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Cenovus closes Husky transaction

Deal creates oil and gas leviathan

Screen Shot 2020-10-26 at 12.57.24 PMCenovus Energy Inc. has announced that its strategic combination with Husky Energy Inc. has now closed. The transaction was completed through a definitive arrangement agreement announced on October 25, 2020, under which Cenovus and Husky agreed to combine in an all-stock transaction.

With the close of the transaction, Husky has become a wholly-owned subsidiary of Cenovus. The combined company will continue to be headquartered in Calgary.

“This is an exciting day for Cenovus as we become a leaner, stronger, more fully integrated oil and natural gas company that is exceptionally well-positioned to weather the current environment and be an energy leader in the years ahead,” said Alex Pourbaix, Cenovus president & CEO. “With the closing of this transaction, we will focus on safely and efficiently integrating the assets and teams of these two great companies while working to realize the $1.2 billion in synergies we’ve identified. These cost and capital efficiencies, combined with our strong portfolio of well-matched upstream production, midstream and downstream assets as well as improved financial strength, are expected to generate strong value for our shareholders.”

The combination creates Canada’s third-largest crude oil and natural gas producer, based on total company production, with about 750,000 barrels of oil equivalent per day (BOE/d) of low-cost oil and natural gas production. Cenovus is also now the second-largest Canadian-based refiner and upgrader, with total North American upgrading and refining capacity of approximately 660,000 barrels per day (bbls/d). The company also has access to about 265,000 bbls/d of current takeaway capacity from Alberta on existing major pipelines, 305,000 bbls/d of committed capacity on planned pipelines and 16 million barrels of crude oil storage capacity as well as strategic crude-by-rail assets that provide takeaway optionality.


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Suncor’s Q4 takes a hit

Newfoundland project in question

Suncor, Canada’s leading integrated energy company, has announced it will record a $425 million non-cash after-tax impairment charge in the fourth quarter of 2020 on its share of the Atlantic offshore White Rose asset and West White Rose Project.

White RoseThe West White Rose Project was cast originally as a partnership between Husky Energy, Nalcor and Suncor. However, the recent acquisition of Husky Energy by Cenovus, a $21 Billion Calgary-based oil and natural gas company, has placed a shadow on the future of the West White Rose Project where plans are to access 200 million barrels (gross) of crude oil and extend the life of the offshore White Rose field by approximately 14 years. Discussions are ongoing with the operator and various levels of government to determine the future of the project.

Suncor’s 2021 guidance remains unchanged as the White Rose field will remain online producing as expected. 

The White Rose asset joint venture owners are Cenovus (operator, 72.5%) and Suncor (27.5%). The West White Rose Project joint-venture owners are Cenovus (operator, 69%), Suncor (26%) and Newfoundland and Labrador provincially owned energy corporation Nalcor (5%).

 


Bob Larocque_CFA Pres

Q&A with Bob Larocque, new president & CEO at the Canadian Fuels Association

 

Bob Larocque_CFA PresOCTANE:  You have been on the job for a few months now – what are your first impressions of Canada’s transportation fuels sector?

Larocque: From day one at the Canadian Fuels Association, I have been blown away by the deep technical expertise and the continuous improvement mindset that exists among CFA staff and members.  Previously, I had some exposure to CFA and its staff during my time at the Forest Products Association of Canada, but I have gained an appreciation of the critical importance of our industry since the pandemic started, as well as an excitement about where we are headed.

OCTANE:  It’s always challenging to work in a new industry, but taking on a leadership role at CFA must be even more difficult in the middle of a pandemic with declining demand for your products.  What is your assessment of the health of transportation fuels in Canada?

Larocque: During the early days of the pandemic, our industry demonstrated that we are a part of Canada’s critical infrastructure.  CFA members and their employees went above and beyond to ensure that the fuel supply was maintained to support critical services like the movement of medical supplies and food.  Throughout our response to COVID-19, we have reinforced the value that our sector has created for Canadians for more than 100 years.  While the pandemic has not been easy on CFA and its members, we are proud of our contribution during the response and look forward to playing a significant role in Canada’s recovery efforts.

OCTANE:  How do transportation fuels fit into Canada’s plans to ‘build back better’?

