Has the Canadian Oil Sector Turned a Corner?
All across the country there are signs that the Canadian oil sector is turning the corner.
The worst of the price shocks may be over, and Canada enjoyed a surprise job expansion in January. The oil patch has recently seen growth in shipments of energy products, total energy exports, heavy crude exports, crude by rail exports, total oil and gas output, and number of active drilling rigs. As if that is not enough, there have been recent positive signs from a number of major companies in the business.
Frack Sand Company Goes Public
Source Energy Services Inc. is Canada’s largest distributor of the high-quality sand used to hydraulically fracture oil and gas wells, and the company has filed for an initial public offering. It is headquartered in Calgary, Alberta and has operations in British Columbia, Alberta, Saskatchewan, and the United States. On its website, the company explains that it takes sand from mines (largely in the U.S.) all the way to its customer’s well sites. Source Energy is betting on a revival in oil drilling boosting demand for the sand, and it hopes to raise $250 million that it will deploy to bolster its edge as a leader in the services industry.
Husky Makes a Deal Chinese Markets
One of the most intractable challenges for the Canadian oil industry has been its heavy reliance on the United States as a customer, but reports surfaced in early February that Husky Energy is expanding into the Chinese market. The company sold a nearly one-million-barrel cargo from its White Rose offshore project outside Newfoundland to a buyer in China.
This may be the first time that oil from Canada’s Atlantic Coast will make it to China. To the extent that Eastern Canada exports oil by ship, that oil generally finds its way to Europe. Husky’s buyer for the Chinese shipment is undisclosed. Analysts say that this deal was made possible due to dropping shipping prices combined with higher oil prices in Asia caused by recent OPEC cuts. It is not clear if the opportunity will remain for the long-term, but opening a new market certainly won’t hurt an industry struggling to gain market access.
Cenovus May Expand Oil Sands Operations
One of the Canadian oil sector’s top producers, Cenovus Energy, recently announced that it is carefully taking the initial steps to restart two major oil sands projects in Northern Alberta that were shuttered after oil prices dropped. The company says it is stockpiling cash while doing the necessary engineering work to ensure that if the projects are restarted they can be fully completed.
If completed, the projects could combine with another recent Cenovus oil sands project to produce 125,000 barrels per day. Cenovus appears intent to stay cautious, however, even as it holds on to $3.7 billion in cash and reported a return to profitability in the last quarter of 2016.
Pipeline Boom Underway
Canada is rapidly moving from a shortage of pipeline capacity to what some call a possible glut. Several major oil sands projects are slated to come online in the next couple years, and that is expected to strain the existing pipeline (and rail) shipping options. However, recent weeks have seen a series of pipeline projects move forward to varying degrees.
The most publicized is, of course, the Keystone XL Pipeline, which was shut down by President Barack Obama but has now been essentially greenlighted by President Donald Trump. That is not the only new option, however. In November 2016, Prime Minister Justin Trudeau approved Kinder Morgan’s Trans Mountain Pipeline and Enbridge Inc.’s Line 3. Combined, these three pipelines appear poised to deploy $20 billion in investment over the next few years.
Cautious Optimism in Canada’s Oil & Gas Industry
Individually, these developments might not be anything to get excited about on a macro level. But combined, they represent a positive direction for the Canadian oil sector. With a new approach to the energy industry taking shape in the United States, new pipeline project moving forward in Canada, the global price of oil relatively stable (although still low compared to three years ago) and new project execution technologies proving to be very efficient, companies in Canada’s oil and gas industry have reason to be cautiously optimistic.