3 definition from the Transportation Safety Board of Canada “Policy on Occurrence

2nd Crude by rail

derailment and

fire in Sask


19

Energy Tidbits

Classification” last revised Oct 31, 2019. [LINK]. “Class 3 occurrence. A class 3 occurrence may have significant consequences that attract a high level of public interest. It may involve multiple fatalities and/or serious injuries. There may be a medium-sized release of dangerous goods. There is moderate to significant damage to property and/or the environment. There are public expectations that the TSB will investigate. It is quite likely that new safety lessons will be identified and that transportation safety will be advanced by reducing risks to persons, property, or the environment. A detailed investigation is required”. We still think the expectation is that there will be an earlier phase out of Jacketed CPC-1232 and DOT-117R Retrofit tankcars. Its inevitable, it’s a question of when. The question is will the CP Sask tankcar derailment/fire be the catalyst. It goes back to the common theme from Trudeau in the election (and before) on the safety concerns on moving crude by rail. And will they take the findings from CP Sask event and develop “new safety lessons” as would be expected from a Class 3 Occurrence.

Nothing specific in Garneau’s recent new mandate letter on oil tank cars

On Dec 14, 2019, we tweeted [LINK] on the new mandate letter for Transport Minister Garneau that did not include anything specific related to oil tank cars or crude by rail. The only general reference was “Continue to improve the safety of Canada’s transportation sector through a review and modernization of relevant legislation and regulations”.

Risk to earlier phase out of DOT-117R & jacketed CPC-1232 tank cars

In the SAF energy outlook Oct 7, 2019 webcast, we noted our expectations for increasing Cdn crude by rail with the upcoming Alberta sale of its crude by rail position and its expected allowance for increased crude by rail outside of the curtailment. In our slides, we also wrote “Good news for crude by rail is that there have been no moves by the Liberals in 2019 place any additional rail car restrictions”. One of our calls that hasn’t come true, at least so far, was our expectation for the Liberals to announce an earlier than scheduled phase out of the Retrofit DOT-117R tank cars and the equivalent Jacketed CPC-1232 tank cars. This was certainly hinted or implied by the Liberals in Sept 2018 and subsequently. We had assumed the Liberals would roll it, but it hasn’t happened so far. Especially when in the election debates, we tweeted on the English debate [LINK] “Trudeau in debate “we should have less oil by rail”, reminds of concern Liberals will move to earlier phase out of retrofit DOT-117R & Jacketed CPC-1232 tank cars – the work horses of crude by rail. Looks like may be still on Liberal to do list. See SAF created transcript”. And then in the simultaneous translation replay [LINK] of the French debate, Trudeau said “people know that we can’t have more oil by rail, its very dangerous and it pollutes a lot”. And in at the 3:32:39 mark, in talking about pipelines, he says “its better than having more oil by rail”. The last side comment on this is that we suspect he worries less about making an Alberta premier mad since Notley is gone and replaced by Kenney.

Liberals first pointed to this risk on Sept 19, 2018

It was 15 months ago, on Sept 19, 2018, the Liberals first pointed to an earlier phase out of these tanker cars by noting the Liberals support for an industry led working group for recommendations for an earlier phase out of these tank cars. Did Garneau ever get a recommendation and, if so, what was it? Our Oct 28, 2018 Energy Tidbits wrote “We hate to be the only ones worried on the risk that the increased crude by rail ramp up in Canada or even Notley’s suggestion above could be stopped and

http://www.tsb.gc.ca/eng/lois-acts/evenements-occurrences.html



https://www.youtube.com/watch?v=8hddpjR9kGM


20

Energy Tidbits

even be at risk to be cut back existing crude by rail volumes. However, we believe the next year, in particular the ramp up to the Oct 2019 federal election, is a critical period for this potential risk. And we believe the Liberal govt has clearly warned that industry should expect an earlier than expected phase out of the jacketed CPC 1232 tank cars. The recent Sept 19, 2018 “Transport Canada speeds up removal of least crash-resistant rail tank cars from service” press release [LINK] also included a key warning sentence “The Minister today also announced his support for an industry-led crude oil and condensate tank car working group that will make recommendations to Transport Canada on advancing the timelines for the phase out of jacketed—with a layer of thermal protection—CPC 1232 tank cars.” In addition, we see the risk that the Liberals also move to announce a phase out of the DOT 117R (the refurbished cars to DOT 117 standards) or, just like the Sept 19 press release, announce they are studying the phase out of the DOT 117R tank cars. The reason why we worry is that the Liberals will have the cover of following the relatively under the radar changes that started to happen in the US this summer as noted in the next item.

