Alberta's oil sands, TransCanada's Keystone pipeline xl & Enbridge's attempt to access China

    Keystone XL, struggling through the approval phase, aims to bring more of Canada's oil to the United States in an effort to reduce their dependency on Middle East oil by 75% by 2020.

Among other top sources, Mexico is an unsustainable source due to dwindling resources there while Saudi Arabia (number 2) is viewed as unstable due to its situation within the Middle East & participation in opec (opec has tried to influence the price of oil by capping production). TransCanada's $7 billion pipeline (proposed in 2008) would double Alberta's oil exports to the United States. The Keystone Pipelines lowers delivery costs (reliance on overseas shipping/the many smaller pipelines that would be needed in place of it). The pipeline would be the safest pipeline in use so risks associated with oil spills would be minimal. There has already been over 40 months of review including three (and a final) major environmental assessments and numerous public meetings. Even with that considered, US President Obama put a key decision on the matter on hold until after the 2012 elections, by ordering another environmental assessment. The sticking point appears to be the pipeline's proposed route through Sand Hills, Nebraska (Sand Hills covers the mid to western portion of the state and has been designated an ecoregion by the WWF with 85% of Sand Hills (1/4 of Nebraska) being intact natural habitat). However, other routes result in a longer pipeline track and that creates more risk according to TransCanada Corp, Canada's 4th largest petroleum company. Even if another route is chosen it is highly likely that it will still impact Nebraska given that eight of the 14 different routes affect the state (only 1 avoids the sensitive Ogallala aquifer but six reduce the mileage across Sand Hills). The pipeline project would immediately create 20,000 American jobs while giving oil refineries in Texas a much needed boost in raw supply. According to TransCanada president Russ Girling “This project is too important to the U.S. economy, the Canadian economy and the national interest of the United States for it not to proceed." The 1,700 mile Keystone Pipeline would carry 700,000 barrels of oil per day to six Texas refineries in Padd III (would reduce Canada's reliance on refineries in Padd II where a glut of supply has depressed the price of Western Canadian Select oil). The Keystone Pipeline isn't the only major North American project underway, there's also the 800,000 bpd Wrangler Pipeline (Enbridge & Enterprise Product Partners) that will pipe oil from Cushing OK to the Gulf Coast. Another company, Kinder Morgan already operates three pipelines between Canada and the United States. (USA Today: Obama delay of Canadian pipeline won't stop tar sands) Oil price is up 25% over the last month and a half (ending November 16) driven by tensions between Israel and Iran.
Update January 20, 2011 Obama rejected a permit for the Keystone Pipeline. In response, Stephen Harper threatened to give more support over to the other pipeline project Northern Gateway Pipelines which will take the oil to British Columbia then overseas to destinations in China. Canada is home to 90% of 2P oil reserves outside of OPEC nations. The irony behind it all is that the decision by Obama makes the US more dependent on oil from unstable sources (Venezuela, Saudi Arabia) while also making the US a less financially secure/more hostile place to do business for traditional allies like Canada.

Alberta is home to nearly 170 billion barrels of proven and probable oil reserves (much of it amongst easily processed oil sand) exceeded only by Saudi Arabia and Venezuela (AP:China eyes Canada oil, US's energy nest egg) In Alberta alone, more than 1.6 trillion barrels of oil in inferred resource isn't even included because extraction methods SAGD and THAI/CAPRI aren't able to bring it to the surface by economically viable means. However, considering only conventional sources, Canada has major sources outside Alberta (Saskatchewan and Newfoundland combined have about 1.4 times as much oil reserves as Alberta). (NEB - Energy Reports Canadian Energy Ovewview) Approximately 20% of Alberta's oil sands are close enough to the surface to be recovered by open pit mining, the rest requires vairous in-situ technologies; the government of Alberta requires that oil companies bring the land back to 'equivalent land capability' that is, restore it to a level that makes it useful to the community either as boreal forest (which was initially destroyed) or pasture for bison (though many companies have only restored a fraction of that, for example Syncrude Oil restored 22%). Oil sands operations have been approved to use about 360 million m3 of water from the Athabasca River (runs through the mining district, water source is a glacier over 1,200 km away), that's twice as much water used by the entire city of Calgary though less than 1% of the water from the river is used by the province and oil operations; 24 m3 of water is used to produce 1 m3 of synthetic oil (1 m3= 6.29 barrels of oil). As oil sands production grows, companies like Canadian Natural Resources (ranks behind a couple companies in terms of oilsands production, Suncor is 1st at 355,000 bpd in January 2012) are improvising in order to reduce their usage of water from the Athabasca river so they continue to remain below the limit; CNRL now separates water from solids more effectively by injecting carbon dioxide captured from its hydrogen plant into tailings lakes reducing the need for additional water. 90% of conventional oil reserves are controlled by state owned oil companies.