Larocque:  Our industry has a long history of using innovation to continuously improve our environmental footprint and adapt to the changing needs and expectations of consumers.  This is an exciting time for our industry and we believe that we can support a strong, resilient economy while making a significant contribution to Canada’s targets for emission reductions.  This fall, we will be releasing a ‘vision for 2050’ for our industry that outlines how lower-emission transportation fuels will be part of Canada’s energy mix for generations to come.  This will be achieved through our pursuit of innovative products and processes as well as new ways to leverage Canada’s transportation fuels infrastructure.  We can’t wait to share this with our partners and stakeholders – stay tuned.

OCTANE:  What about the upcoming national Clean Fuel Standard?  How is the CFA involved?

Larocque:  The Canadian Fuels Association has supported the concept of a national Clean Fuel Standard (CFS) since it was first introduced in 2016.  Our members are the principal obligated parties for the liquid component of the CFS and are committed to the success of this policy.  We believe that leveraging Canada’s existing refining and transportation fuel infrastructure is essential to making this happen.   For more than 100 years, our domestic fuels infrastructure has achieved the scale, reliability and accessibility required to successfully move people and goods throughout Canada and beyond.  We will continue to share our knowledge and insight to ensure that we maintain refinery competitiveness, ensure energy security over the long term and meet the GHG reductions of the Clean Fuel Standard.


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ExxonMobil Canada cuts staff

Cost-cutting and layoffs continue in Canada’s oil and gas sector. Last week, ExxonMobil Corp announced plans to reduce its Canadian workforce by 300 positions. Citing the COVID-19 driven price slump, ExxonMobil reported they will reduce positions at Imperial Oil, ExxonMobil Canada and at its ExxonMobil Business Centre Canada.

According to the company, the workforce reductions are the result of insight gained through reorganizations and work-process changes made over the past several years. The impact of COVID-19 on the demand for ExxonMobil’s products has increased the urgency of the efficiency work, they said. The company’s U.S. head office already announced massive cuts of more than US$10 billion earlier this year in a move to help reverse the negative trend.

Imperial Oil confirmed its plans to furlough 200 of its 6,000 workers in a move to cut costs in the face of a market downturn. This move mirrors Suncor’s announcement that it plans to shrink its cohort by 15% over the next year and a half.


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Alberta says oil and gas industry to save money with new pollution rules

Alberta has reached a deal with the federal government to establish its own rules to restrict a potent form of carbon pollution, saying Thursday the move would save the oil and gas industry money.

The agreement replaces federal regulations on methane, the main component in natural gas, with new provincial rules that would last “up to five years.” Methane is a greenhouse gas that is 86 times as powerful as carbon dioxide over a 20-year period. Federal Environment and Climate Change Minister Jonathan Wilkinson announced that a similar deal had been reached with Saskatchewan.

“Without this agreement, the federal system would apply in Alberta, costing the oil and gas industry money, and adding unnecessary red tape to our industries,” said Alberta Environment and Parks Minister Jason Nixon during an online presentation on Nov. 5.

“Alberta’s methane regulations will save job creators time, money and resources. It will cut the same amount of emissions as the federal system by 2025, but with the added benefit of cost savings for our industry.”

The oil and gas industry is the largest contributor to methane emissions because the industry flares or vents the gas into the air, and it also leaks accidentally from equipment. Research has connected a rise in global methane levels with fracking operations, and scientists say this rise in atmospheric methane is putting efforts to fight climate change at risk.

The deals with Alberta and Saskatchewan lock in an approach that the federal government’s own analysis has shown will mean that, without other additional measures, Canada will fall short of its 2025 methane reduction target. Canada committed in 2016 to cutting methane emissions 40 per cent below 2012 levels by 2025, but the approach is expected to achieve a 29 per cent cut.

Dale Marshall, national climate program manager for Environmental Defence Canada, says the federal government should have strengthened its own rules and then insisted that the provinces improve theirs. Instead, the result represents a “meek approach to reducing emissions,” he said, which “casts further doubt on Canada’s commitment to fighting climate change, even while Canadians face mounting climate impacts.”

“The Canadian government needs to stop bending over backwards to the big oil lobby and oil-friendly provincial governments at the expense of public health and action on the climate emergency,” said Marshall.