All Garneau was doing in Sept 2018 was following BNSF’s July 2018 lead

Our Oct 28, 2018 Energy Tidbits had an item “It may surprise that DOT 117R tank cars are being rejected by certain US railways”, We were referring to BNSF’s actions in July 2018. We first noticed this risk in a Reuters July 23, 2018 story “Oil industry concerned over BNSF's move to limit retrofit tank cars”. At that time, Reuters wrote “Last month, 14 tank cars carrying sludgy, Canadian oil derailed and punctured in Iowa, sending some 230,000 gallons of oil into a state waterway. The tank cars were retrofits, called DOT-117Rs, according to state and federal officials. After the incident, BNSF told shippers that it was going to ban the retrofitted tank cars in all new contracts, according to three sources familiar with the discussions.” We had been waiting for news of BNSF’s move, which was known within crude by rail players.

Oil – Oil input into refineries up 48,000 b/d to 15.972 mmb/d

For the Jan 31 week, EIA estimates crude oil inputs to refineries were up 48,000 b/d to 15.972 mmb/d, which compares to the Jan 24 week where oil inputs were down 933,000 b/d. Overall crude inputs are now 661,000 b/d lower YoY. We are now in the normal seasonal decline in refinery crude oil input volumes as refineries move into the normal Q1 turnaround period. Refinery utilization was up 0.2% this week to 87.4%. The below graph notes how every year, crude oil inputs to refineries are always lower in Jan/Feb.

Figure 15: US Refinery Crude Oil Inputs (thousand b/d)

Source: EIA, SAF

Oil input into

refineries up

48,000 b/d

https://www.canada.ca/en/transport-canada/news/2018/09/transport-canada-speeds-up-removal-of-least-crash-resistant-rail-tank-cars-from-service.html


21

Energy Tidbits

Oil – Not looking like any binding arbitration for Co-op refinery

It looks like the Co-op Refinery lock out will be continuing unless the govt imposes binding arbitration. As hoped by the union, Premier Moe stepped in on Monday to off ““I will appoint a special mediator today if and only if Unifor follows the law,” Moe told the crowd at the Saskatchewan Urban Municipalities Association annual convention. “Unifor must cease all illegal activity immediately,” Moe added. “This includes removing unlawful barricades that are erected at the refinery.” Unfortunately, Moe did not offer what the union wants – binding arbitration. And the Co-op Refinery continues to be against binding arbitration. Our Supplemental Documents package includes the Leader Post story.

Oil – US “NET” oil imports up 50,000 b/d to 3.202 mmb/d

US “NET” imports were up 50,000 b/d to 3.202 mmb/d for the Jan 31 week. US imports were down 46,000 b/d to 6.615 mmb/d and US exports were down 96,000 b/d to 3.413 mmb/d. Some items to note on the by country data. (i) Canada was down 20,000 b/d to 3.825 mmb/d for the Jan 31 week, which is in line with average imports from Canada in Jan 2019. (ii) Saudi Arabia was down 202,000 b/d to 353,000 b/d, which is well below the 600,000 b/d Motiva refinery capacity. Imports from Saudi are significantly lower YoY, as average imports in Jan 2019 were ~775,000 b/d. (iii) Colombia was -34,000 b/d to 304,000 b/d. (iv) Iraq was up 257,000 b/d to 400,000 b/d. Nigeria has been basically zero for the past two weeks. (v) Venezuela remained at 0 due to US sanctions. (vi) Mexico was +153,000 b/d to 953,000 b/d. Below is our table of the US oil imports by major country.

Figure 16: US Weekly Preliminary Oil Imports By Major Countries

Source: EIA, SAF

Oil – Sounds like no emergency OPEC+ meeting Up until this morning, the OPEC+ speculation was whether Russia would agree to added cuts and when would OPEC+ meet for an emergency meeting to deal with lost demand related to Coronavirus. (i) Sounds like no emergency meeting. Earlier this morning, we tweeted [LINK] on the TASS story “OPEC+ ministers not planning early meeting over coronavirus, Baku says” that quoted Azerbaijan’s Energy Minister “Obviously, no early ministerial meeting in the OPEC plus format will be held," and “There were proposals on rescheduling the March meeting for the middle or the end of February. However, the situation was analyzed and the meeting will be held in March as planned”. (ii) The OPEC+ Joint Technical Committee meeting ended up being extended to go a 3rd day as the JTC was trying to build a common agreed upon front coming out of the JTC meetings. The JTC reportedly recommended an additional 600,000 b/d cut as a temporary measure to respond to the impact of the Novel Coronavirus on oil markets. The Russian response seemed a little confusing at first. On Thurs, Reuters reported “Russia backs OPEC+ proposal to cut oil output: Lavrov” [LINK], which was in direct contrast to the TASS Thurs report “Russia requests resumption of talks on need for new OPEC+ reductions, says source” [LINK] that said “Russia did not support the