By 2045 oil sands will produce close to 11M bbls/d and that will continue for a century. Tar sands crude is over five times more expensive to extract than middle east oil however with oil prices up more than 400% since 2001 and Alberta continuing to charge one of the lowest royalty rates in the world (down from $3/bbl in 2001 to $2/bbl in 2009) there is much profit to be made. Many smaller Canadian companies lack the billions needed to extract the oil and that has created opportunity for foreign companies including Norway's Stat Oil which has shown a lot of interest (Statoil's licenses in Venezuela were revoked by Chavez and their core reserves in the North Sea are nearing depletion). Fort McMurray is at the epicenter of Alberta's oil boom.

With crude oil fetching higher prices in Asia, Canadian producers are also looking to other markets outside North America (nearly all Canadian oil (2M bbls/d) currently heads south, 2010). The supply chain has, more recently become overwhelmed in the United States due to the release of 30 million barrels of reserve oil onto the market Parkersburg News and already filled up pipelines and storage tanks. With China's interest in Canada growing, another major pipeline project has been proposed; The 728 mile (1,200 km), 575,000 bpd Northern Gateway Pipeline proposed by Enbridge (construction by 2015, Enbridge already operates the world's longest oil pipeline). The new pipeline system is composed of two pipelines, 1 designated for the import of natural gas condensate, the other to the export of crude oil from Edmonton to Kitimat BC. Currently 99% of Canada's oil goes to just one market and even within that market (USA) Canada isn't getting as much in return for its oil as it could be getting since 55% of that oil goes to an area in the north east known as PADD II where a glut of supply is keeping prices down on West Canadian Select. The pipeline is gaining the attention of politicians and oil companies eager to broaden their customer base. More on Oil Supply and Demand (2011-2016)

The US delaying a key decision in the Keystone Pipeline case can only hurt North America’s energy indepedence given that China wants to tap into Canada’s oil supply and Canadian companies like that because heavy oil commands higher prices in Asia (than it does in the United States or even Canada). The Northern Gateway Pipelines which would carry Alberta oil to Kitimat BC then be loaded onto tankers headed for Asia. No Keystone Pipeline means China would eventually take a larger share of Canada’s oil putting US supply at risk (Canada is the largest source of US oil, Canada is also one of only a handful of countries with production growth).

Ironically, environmentalists are both helping and hampering efforts to provide access for Asia; The oil pipelines face fierce opposition from environmentalists and Native Indian groups concerned over wildlife and possible oil spills (like what happened with Enbridge in Michigan in 2010); at the same time American environmental groups have opposed the oil sands on the grounds that it makes excessive use of water and increases greenhouse gas emissions.

Here's what Newt Gingrich has to say about the Keystone Rejection

The Iranians are practicing closing the straits of Hormuz, the Canadian prime minister has already said to the US president, if you don't want to build this pipeline to create 20,000 American jobs and bring oil through the United States to the largest refinery complex in the world, Houston, I want to put it straight west in Canada to Vancouver and ship the oil direct to China so you'll lose the jobs, you'll lose the throughput, you'll lose 30 or 40 years of work in Houston. The president cannot figure out, I'm using milder words here, utterly irrational to say I'm now going to veto a middle class tax cut to protect left wing environmental extremists in San Francisco so that we're going to kill American jobs, weaken American energy, make us more vulnerable to the Iranians and do so in a way that makes no sense to any normal, rational American.

