What a wild ride for markets and it sounds like some major trading profits were made since last night ie. Bloomberg’s reporting of Carl Icahn leaving Trump’s victory party to invest $1 billion. [LINK] . As the momentum shifted to Trump, US equity futures were getting creamed and, around midnight, US S&P futures were halted as they hit market limit down of 5%. By 3am, when it became President-elect Trump, US S&P futures were only down 2.5%, and then 7 hours later, the S&P opened up.
It also means that the time has now passed to keep ignoring Trump and to try to figure out what it means to oil and gas and markets. That is the challenge. There wasn’t the normal level of detail over the past several months. But we can piece together the key energy specifics from the key items: (i) His official “An America First Energy Plan”, which had 7 broad statements on his vision for energy. [LINK] (ii) His May 26 speech to the oil and gas sector on his “An America First Energy Plan”. [LINK] and (iii) His Oct 22 Gettysburg speech “Donald J. Trump Contract With The American Voter”. [LINK]
- Eliminate imports from OPEC or other hostile nations. His energy plan is to “become, and stay, totally independent of any need to import energy from the OPEC cartel or any nations hostile to our interests”. Don’t forget, OPEC includes Venezuela. This could be a huge opportunity for Canada’s heavy oil to replace heavy/medium sour OPEC imports. In Aug, the US imported 10.3 million b/d of total oil and products, which included 3.4 million b/d from OPEC, which included 0.7 million b/d of heavy oil from Venezuela. US imports from Canada were 3.8 million b/d. It is unrealistic for the US to replace OPEC oil imports by domestic growth plus the US doesn’t have any visibility for growth in heavy oil to replace the heavy/medium sour imports, hence a reason for Keystone XL.
- Keystone XL could be approved. A key to reduce OPEC imports will be Canada. His May 26 speech said “I’m going to ask TransCanada to renew its permit application for the Keystone Pipeline”. Note that his press conference Q&A that day added the caveat “I would absolutely approve it, 100%, but I want a better deal”. Keystone XL had a proposed capacity of 830,000 b/d and could clearly replace some US heavy oil imports from OPEC.
- Lift restrictions on shale, oil, gas and clean coal. His Oct 22 speech said, in his first 100 days, “I will lift the restrictions on the production of $50 trillion dollars worth of job producing American energy reserves, include shale, oil, natural gas and clean coal.” His energy plan will “open onshore and offshore leasing on federal lands, eliminate moratorium on coal leasing and open shale energy deposits”. His May 26 speech included “we’re going to revoke policies that impose unwarranted restrictions on new technologies”. Most interpreted his new technologies to include fracking, but fracking restrictions can also be at the state level ie. New York banned fracking. It is clear that Trump looks to maximize the US oil and natural gas production potential. His energy plan is to “encourage the use of natural gas and other American energy resources that will both reduce emissions but also reduce the price of energy and increase our economic output”. It is needed if he wants to replace OPEC imports, but that gap is so large, it is tough to see Canada getting squeezed, especially for heavy crude.
- Cancel Paris Climate Agreement. His May 26 speech said “we’re going to cancel the Paris Climate Agreement”. One of the priorities for Obama to meet Paris targets is to reduce methane emissions from the oil and gas sector. If Trump pulls back on the increasing methane reduction call on the oil and gas sector, it won’t help Canada’s oil and gas as methane reduction is a priority for Trudeau and Notley
- Coal industry to be saved. His May 26 speech said “We’re going to save the coal industry and other industries threatened by Hillary Clinton’s extremist agenda.” The EIA forecasts coal fired generation to reduce by 24% to 28% to 2030 under the current Obama clean power plans. Coal is a base load power and retaining the capacity would reduce capacity growth in natural gas and renewables.
- Spur infrastructure investment. His Oct 22 speech noted his plans to introduce the “American Energy & Infrastructure Act. Leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years. It is revenue neutral.”
- “Cancel every unconstitutional executive action, memorandum and order issued by President Obama”. We went thru all the Obama executive orders [LINK] and logic says that he shouldn’t care about changing most of these. The recent Oct 13, 2016 “Coordinating Efforts to Prepare the Nation for Space Weather Events” is about coordinating agencies for potential solar flares and other space weather events that can harm electricity grids. But there are others that cause regulatory and review encumbrances and removing would tie to his position that “any regulation that is outdated, unnecessary, bad for worker, or contrary to the national interest will be scrapped”.
- Mexico to pay for the “Wall”. In the final days, Trump restated that he will have Mexico pay for his $12 billion wall for Mexico. He was criticized for the cost estimate but moreso for not explaining how he would get Mexico to pay for the wall. No one knows! US natural gas landed via pipelines in Mexico is lower cost than LNG imports. If tariffs get into the equation, a tariff on natural gas exports to Mexico of $0.10/mcf should have no impact on volumes exported and would, by itself, raise ~$150 million per year.
We also want to watch developments on two foreign policy areas that could materially impact the outlook for oil and gas.
- Improving relations with Russia. A key item to watch will be if Trump takes actions to remove the current US sanctions for companies on energy in Russia. This would allow a company like ExxonMobil to move back to develop its Kara Sea 2014 significant oil discovery. This week, OPEC issued its 2016 World Oil Outlook that forecasts flat Russia oil production to 2040. [LINK] Our bigger worry is the mid to long term if more capital goes to develop Russia’s large oil and natural gas potential.
- Iran and the Middle East. Trump has talked about enforcing the Iran nuclear deal precisely so it essentially falls apart on its own. He said “I would police that contract so tough that they don’t have a chance. As bad as the contract is, I will be so tough on that contract”. But what he does with Iran, how big a role he plays in the Middle East, how he deals with the range of hotspots, how his target to eliminate imports from OPEC, and the added dynamic of Russia’s growing relationship with Iran should all add up to more uncertainty and more risk to the Middle East.
Trump will help ensure US drilling runs at max levels. But there can be some big holes to fill in the US energy equation if Trump is sincere about eliminating OPEC imports. It won’t be free, but Canada is extremely well positioned to fill a good portion of the gap.