Dec 6/19 Dec 13/19 Dec 20/19 Dec 27/19 Jan 3/19 Jan 10/19 Jan 17/19 Jan 24/19 Jan 31/19 WoW

Canada 3,510 3,675 3,921 3,611 3,606 3,837 3,559 3,845 3,825 -20

Saudi Arabia 480 223 493 567 416 203 360 555 353 -202

Venezuela 0 0 0 0 0 0 0 0 0 0

Mexico 624 788 459 605 576 595 481 800 953 153

Colombia 186 341 254 50 396 180 727 338 304 -34

Iraq 353 406 360 117 468 537 227 143 400 257

Ecuador 267 202 197 360 252 334 218 186 167 -19

Nigeria 306 132 191 96 150 131 184 0 1 1

Kuwait 0 0 0 0 0 0 0 0 0 0

Angola 49 0 0 0 0 0 0 0 0 0

Top 10 5,775 5,767 5,875 5,406 5,864 5,817 5,756 5,867 6,003 136

Others 1,112 812 934 946 866 735 676 793 612 -181

Total US 6,887 6,579 6,809 6,352 6,730 6,552 6,432 6,660 6,615 -45

No signs of an

end to Co-op

Refinery lockout

Russia not yet

agrees to JTC

proposed cuts

US NET oil

imports up

50,000 b/d


https://www.reuters.com/article/us-oil-opec-china/russia-backs-opec-proposal-to-cut-oil-output-lavrov-idUSKBN20010S

https://tass.com/economy/1117385


22

Energy Tidbits

general recommendation of the OPEC + technical committee on the need for an additional reduction in oil production by 600,000 barrels per day at a meeting on Wednesday and requested the resumption of consultations, a source told TASS.”. This TASS reporting was in line with Russia Energy Minister Novak’s Friday comments that it would still take days for Russia to decide. Interestingly, Bloomberg terminal reported Novak saying regarding China “As you understand, 150-200k b/d is an insignificant volume”. Our Supplemental Documents package includes the TASS reporting on both items.

Figure17: OPEC and OPEC+ Ministers Meeting Schedule

Source: OPEC

Oil – Libya oil production now down 1.038 mmb/d, lost revenue now $1.04b

There is no change to the vast majority of Libya oil production still being shut in with the Haftar ports blockade. As of our news cut off of 8am MT, the latest Libya National Oil Corporation update is at the end of Wed [LINK]. Note the NOC updates haven’t posted any of these updates since Jan 20 on their website, rather only been posted on Twitter. The shut in levels increased. Production is now 181,576 b/d, which is down 1,038,424 mmb/d from pre blockade of 1.220 mmb/d. Most significantly, the lost revenues are now over $1b at $1.042b. Our Supplemental Documents package includes the NOC production update.

Still sounds like major issues are unresolved

The two parties held 3 days of meetings in Geneva, but some of the reporting, including the UNSMIL’s Sat press release, failed to mention that the two parties never met face to face in Geneva. Rather, it seemed like when a mediator goes back and forth between parties in separate rooms looking for agreement on small items to build some rapport. It seems like that is where the parties are still – no change on big issues. One of the big issues was reported by Bloomberg terminal “Salame added that the mission is in constant contact with the country’s internationally recognized National Oil Corp. and tribal leaders who contributed to closing oil export terminals. He said the Eastern tribal leaders communicated the issue of the “unfair distribution of oil” to him and he told them that the closure of oil ports “is not a healthy situation”. Salame said he expects them to give him a list of demands on Thursday. Salame added that the distribution of oil revenues will be discussed in Cairo. A political dialogue will also begin on Feb 26.” Salame is the UNSMIL Special Representative. The United Nations Support Mission in Libya (UNSMIL) press release yesterday [LINK] made no mention of recent attacks and truce violations, but noted that both sides want to respect truce and not violate it. The UNSMIL did not note any agreement on any significant subjects ie. control and distribution of oil revenues, but that there will be more meetings on Feb 18 in Geneva. We still think this plays in to Haftar using oil as a weapon and a delaying tactic to squeeze Tripoli.