 According to Alberta's 2012 budgetary report, total oil production will reach 3M bpd by 2014, 2.4M of that is from non-conventional sources like bitumen (bitumen royalties totalled $5.7B in 2011 will be $9.9B in 2014).  2011-2012: non-conventional oil production was at 1.78 million barrels per day.  Conventional oil production will be 500,000 bpd in 2013.  Provincial royalty revenue:  Bitumen contributed $5.7B of the $6.5B total which includes conventinal, in 2012, 30% higher than the $4.4B earned the year before.  Total will be around $12.2B in 2014.

29 too big to fail banks forced to raise cash ratio, Groupon GRPN joins Nasdaq, Unemployment lower in US but higher in Canada

Global banking regulator The Financial Stability Board on Friday November 4, 2011 released a list of 29 banks deemed "too big to fail", 8 of which are US based. Those making the list will be addressed directly by new global banking rules imposed by the G20 that will force banks to increase their cash so as to bring their cash reserves/loan ratio to a more appropriate level. The FSB is headed by bank of Canada governor Mark Carney (though none of Canada's banks made the FSB's list, appointment of Mark Carney comes at the same time Canada PM says no to European bailout support).
Dec.15 update: Fitch Ratings, a subsidiary of Paris based Fitch Group (1 of 3 credit rating agencies recognized by the US Exchange Commission (next to S&P and Moody's), downgraded 8 of the 29 banks viability ratings (the banks are dubbed GTUB's (global trading and universal banks). The banks are Bank of America, UBS, Credit Suisse, Morgan Stanley, Barclays, BNP Paribas, Goldman Sachs and Societe Generale. According to Fitch the bank's "business models are particularly sensitive to the increased challenges the financial markets face". Even though Fitch "incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges" it still downgraded them by one or two notches. According to Fitch "the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress". BNP Paribas, the largest of the European banks, was also downgraded by Moody's to Aa3 on Dec.9.

The criteria required to make the list of 29 banks?
-must have exposure to more than just a couple economic sectors
-sizeable enough so that any threat posed to them will have widespread implications for the economy as a whole, that makes them eligible for government support which lowers any associated risk.
... more specifically

Financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances.

Key definition - Loan Loss Reserves: A valuation of the good collateral a financial institution has on hand to cover bad or slow paying loans. The total value of the reserves changes with every charge-off (a loan that fails to meet its obligations - bank abandons collecting on it - it is no longer an earning asset). The provision for loan losses is an amount/allowance set aside (quarterly or annually) to boost loan loss reserves when they get too low. Note: some charge offs do recover (recovery rate), when they do they are added back to reserves. More on the world's largest banks here

Grmike's advice
-In the 4th quarter of 2011 tred cautiously with your investments in the banking sector; European Stability Fund bonds are not attracting as much investment as anticipated and banks, particularly European ones remain highly exposed. Obama says he's concerned about the debt problem.
-Invest in technology - The sector is still booming (Samsung - Galaxy smartphone, HTC new products are attracting a lot of attention) and Research In Motion countinues to be severely undervalued (Earnings to price ratio only 5.47 despite the company still having solid market share for operating systems & handheld devices as well as a growing list of subscribers (earnings may be lower but they have literally reached nil at Nokia and fell 42% for google between the last two quarters).
-Nordstrom (designer apparel) remains solid in terms of same store sales/growth, an indication that high end consumers are still shopping (in contrast with the low end where margins are being sqeezed).
-Don't forget about Bombardier - The producer of light rail/subway cars and most importantly small and large jets (most popular are the challenger and global families (combined produced 50 in the first half of 2011) but the aerospace division is most known for its Learjets (sold 19 last six months)). July backlog was $23B up 20% since the end of 2010. The Learjet 85 (in development since 2008) already has 60 orders even though the first ones won't be delivered until 2013. What's most attractive about Bombardier's stock is that even with all the upside to the company (backlog, new jets reaching first flight, strong order in rail cars, increasing market share for business jets, revenue up 18.2% in the quarter ended July 2011, net income up 48.9% qoq) its price to earnings ratio is currently 8.30 (Nov.5,2011) lower than key competitors Boeing (13.03) and Embraer SA (10.84). In the last five months of 2011 88 rail cars are scheduled to be delivered to Bombay's tram system.More on Bombardier

in other news..
Groupon joins the Nasdaq as GRPN exactly 3 years after its founding in November 2008 - The IPO was $700M the highest for a web based company since Google's 2004 $1.7B ipo. During the day it increased the number of shares by 1/6th (5M) with each priced at $20. Over the trading session shares rose by about 30% and by the end of the trading day Groupon was valued at $12.8 billion or 2.27 times (113%) more than what Google tried to buy it for in December 2010.