The Trudeau government says it is still committed to the 2025 methane target, and the regulations are not the only way it expects to restrict the gas. Wilkinson’s office also pointed to a $750-million federal fund meant for the oil and gas industry to help companies develop “green technologies to reduce methane emissions.”

Alberta has also rolled out an industry-funded program called the “technology innovation and emissions reduction system” that it says will support methane-reducing projects.

As well, the federal government has proposed, but has yet to launch, a “clean fuel standard” that aims to decarbonize fossil fuels used in Canada, and Ottawa also expects another $1.72-billion fund for cleaning up orphan or inactive oil and gas wells to contribute to methane reductions.

Finally, federal Natural Resources Minister Seamus O’Regan has not ruled out tightening the rules if “future data and modelling” convinces him it’s necessary.

But Marshall said the agreements would be difficult to open up before they expire at the end of 2024. That significantly increases the chances that Canada will miss its target, he said.

British Columbia has a separate agreement with the federal government on methane that was finished earlier this year.

The government said Thursday it expects to update the public on its efforts to hit the 2025 target “in late 2021.”


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Cenovus and Husky to consolidate

Massive deal reshapes Canadian oil and gas sector

Screen Shot 2020-10-26 at 12.57.24 PMCalgary-based Cenovus Energy has announced that it has entered into a merger agreement with Husky Energy Inc. Under the terms of the agreement, Cenovus will combine with Husky Energy for (C)$23.6 billion in an all-stock transaction. Together the companies will trade as Cenovus Energy and will remain headquartered in Calgary. The deal, approved by both boards of directors, is expected to close Q1 of 2021. Husky shareholders will receive 0.7845 of a Cenovus share plus 0.0651 of a Cenovus share purchase warrant in exchange for each Husky common share.

The idea behind the merger is to create a resilient integrated energy leader with an advantaged upstream and downstream portfolio. When the deal is complete Cenovus will become Canada’s number three oil and gas producer behind Suncor and Canadian Natural Resources.

The consolidation of the industry is a trend that is occurring globally. Recently in the U.S. ConocoPhillips picked up Concho Resources while Chevron bought Noble energy. Here in Canada Canadian Natural Resources purchased assets from Shell and Marathon Oil in 2017 to become the country’s number two player in oil & gas production. This deal between Husky and Cenovus is the largest oil & gas sector M&A in the last four years.

“We will be a leaner, stronger and more integrated company, exceptionally well-suited to weather the current environment and be a strong Canadian energy leader in the years ahead,” says Alex Pourbaix, Cenovus president and CEO. “The diverse portfolio will enable us to deliver stable cash flow through price cycles while focusing capital on the highest-return assets and opportunities. The combined company will also have an efficient cost structure and ample liquidity. All of this supports strong credit metrics, accelerated deleveraging and an enhanced ability for return of capital to shareholders.”

Husky president and CEO Rob Peabody agrees. “Bringing our talented people and complementary assets together will enable us to deliver the full potential of this resilient new company,” he says pointing to the integration of Cenovus’s best-in-class in situ oil sands assets with Husky’s extensive North American upgrading, refining and transportation network and high netback offshore natural gas production.

Altogether, the company will be the third-largest Canadian oil and natural gas producer, based on total company production. Combined, Cenovus will produce about 750,000 barrels of oil equivalent per day (BOE/d) of low-cost oil and natural gas production, including 50,000 BOE/d of high free funds flow generating offshore Asia Pacific production. It will be the second-largest Canadian-based refiner and upgrader, with total North American upgrading and refining capacity of approximately 660,000 barrels per day (bbls/d), which includes approximately 350,000 bbls/d of heavy oil conversion capacity. The company will have access to about 265,000 bbls/d of current takeaway capacity out of Alberta on existing major pipelines, as well as about 305,000 bbls/d of committed capacity on planned pipelines. Also, it will have 16 million barrels of crude oil storage capacity as well as strategic crude-by-rail assets that provide takeaway optionality.

 


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Oilpatch capital spending fell by 54% in second quarter, StatCan reports

Statistics Canada says capital spending in the country’s oil and gas sector fell by 54 per cent in the quarter ended June 30 as numerous producers chopped budgets amid sliding global oil prices.

The federal agency says the industry spent about $3.88 billion in the three-month period, down from $8.46 billion in the first quarter and $8.59 billion in the second quarter of 2019, as a global price war and demand destruction caused by the COVID-19 pandemic eroded crude prices.