Libya oil

production

down 1.038

mmb/d

https://twitter.com/NOC_Libya/status/1225872259505696769

https://unsmil.unmissions.org/unsmil-statement-first-round-talks-libyan-55-joint-military-commission-geneva


23

Energy Tidbits

They didn’t say so, but we have to wonder if the bigger issue on revenues isn’t redistribution but control of revenues and ability of eastern Libya based oil companies to directly deal with foreign buyers and directly receive revenues. Remember that approx. 75% of the oil production is in Haftar controlled regions. But, we continue to believe that Haftar’s finally deciding to use oil as a weapon is a key to at least trying to find out if a deal is doable as opposed to an indefinite standoff. Tripoli based Libya govt is now lost over $1b in revenues since the blockade and that has to hurt, whereas the reports continue that the UAE is still providing supplies/arms to Haftar allowing him to continue his using oil as a weapon campaign. Our Supplemental Documents package includes the Bloomberg terminal and Libya Observer reporting of the Geneva meetings, and the UN press release yesterday.

Oil – Coronavirus oil demand hit, BP 300 – 500,000 b/d, COP 100 – 200,000 b/d

We believe it is important to differentiae between the oil demand impact from Novel Coronavirus on the full year 2020 average oil demand vs the impact on oil demand n Feb/March. (i) Our concern on focusing on the full year impact is that it gets in to a debate on how long Coronavirus impact on oil lasts. The impact on full year average is a mystery because it all comes down to the assumption on how long the oil demand impact lasts in its fullest and the time to ramp back up to more normal oil demand levels. In other words, a 3 mmb/d hit to oil demand hit for one month (say Feb) reduces the full year average by 250,000 b/d, whereas a 2 month hit is 500,000 b/d impact on the full year average. In its Q4 call on Tues, BP said “We're currently seeing for the year, something around 300 to 500,000 barrels a day impact on demand growth that we were looking at around 1.2 coming into this year and of course that will unfold as the year progresses. It may be more or less than that, but that our current estimations”. Whereas in the Conoco Q4 call on Tues, mgmt. said “we're still projecting something on the order of 1 million barrels a day of demand growth as we go through 2020. Now, that's probably down a 100,000 barrels or 100,000 to 200,000 barrels a day because of the current issues that we're facing with coronavirus in China.” (ii) Whereas the focus on the current impact of Coronavirus lets markets know how much worse the global oil inventory surplus becomes every day. We recognize that any deliveries to China not being consumed by refineries will be into non-OECD inventories, and not reflected in monthly OECD inventory data reported by IEA and OPEC monthly estimates. And that any crude oil produced by OPEC but waiting in tanks to be shipped or on tankers in temporary floating storage, but the reality is that there is an added surplus to global oil inventories. Last weekend, we saw the estimates that China oil demand could be hit by 3 mmb/d. After looking at all the videos of ghost towns in multiple major Chinese cities, we have to believe that estimate is likely too low. In other words, somewhere in the world, there is another .3 mmb/d being added to storage.

Oil and Natural Gas – sector/play/market insights from Q4 calls

We are now into the period of Q4 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.

Sector insights

from Q4 calls

Major estimate oil

demand impact

Coronavirus


24

Energy Tidbits

BP – Reserve replacement of 67% in 2019, lower 48 production going lower

Earlie in the memo, we commented on BP estimating coronavirus to cut 300 – 500,000 b/d of 2020 demand growth, and there were a few other sector insights from the BP Q4 call on Tues. (i) Lower US oil growth rate in Q4. BP did not provide any estimates for 2020 US oil growth nor did they say US oil production would reach a plateau or keep growing. However, in their prepared remarks, mgmt. discussed the recap of 2019 and said “Oil prices were volatile through the year with supply and demand impacted by changing macroeconomic and geopolitical factors slowing demand growth was largely balanced by OPEC plus production cuts and deceleration in US onshore production growth”. (ii) Reducing Haynesville dry gas drilling. BP reinforces the sector theme that low gas prices means US dry gas drilling will go down and US gas is likely to plateau later in 2020. In Q4/19, BP ran 7 Eagle Ford rigs, 3 Haynesville rigs and 3 Permian rigs in the Lower 48. In the Q&A, mgmt. replied “So you'll see that come through this year, which is more report is lower in terms of underlying you've got lower activity in Haynesville. So you think from a value of a volume perspective. That's a good thing. So the rig count stands. I think just one rig or two rigs I think about one rig now then Haynesville. So that will be lower.” And in the Q&A, mgmt. replied “and it's worth just pointed out, but on the gas side, we've seen something like a 40% drop across the sector in the gas rig count year-on-year and about 25% of all the gas. You see in the United States comes from Associated all and that's started to taper off a little bit at the back end of last year, but we will be able to ramp activity up as opportunities arise”. (iii) Lower 48 production lower in 2020. They didn’t provide the explanation or financial detail to determine which properties are lower in 2020. But based on drilling activity, the logical place is dry Haynesville shale. In the call, mgmt. said “we continue to focus on value over volume diverting investment from high-volume low-margin gas production to higher-margin oil production in the Permian and Eagle Ford basins where we continue to ramp-up activity. We expect full year underlying production to be lower than 2019 due to declines in low margin gas basins”. (iv) Reserve replacement of 67% in 2019, and not making a big deal about being below 100%. We were surprised by the answer in the Q&A when asked if reserve replacement is still a relevant metric for BP, and if they are consciously looking to replace reserved, CEO replies “but a year or so ago we remove reserve replacement ratio from our compensation metrics over the last five years, we've had a rolling average of 97% in terms of reserve replacement ratio of this last year 67, a little lower. We had fewer major development sanctions than typical in 2019 than we've had in the past the reserves are still healthy our reserve production ratio RP ratio still just around 14 years, but I think. I think the idea of being driven for just reserve replacement ratio is not, how will drive BP going forward. It doesn't mean, we're not going to though add reserves. We still have a whole set of projects out going on we can see 2025 but I feel that, it's the kind of reserves you add whether it's gas advantage oil advantage gas is going to be key and that's. I'm sure will drive our project sanctions”. (v) See bearish LNG prices thru 2020. In the Q&A, mgmt. said “But I think we're pretty much held a position, which is that we were pretty -- third quarter we talked about this been pretty bearish gas prices certainly through 2020 and the question is, do you start to recover in 2021 or 2023 given the two effects of gas being backed up in the United States and big LNG projects around the world coming on. What we will be moving some of those volumes to our merchant business. But I think you're LNG is all about. In terms of LNG trading, it's all about the optionality and making sure that we retain those options with different price points that allows the team to optimize the way they have had a very