October jobs numbers: The United States created 80,000 jobs bringing the unemployment rate down to 9.0% from 9.1%. Canada lost 54,000 jobs (CDN dollar down about one cent versus the greenback on the day on which the report was released/2.4% loss over the week). Also affecting Canadian metrics: Insurance company Sun Life reported a quarterly loss ($621M/$1.07 per share) for the first time since 2009, on Wednesday November 2, 2011. Manulife disappointing results continue (loss of $2.4B). All of the 54,000 jobs lost in Canada are full time jobs, it pushed the unemployment rate up to 7.3% from 7.1%. Prior to October, 291,000 jobs were created over the last year in Canda. Labour numbers for Canada here

South Korea's tourism industry is thriving, the number of tourists visiting the country is up 47% in just the last five years. That compares to the 10% increase experienced by China. Most of South Korea's tourists come from China.

August 8, 2011: Stocks Fall Hard, Dow Records Its Second Largest Loss Since 2008, In Just Two Days; Credit Swap Prices Rise By Record Amount (insurance, banks)

On Friday, August 5, 2011 the Dow Jones recorded its largest single day loss since the 2008 recessionary period, just following that the S&P downgraded its credit rating to AA+ from AAA (even though other debt-laden countries such as France were allowed to keep their AAA rating) and another record breaking day ensued on Monday, August 8 when the Dow fell twice as much, 635 points (5.55%). All three American indices fell by a significant amount (S&P 500 6.66%, Nasdaq 6.90%), that compares to drops of 3.77% in Shanghai, 2.18% in Japan, 2.17% in Hong Kong, 3.39% in the UK and 4.04% in Toronto.

Investor confidence is also at a low point evidenced by the rising popularity of Credit Default Swaps (CDS, if a government default occurs, holders of the bond are able to exchange it with the seller of the CDS for its face value less value of defaulted debt, if there's no default, the seller earns an annual rate of interest, 1bp = 1 basis point = $1000 annually on contract protecting $10 million worth of debt). Overall, the average credit swap for the 6 biggest banks by assets was 32.3% higher to 210.9 bp (highest since May 2009). Bank of America default swaps rose 42.2% (to 295 bp) at the same time AIG was suing it for $10 billion in losses claimed on mortgage bond investments, Morgan Stanley swaps up 40.1% to 280.1. Swaps on the biggest insurers was up to its highest level since July 2010. (SFGate: Bank of America Leads Surge in Credit Swaps on Downgrade Concern) There was concern also that S&P might lower its ratings of major US banks but it shot down that rumour saying that none of the banks have a higher rating than the AA+ US rating. Though risky, on the year, bonds have had the second highest rate of return second only to gold (price of gold up 43.93% or $527.70 (August 9, 2010 - August 9, 2011).

The market volatility, inflation and overall economic tightening are errily reminiscent of the 2008 recession, the big problem now though is that the US government has used up most of its arsenal (quantitative easing, stimulus) leaving it highly vulnerable. Grmike's advice: Don't take cheap energy for granted! It's the best remedy for an economy on life support. Per kWh of energy production: coal 4 cents, natural gas 9 cents, renewables 23 cents.