In June, the Canadian Association of Petroleum Producers estimated that $23.3 billion would be spent in the oil and gas production sector in Canada this year, a downward revision from about $37 billion in its January forecast.

Last week, the Canada Energy Regulator said it expects oil production in Canada will average 4.38 million barrels per day this year, down by 6.6% compared with 2019.

Earlier this week, IHS Markit reported that world oil demand has grown by 13 million barrels per day in the four months since the bottom of the COVID-induced collapse in April to about 89% of last year’s levels.

It says it expects demand growth to plateau at roughly 92 to 95% of 2019’s average output of around 100 million barrels per day through the first quarter of 2021 as travel-related fuel demand remains subdued until virus vaccines are widely available.


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Trans Mountain pipeline restarts after light crude spills in Abbotsford, B.C.

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Trans Mountain says oil is flowing again through its pipeline after as much 190,000 litres of light crude spilled from a pumping facility in Abbotsford, B.C.

A statement from the Crown-owned company says the pipeline was restarted Sunday afternoon.

The line was shut down early Saturday when an alarm was triggered at the Sumas pump station.

An investigation continues but Trans Mountain linked the cause to a fitting on a 2.5-centimetre pipe, and says the oil was contained, recovered and slated for disposal.

A statement posted late Sunday by the Environment Ministry says Trans Mountain’s is co-ordinating the response at the site, along with environmental and emergency contractors.

The ministry says there has been no reported impact to groundwater, but monitoring continues.

Sumas First Nation Chief Dalton Silver said Saturday’s spill marked the fourth time in 15 years that the pipeline has spilled oil on their land.

He said in a statement that it happened just south of a cultural and burial ground of great significance to his people.

“Our main concern is for the cleanup of this spill and preventing further impacts to our territory. We need to have our monitors on the ground immediately.”

Trans Mountain said crews at its incident command post were working on the cleanup with local officials, area Indigenous groups, the CanadaEnergy Regulator, the Transportation Safety Board and the province.

The pipeline moves about 300,000 barrels of crude a day between Alberta and B.C.’s waterfront terminal near Vancouver.

The federal government approved expansion of the Trans Mountain pipeline last June that will triple its capacity.


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New rules to speed up approvals for exploratory drilling off Newfoundland

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The Canadian government is moving ahead with new rules it says will speed up approvals for exploratory oil and gas drilling off the east coast of Newfoundland, but conservation groups are warning the changes undermine environmental protections.

Natural Resources Minister Seamus O’Regan issued a statement last week saying the new regulation will improve the efficiency of assessments while upholding the “highest standards” of environmental protection.

“Our government recognizes that Newfoundland and Labrador’s ability to rebound from the COVID-19 pandemic will depend largely on a strong, resilient and innovative offshore,” O’Regan said.

Three environmental groups have launched a federal court challenge, arguing exploratory drilling off Newfoundland will now be green-lit without proper environmental assessments.

The Ecology Action Centre, Sierra Club Canada Foundation and World Wildlife Fund Canada argued earlier this month that the science behind the new “regional assessment” or RA process is flawed.

Lawyer James Gunvaldsen-Klaassen, whose firm Ecojustice is representing the groups, argued that the regulation “flies in the face” of the purpose of environmental scrutiny under the new Impact Assessment Act.

The court later decided the case can proceed to a judicial review, but denied the group’s request for an injunction.

“The federal government stated that it intended to use the flawed RA and a loophole in the … legislation to allow for a broad exemption of all future offshore exploratory drilling in the region,” the groups said in a statement Thursday.

“Left unchallenged, this would set a poor and dangerous precedent for regional assessments, which could otherwise be a promising new mechanism under the Impact Assessment Act.”

O’Regan said the new regulation will help the oil and gas industry remain competitive because it will provide investors with “more predictability and certainty.”

As well, O’Regan said the regulation strengthens conditions to ensure projects adhere to environmental protection standards.

The Newfoundland and Labrador government said the new assessment process will shorten timelines to as little as 90 days. The province said the existing process can take up to 900 days.

“This is a significant improvement over the previous process which caused considerable delays,” the province said in a statement.

Siobhan Coady, Newfoundland and Labrador’s natural resources minister, said the province can now “explore its offshore and hopefully make some great discoveries.”