25

Energy Tidbits

successful year last year”. Our Supplemental Documents package includes excerpts from the BP Q4 call transcript

Conoco – “Still participating” in LNG

Conoco held its Q4 call on Tues. (i) Earlier in the memo, we noted Conoco’s view on the impact to oil demand from Coronavirus and its views on the Permian. (ii) “Still participating” in LNG. It sounds like an unenthusiastic belief in LNG. In the Q&A, mgmt. replied “as well. We do see some weakness in the spot LNG market, it's had some pretty warm winters around the world. So demand has been -- demand growth we still see over the long-term in the LNG markets, but we've seen softness in the LNG side and of course how that lags in terms of how it manifests itself in our cash flows for the company. So -- but we still have long-term belief in the growth in the LNG market and still participating in that channel of the business”. (iii) Haven’t had Chinese force majeure for LNG yet. Interesting answer. I don’t know the specifics of any long term LNG contract, but the inference from their reply was that they have both long term better priced LNG contracts and spot sales. And if there is a force majeure, they will agree but reduce spot sales at lower prices as opposed to reducing volumes in their long term contract. In the Q&A, mgmt. replied “I'll take this one. First, we've heard similar concerns raised in the market about force majeure into Asia. But to-date, we haven't had any force majeure declarations. So we are continuing to watch the market and see, if we do, we'll be addressing those with spot sales or domestic sales in the market and managing appropriately. So nothing to-date, but we have heard similar concerns.” (iv) Nothing specific on Qatar LNG expansion bidding, but still interested. In the Q&A, mgmt. replied “With respect to Qatar, we continue to be very interested in Qatar. We continue to believe we are well placed. Qatar is a great location with -- that serves the global market with low cost, supply resources and is a strategic location that works well for both Europe and Asia. We are still in the process. That process is being managed by Qatar Petroleum and they're in control of that pace. We're moving along at pace as they provide. Really can't say any more on that at this time. What I can say is that we're very hopeful the opportunity is going to be a competitive cost of supply addition to our portfolio. And as we laid out in November, it needs to be a competitive cost of supply to be an attractive addition. So that's kind of where we're at for Qatar”. (v) Libya, not at zero yet but expect to go there. In the Q&A, mgmt. replied “Yeah. So you're right, we don't guide for production in Libya, our guidance is excluding Libya. Right now because of the disruptions associated with this conflict, our Libya project company and the Libya national oil company have declared force majeure and so we're just in the process of tapering down our production, we're not quite at zero now, but we expect to be fairly soon. So our hope is that these parties can resolve this conflict and we can restart operations soon. But right now, we're tapering down towards not producing”. Our Supplemental Documents package includes excerpts from the Conoco Q4 call transcript.

FirstEnergy – “Manufacturing recession continuing on in 2020”

FirstEnergy held its Q4 call on Friday. Most of the call was focused on financial items, but in the Q&A, mgmt. was asked “And despite sort of a strong overall economy, it doesn't seem like we seen a lot of that in Ohio or elsewhere may be new territories. Could you discuss that a little bit and maybe give us some sense of what you have seen on the ground and what can change that to actually see some positive load growth? Mgmt’s reply included “So right now, we do see the manufacturing recession continuing on in 2020 before we start to see recovery.