As big as the US news was, the potential for a financial armageddon came from Europe where the world's 8th and 12th largest economies (Italy and Spain) are also facing possible defaults down the road as high borrowing rates make it harder to borrow and borrowing is something the countries cannot do without (interest on debt is already very high). The European Central Bank (ECB) risked its own downgrade by buying up Italian and Spanish bonds in a bid to lower interest rates enough to keep those economies afloat. The fix is short term only, it doesn't change the long term outlook for either economy but does have long term negative ramifications for the European Central Bank which has now committed itself to buying €2.5 billion worth of Spanish and Italian bonds, daily; That's a significant increase from the €80 billion worth of debt in total that the ECB invested in Greece, Ireland and Portugal. The move lowered Italy 10 year bond yields (interest rate) by 0.7 to 5.3% and Spain bond yields by 0.9 to 5.14%. The European Reserve Fund has put together a $1.5 trillion rescue package for Italy and Spain, France which is in its own fiscal quagmire will be responsible for a couple hundred billion of that. Can the euro withstand the European debt crisis? Will the bond between EU countries become stronger or weaker? What is an appropriate level of debt? those are just a few of the many questions that have investors frustrated.On August 11, 2011 Italy and France joined Greece, South Korea and a growing list of other countries in banning short selling (borrowing stocks/securities/assets from a broker, selling them to another group with the intent of returning them to the broker some time later) after it was rumoured that short sellers were trying to exploit a French downgrade. A Europe-wide ban is unlikely given the Europe's lack of authority to impose it.

Some other things to take note of

Italy is home to the third largest bond market in the world (valued at about US$ 2 trillion) meaning a bond crisis would have an even more devastating effect on the country. Italy is also the world's 7th leading export nation (US$ 458 billion in 2010).

French banks hold a lot of France's debt, which credit agencies are beginning to take a closer look at. Holding French debt is getting more expensive and that is taking a toll on them, on August 10, 2011 Societe Generale lost around 14% of its market value (down to $24.11 billion), Credit Agricole 11.8% (to $14.59 billion), BNP Paribas 11% (down to $68.12 billion); In Italy, Intesa Sanpaolo lost 15.4% (to $29.45 billion); In Spain, Banco Santander 9.48% (to $70.14 billion) and Banco Bilbao 10.42% ($37.55 billion). BNP Paribas Credit Agricole and Societe Generale rank 2nd, 10th and 18th among all companies in terms of assets ($2.7 trillion, $2.2 trillion and $1.5 trillion (Forbes: March 2011 The Global 2000 List) but their combined market value has fallen to $74 billion about the same as the Royal Bank of Canada (August 10, 2011 at the close of the market) making them severely undervalued (considering Societe Generale earned about the same amount of net income as Royal Bank of Canada ($5.3 versus $5.6 billion), had more than twice as many assets but only half the market capitalization. Further complicating things for France is the 0% 2nd quarter gdp growth announced on August 12, 2011, which follows 0.9% growth in the first three months (business stocks increased which didn't happen in the second quarter, consumer spending ended with the 2010 fiscal year). Only if France's gdp grows by at least 2% in 2011, will it be able to lower deficit to 5.7% of gdp which is important since that could determine whether credit rating agencies downgrade the country's debt.

The Canadian dollar was the only major currency to lose ground against the greenback (August 8, 2011). Possible reasons for that include 0.78% drop in the price of oil (down to US$ 80.45 or about 20% off what it was a couple months ago); even more concerning for Canada is that heavier oil (crude) was down 5.15% to $103.74 a barrel, government policies designed to keep the exchange rate from being too high as to encourage exports (60% of exports go to the USA) and Canada having one of the lowest bank rate/interest rates in the world (was as much as 4X lower than Australian rates). Gains by Canada's gold companies have helped to buffer against losses in other sectors (on August 10th, gains by Canada's gold miners pared losses suffered by oil and technology companies). When oil companies begin to release their second quarter results (Crescent Point Energy, Canada's 12th biggest oil company with $11B in market cap, experienced 158% increase in 2011 2Q earnings, up to C$184.9M or 59% of revenue compared to a loss of C$102M in the previous qtr), they should begin to prop up Toronto's Stock Exchange.
Of concern in Canada is a widening trade deficit; in June it was up to $1.6 billion or $5.2 billion with countries other than the United States making it even harder for the country to lessen its reliance on trade with the USA (in the USA, the trade deficit was $53.1 billion in June, the highest since October 2008). For Canada, both imports and exports fell but exports fell by a wider margin.