Good morning!
It’s curious that Warren Buffett chose an old-school sector — natural gas — to come out of his M&A hibernation. On Monday, the Oracle of Omaha’s Berkshire Hathaway Inc. bought Dominion Energy Inc.’s natural gas pipeline and storage assets in the United States for US$9.7 billion.
It showed the so-called master of value investing thinks energy is an undervalued sector — and may be it’s a signal for other investors to take another look at the beaten up sector.
It must be noted that Berkshire Hathaway had quit a $9 billion liquefied natural gas project in Quebec in March over concerns about railway blockades and infrastructure challenges.
“That’s the money Buffett was going to spend on the Quebec LNG project. You were happy when he walked away. Dumb. He just invested it elsewhere and Canada is the loser for it,” wrote Norman Levine, managing director at the Portfolio Management Corporation.
Not so fast.
That was about the only good news for the American energy sector that has been rocked by a string of bad news over the past few days.
On Monday, a U.S. District Court for the District of Columbia ruled that the federal permit for the Dakota Access Pipeline — that connects North Dakota’s shale basins to refineries — did not meet the criteria stipulated by the National Environmental Policy Act, and the shortfall is too much to allow the pipeline to continue operating while the Army Corps of Engineers reassesses the environmental impact. That would keep the pipeline offline till 2021.
“Today is a historic day for the Standing Rock Sioux Tribe and the many people who have supported us in the fight against the pipeline,” said Chairman Mike Faith of the Standing Rock Sioux Tribe, which led protests and legal efforts against the project.
Apart from wrecking the prospects of North Dakota shale producers, the pipeline closure would also affect Canadian companies Enerplus Inc. and Crescent Point Energy Inc., among others.
“Outside of North Dakota, we could see an impact to LSB (light sour blend) pricing at Cromer, which would affect revenues of SE Saskatchewan focused producers,” wrote Adam Gill, an analyst at Eight Capital and lead author of a report published this morning. “This is likely to happen if the appeal to keep DAPL and North Dakota producers start to move some volumes north of the border to access the Enbridge system.”
Keystone XL, that troubled pipeline, also suffered a fresh setback Monday when the the U.S. Supreme Court refused to let construction start on the TC Energy Corp.-backed pipeline, rejecting a bid by President Donald Trump’s administration to restart the long-delayed project. The latest hurdle means the pipeline would resume construction in 2021 — or maybe never if Joe Biden gets elected as the new U.S. President.
Meanwhile, in what proved to be the worst a couple of days for North American pipelines in years, Dominion Energy Inc. and its partner Duke Energy Corp. said Sunday they will scrap their US$8 billion Atlantic Coast natural gas pipeline after years of delays and high costs.
The full-blown assault on energy infrastructure means environmental and community activism, that has already stalled Canadian energy development, is finally taking root in the United States.
While DAPL has been a flashpoint before, the latest regulatory setbacks show opposition by communities and environmental groups are going to make life miserable for American oil and gas companies that had largely escaped scrutiny before.
Protests against new energy projects are also becoming increasingly sophisticated and effective, according to a new report. In Canada, a protest and rail shutdown begun by the Wet’suwet’en tribe in British Columbia launched a nationwide movement of students, environmentalists.
Other energy projects are also in danger of being shelved, according to Global Energy Monitor, noting that it’s a combination of organized opposition and bad economics.
“Such opposition threatens to create delays or to cause governmental subsidies to be withheld, toppling projects already weakened due to the recession and pandemic resulting in low gas prices,” GEM said in a new report Monday.
One possible boost for oil and gas prices could present itself if the pandemic recedes and energy consumption returns closer to its normal level — but that may not happen either any time soon.
A new report by Rystad Energy notes that oil demand, which has already fallen from an average of 100 million barrels per day to around an estimated 89.5 million bpd, could slide further if the pandemic persists in the energy-hungry markets of the U.S., the Middle East and Southeast Asia. The new range of risk factors that still lie ahead in 2020 and 2021 would point to more price volatility and downside risk before any “flip” back into a true backwardation happens, the Norwegian energy research firm noted.
“COVID-19 will also re-emerge in other regions in our ‘second wave’ scenario when the flu season starts in the northern hemisphere in September and October,” said Rystad Energy’s senior oil market analyst Artyom Tchen. “If the second wave materializes, global oil demand will recover much more slowly in 2021, landing between 4 million and 5 million bpd lower per month than it would under our current base case, thus dragging the pandemic’s market effect further in time.”