26

Energy Tidbits

We're hopeful to start to see that recovery in mid-year or a little bit later. So right now, I would just say, look forward to flat load growth within our territories. We don't really see that changing significantly.”. FirstEnergy’s key states are Ohio, Pennsylvania, New Jersey and Maryland.

Helmerich & Payne – AI for autosteering in horizontal legs is “disruptive”

Helmerich & Payne held its Q4 call on Tues. (i) Earlier we noted HP’s view on US wells drilled being down 14% YoY. (ii) Interesting development on AI and drilling. It makes sense for horizontal wells to be more consistent with less horizontals drifting out of the zone. We would be most interested to know where it works better or worse ie. thick vs skinny zones, shale vs tight zones, etc. But the logic is there, it makes sense that AI can take more data and autocorrect steering faster than an operator. And most of all, it makes sense in a resource play world where there are thousands of well in a zone or type of rock so there is a lot of learning data points. HP has a system AutoSlide that basically autosteers the horizontal leg thru the zone instead of an operator steering the horizontal leg. They are having this pick up in penetration, although still relatively early. In the Q&A, mgmt. said “I think 60% or 70% of the AutoSlide jobs we have today are fully de-manned, as far as the directional drilling not being on the rig, which is a great thing. It's a great thing for the customer, it's a great thing for the industry because of the reliability piece, less exposure but it is disruptive.” (iv) Argentina, still bullish on Vaca Muerta shale, optimistic for more rigs, but not certain when and are in discussions with IOC and other players on deploying more rigs. (v) Excited about unconventional plays in Middle East, including recent UAE unconventional gas discovery. In the Q&A,, mgmt. replied ‘We have numerous discussions happening in various countries in the Middle East and are very excited about being able to participate and unconventional play as they begin to really take shape at scale in some countries there.” “ it's early days, but we have 45 idle super-spec in United States that are great candidates to put to some of those opportunities when they come to fruition” “And, yes, that's exciting opportunities in many countries there including UAE.” Our Supplemental Documents package includes excerpts from the HP Q4 call transcript.

Patterson UTI – Moving rigs from Eagle Ford, SCOOP/STACK and Marcellus

Patterson UTI held its Q4 call Thursday. (i) Earlier we noted the interesting comment on a major suddenly pulling frack spreads. (ii) Drilling bottomed in Q4 and should increase modestly in “early 2020”. Q4 was expected to be the bottom for industry as Q1 includes refreshed producer budgets, but the interesting comment was that some producers are still finalizing their 2020 budgets, which is extremely late for budgets to be finalized. In the prepared comments, mgmt. said “The fourth quarter was one of transition after a steady decline activity through 2019. The contract drilling hitting a bottom in rig count and pressure pumping activity slowing as customers reduced activity at year end. Customers are still working to finalize their budgets, and while there is more visibility in contract drilling than in pressure pumping at this time, we are cautiously optimistic about both businesses through the year at current commodity prices. In contract drilling, we believe our rig count bottomed in the fourth quarter, and will modestly increase in early 2020”. (iii) Patterson is transferring rigs from East Texas, Appalachia and Mid Continent to the Permian. They don’t specifically name the plays, but this means transferring rigs from the Eagle Ford, Marcellus, and SCOOP/STACK. The concern we have to be careful about is a continuation of these trends, or at least these areas keep losing rigs. In the prepared comments, mgmt. said “For the first quarter, we expect the level of geographic