Provincial officials say the delays started in 2010 when the responsibility for offshore environmental assessments were shifted from the Canada-Newfoundland and Labrador Offshore Petroleum Board to the Canadian Environmental Assessment Agency.

According to the Canadian Association of Petroleum Producers, environmental assessments for exploratory wells in other countries take far less time to complete: 44 days in Australia; 96 days in the U.S. Gulf of Mexico; 79 days in Norway; and 18 days in the U.K.

During a recent industry conference in St. John’s, Coady warned that with oil prices plummeting, companies are closing and jobs are being lost.

In mid-March, Equinor and Husky Energy announced the decision to defer the Bay du Nord offshore development project due to falling oil prices and the economic downturn as countries responded to the novel coronavirus.

In addition, Hibernia has recently suspended its drilling program, the Terra Nova refit for May has been suspended and the West White Rose project has been deferred.

The Newfoundland and Labrador Oil and Gas Industries Association has said in order to remain competitive with Norway, the United Kingdom and Australia, the federal government needs to provide a renewed program of “incentives for offshore exploration.”

The offshore industry accounts for close to one third of the province’s GDP, 13% of wages and 10% of all jobs.

 


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N.L. warns of exodus of oil and gas industry without more federal help

Newfoundland and Labrador’s government is looking for a rapid answer from Ottawa on its request for aid for the offshore oil sector in light of a quickening exodus of exploration rigs from the province.

Premier Dwight Ball, Natural Resouces Minister Siobhan Coady and industry leaders held a news conference May 26 to repeat earlier warnings that hydrocarbon projects could be permanently lost to the province without a commitment from Ottawa.

Ball and Coady repeatedly warned that as each week passes, companies are closing and jobs are being lost.

The global COVID-19 pandemic and plummeting world oil prices have been causing problems for the East Coast industry.

In mid-March, Equinor and Husky Energy announced the decision to defer the Bay du Nord offshore development project due to falling oil prices and the economic downturn as countries respond to the novel coronavirus.

In addition, Hibernia has recently suspended its drilling program, the Terra Nova refit for May has been suspended and the West White Rose project has been deferred.

“Time may not be our friend,” the premier during the event.

imagesThe Newfoundland and Labrador Oil and Gas Industries Association, or NOIA, has said in order to remain competitive with Norway, the United Kingdom and Australia, the federal government needs to provide a renewed program of “incentives for offshore exploration.”

The province is backing many of the industry proposals, noting the offshore industry accounts for close to one third of the province’s GDP, 13% of wages and 10 per cent of all jobs.

Coady noted in an April 20 letter to federal Natural Resources Minister Seamus O’Regan that the province appreciated a $75 million allocation to help its industry reduce greenhouse gas emissions, but it needs further assistance.

Coady wrote that the province needs a program similar to Norway’s system of stimulating exploration through “direct tax payments.”

Her letter also called for a renewal of a regional tax credit program, and the introduction of 100% deductibility of capital costs to encourage companies to continue with their exploration plans.

Charlene Johnson, the chief executive of NOIA, said during Tuesday’s news conference that there are three drilling rigs in the province and the industry is hoping they will remain there, rather than being shifted to other jurisdictions.

“It’s a real toss-up because the minute Norway approves (incentives), it’s going to be very hard to entice them to stay in our waters,” she said.

“These decisions are being made now. We’ve had over a dozen companies end their membership in NOIA because they’re closing up shop here.”

O’Regan, who is also the MP for St. John’s South, said in a tweet that he’d been in discussion with Johnson regarding the growing anxiety in the offshore sector.

“We all have friends and family who are worried about their jobs. Oil and gas is in a state of upheaval out West, and around the world. But I am a champion of our offshore. Together we will get through this.”

Ottawa has been offering programs to help companies with liquidity problems during the pandemic.

Federal agencies last month announced commercial loans, ranging in size from $15 million to $60 million each, to fund cash flow needs for a year for companies that had shown themselves to be financially viable prior to the pandemic.

A spokesman for O’Regan’s office said these kinds of programs have helped provide liquidity to the small and medium-sized players in the industry.

In addition, the Canada Emergency Wage Subsidy program covers up to 75% of an employee’s wages for an employer, and can be applied to oil and gas firms, O’Regan office noted.