27

Energy Tidbits

fluctuation in our rig count to remain relatively elevated, primarily as an improving rig count in the Permian will continue to offset softness in most other markets. In the Permian basin, we believe super-spec utilization is starting to tighten. Currently, all of our APEX-XK's in the Permian are working and our last two available APEX PK's in the basin or contracted to go back to work in the first quarter. Accordingly, in addition to one APEX-XK, we transferred from East Texas to the Permian basin in the fourth quarter, we expect to transfer an additional four rigs to the Permian in the first quarter, including two APEX-XK's from Appalachia and two APEX-PK's from the Mid-continent”. (iv) Growing demand for natural gas powered rigs, and interesting commentary on how dual fuel rigs may be as good as electricity rigs for emissions. In the prepared comments, mgmt. suggested both natural gas powered rigs and electricity powered rigs were looking good, and said “We are encouraged by the growing demand for rigs that are capable of using natural gas as a fuel source, both dual fuel and 100% natural gas. As well as for rigs that can run off of electric utility power, also known as highline power. These rigs offer lower fuel costs given currently low natural gas prices, and are more environmentally friendly due to reduced emissions”. Unfortunately it isn’t the clearest transcript, but in the Q&A it sounded like natural gas powered fracking rigs might be as emissions friendly as electricity powered. Mgmt was asked if there was much difference from a greenhouse gas perspective if you use electric frac or dual fuel. Mgmt replied “So I don't want to preempt some work that we're currently doing, but we are in the middle of a study for our emissions for all of our businesses at the well sites, both drilling and pressure pumping. Because we think our operators need to understand where they are today, what are the options and what do those options mean for them. And we have suppliers that we work with that have data on the turbines as well. The interesting thing about the turbine is it doesn't really get discussed, is you can't really shut down a turbine when you're not using it. When you're not under full load, the turbine in your sea level is actually not that efficient. And so you've got a lot of methane bypass. And so there -- I don't want to preempt anything, but it certainly looks like some of the newer dual fuel high horsepower diesel engines where you can get 85% displacement in natural gas at full load, and then you can shut them off when you're not using and has the potential to produce better emission results for the operator at the well side”. Our Supplemental Documents package includes excerpts from the Patterson UTI Q4 call transcript.

Plains – Producer sentiment is not much different than in Nov

Plains held its Q4 call on Tues. (i) Earlier we noted Plains view on the Permian oil growth. (ii) Note there weren’t a lot of comments or questions on the individual pipeline projects. So the updates are primarily from project slides in the slide deck. In the limited comments on the Q4 call, there were no inconsistencies with the info on the slides. (iii) Produces sentiment today isn’t much different than it was at the time of the Q3 call. Mgmt was asked on their producer conversations on “any kind of color you can provide there seeing kind of some weakness with oil prices here.” Mgmt’s reply was that it isn’t much different in tone now vs then. Mgmt replied “We stay in constant dialog with producers and obviously the last two weeks, rather than everybody's forecast but in November. There was a lot of the same sentiment that there is today was kind of a round-trip that went back up because of the global tensions. And then most recently come down as but in November the sentiment was very similar to what it is today and our discussions with producers whether to the Permian production growth that we talked about I think largely in the last month, 25 additional horizontal rigs have been added to the Permian to our forecast is


28

Energy Tidbits

consistent to slightly higher than it was, but it's still moderated from expectation during the year so close to 400,000 barrels a day of growth there is substantial opportunities I think what we're seeing is a concentration of activity in the core block. So those with core acreage dedications will continue to see it with well-capitalized producers. So there'll be has not throughout this I think more broadly in the US we see flat some up some down of the Permian, will have close 400000 barrels a day growth. So we see that of activity now flat prices fall the 40 that could be a different thing, but all along we've expected producer budgeting between $50 and $55 a Barrel.” (iv) “quality segregation”. There really hasn’t been too much in the news lately about quality issues with US crude and Plains did not make a big deal of it. But they did note that one of their advantages is quality segregation. In the Q&A, mgmt. replied “We spent a lot of time talking about our Permian position. So, if your question was really related to the Permian. It also sets the tone for the other regions that we operate in, but we've built our assets over decades, and so we think about our business. It's an integrated asset mix. We've got gathering we've got intra basin long haul. We've got a lot of flexibility with storage tanks. So if we think about our calling card is flow assurance quality segregation and access to multiple markets, so we do think the differentiator for us in the Permian and that's why you see us building on all the projects that we've got the strategic projects really help us further enhance our position and if you think about the other regions that we operate in. It's a very similar business model, trying to get aggregation connectivity and access to multiple points”. Our Supplemental Documents package includes excerpts from the Plains Q4 call transcript and Q4 call slide deck.

Capital Markets – Pope Francis calls for wealth redistribution/debt relief

There were some interesting comments from the Pope Francis speech on Wednesday to a group of financial/business leaders including the IMF head in the Vatican. Pope Francis starts off by saying, “I would like to start with a factual fact. The world is rich and yet the poor increase around us” and goes on to say “A rich world and a vibrant economy can and should end poverty” and “If there is extreme poverty in the midst of wealth - also extreme wealth - it is because we have allowed the gap to widen to become the largest in history”. His key solutions are really for a wealth redistribution (ie. get rid of tax havens, increase taxes on the wealthy etc.) to use the money to help the poor. The Pope also called on credit agencies to forgive/restructure debt from poor nations, as he said “When the multilateral credit agencies advise the different nations, it is important to take into account the high concepts of fiscal justice, the public budgets responsible for their indebtedness and, above all, the effective and leading promotion of the poorest in the social framework . Remind them of their responsibility to provide development assistance to impoverished nations and debt relief for heavily indebted nations”. Our Supplemental Documents package has the Google Translate version of the Pope Francis speech.

Capital Markets – WSJ “the Mormon Church amassed $100 billion”

A religion story more specific to capital markets was the WSJ story yesterday “The Mormon Church Amassed $100 Billion. It Was the Best-Kept Secret In the Investment World” [LINK]. There is a reprint on the Bloomberg terminal. It was an interesting reporting of the Church of Jesus Christ of Latter-day Saints secretive investment fund “Ensign Peak Advisors”, and how their investment fund is now $100 billion. The size may surprise many. I was aware that it was a substantial fund from a former investment dealer partner, but wasn’t aware that it was $100 billion. The fund does not disclose holdings and the WSJ story is more general. Regardless, the $100 billion size is likely to get attention from the financial sector as will the WSj comment “A person who worked at a money management firm said when that firm

Pope Francis

calling for wealth

redistribution/debt

relief

WSJ on the

Mormon Church’s

$100b fund

https://www.wsj.com/articles/the-mormon-church-amassed-100-billion-it-was-the-best-kept-secret-in-the-investment-world-11581138011


29

Energy Tidbits

sought an investment from Ensign Peak, officials at the Mormon fund declined to share how much money they managed. Ensign Peak told this person that a small investment for the fund would be about $30 million and a large investment about $350 million.” Our Supplemental Documents package includes the WSJ story.

Climate Change – No surprise less snowfall than in 1970

The push on climate change continues to accelerate, meaning another climate change report like this week’s Climate Central report “The Case of the Shifting Snow” [LINK] really doesn’t make a difference in reinforcing this trend. The Climate Change report simply reminds that there is less snow than there was in 1970, especially during shoulder seasons. According to Climate Central, the percentage of stations with decreasing snow since 1970 for fall and spring was 80% and 66% respectively, with winter showing a mixed record, as 46% of stations showed decreased snow. Below is the Climate Central table showing percentage of stations with decreasing snow by region over the 1970-2019 period.

Figure 18: Percentage of Stations With Decreasing Snow by Region (1970-2019)

Source: Climate Central

Climate Change – Antarctica sets new record high temperature

This week, The Weather Channel article [LINK] “Antarctica May Have Just Set a New All-Time Continental Record High” said a research station in Antarctica measured a new all time high temperature of 65.1 degrees Fahrenheit on Thurs, and although not confirmed, would be the highest temperate ever recorded on the continent, beating the previous record of 63.5 degrees in March 2015. This compares to avg summer temps of around freezing (32 degrees), and for reference, the Thursday temp in Antarctica was roughly equal to the average high in Houston, San Diego, and Tallahassee, Florida.

Twitter – Look for our first comments on energy items on Twitter every day

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.

@Energty_Tidbits

on Twitter

Less snowfall in

2019 vs 1970

Antarctica hits new

record high

temperature

https://www.climatecentral.org/news/report-the-case-of-the-shifting-snow

https://weather.com/news/climate/news/2020-02-07-antarctica-record-high-preliminary-esperanza-base

https://twitter.com/Energy_Tidbits


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Energy Tidbits

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

For those interested in receiving out Energy Tidbits memos and blogs, 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

Modular construction lets China builds hospitals in less than 2 weeks China’s moves to deal with Novel Coronavirus patients is a great reminder this week of one of the accelerating building construction trends in the world – modular construction. Its pretty amazing to see China building these modular operating hospitals in less than 2 weeks. The Chinese hospitals are very basic shaped rectangles. Almost like a series of shipping containers We suspect many didn’t realize that these modular could be used for much more than a shipping container looking tiny home. We didn’t until we sat down with Horizon North Logistics last spring and realized that modular construction was being used in a wide range of construction such as hotels. But in explaining the advantages of modular construction for something like a hotel or large office building, its easier to understand how China was able to build these hospitals in Wuhan, a city that is a virtual shutdown for industry. One of the big advantages is that the modules are constructed somewhere else and that lets the modules be built not just with the walls but with electricity, water, etc ie. essentially ready to go once assembled onsite. BP’s short lived rebranding as “Beyond Petroleum” was in 2000 It was 20 years ago this summer that BP rolled out its big rebranding from BP standing for “British Petroleum” to its then new “Beyond Petroleum”. After seeing the BP Q4 call transcript and all of its supermajor competitors note their big push to being cleaner on emissions in the earnings calls, we couldn’t help think about BP;s former CEO, Sir John Brown, 2000 rebranding of BP into “Beyond Petroleum”. This may well be the wave for big oil and is not going away unless something disrupts the move. But in summer 2000 and then in early 2001, environmental groups criticized or mocked BP that it, a multinational oil company, that it could not be serious in trying to shift out of oil.

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