MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, FEBRUARY 18, 1998 (3)
FEATURE STORY
Husky To Take Over Saskatchewan Upgrader
Province Selling Stake In Lloydminster
The Globe & Mail
Saskatchewan Premier Roy Romanow will announce today that Calgary-based Husky Oil Ltd. will become the sole owner of the $1.6-billion Lloydminster heavy oil upgrader, which is currently equally owned by Husky and the NDP government.
Mr. Romanow will appear this morning at a news conference in Saskatoon with Husky chief executive officer John Lau to reveal that the Saskatchewan government is selling its 50-per-cent stake to Husky, government sources said yesterday.
The upgrader, which transforms molasses-like heavy oil into synthetic light crude, is one of numerous Husky properties in the Lloydminster region, which straddles the Alberta-Saskatchewan border.
Dwain Lingenfelter, Saskatchewan's cabinet minister in charge of Crown Investments Corp., is also scheduled to take part in today's announcement.
Husky, controlled by Hong Kong billionaire Li Ka-shing, has switched into expansion mode after staging a financial turnaround across its various holdings, including the upgrader.
Progressive Conservative governments in Ottawa, Alberta and Saskatchewan announced the Lloydminster plant's construction with Husky shortly before the 1988 federal election.
Ottawa and Alberta walked away from the controversial upgrader in 1994.
Prime Minister Jean Chr‚tien's Liberal government inherited the project and went on to write off $516-million of Ottawa's $558-million investment.
Alberta took a hit of $391-million on its $423-million of project funding, leaving it, like Ottawa, with about 8 cents on the dollar.
However, Saskatchewan decided to stick with the upgrader for at least a few years and valued the megaproject on its books at $204-million, or more than 60 per cent of its $333-million investment.
One NDP government source in Regina said the Saskatchewan government will be receiving considerably more than book value for its 50-per-cent stake.
The Romanow administration began studying the advantages and disadvantages of selling its stake in the upgrader a year ago.
A widespread provincial program of fiscal restraint had prompted the Romanow government to take steps to unload its interest in the megaproject.
Opened in late 1992, the upgrader cost $1.6-billion to build as it soaked up more than $1-billion in subsidies from three governments.
But the project began turning things around in 1996, when it posted an estimated $16-million profit.
Profit last year and in recent months will be much larger than before as heavy oil prices have fallen about 45 per cent in the past four months, industry observers have said.
The move by privately owned Husky to take over the Lloydminster plant is part of the company's ambitious plans to boost its Canadian presence.
Husky is controlled by Hutchison Whampoa Ltd. and the Li family. Hutchison Whampoa, a Hong Kong-based publicly traded company whose major shareholder is the Li family, owns 49 per cent of Husky.
Mr. Li -- one of Hong Kong's most powerful businessmen -- and his family own another 46 per cent of Husky, while Canadian Imperial Bank of Commerce holds a 5-per-cent stake.
FEATURE STORY
Oil Industry Defends Its Retail Pricing
The Financial Post
Consumers will pay more for gasoline if governments impose pricing laws, the Canadian Petroleum Products Institute said yesterday.
The group said "political initiatives" that could lead to regulated retail prices are being looked at in Quebec, New Brunswick and at the federal level. The moves are in response to recurring complaints about price gouging and big companies "conspiring" to drive smaller retailers out of business.
"An open, fair, competitive market works in the best interest of the consumer," said Brendan Hawley, vice-president of public affairs for the group, which represents Canada's integrated oil companies and large independent marketers.
A recent study by Calgary-based consultant Michael Ervin said average pump prices have been in a long-term decline. The study, funded by the industry and Ottawa, found prices fell 4› a litre, excluding taxes, between 1986 and 1995, or by 10› a litre in inflation-adjusted dollars.
The average gas station in Toronto pumps more than five million litres a year and needs a margin of 3› a litre, the study found. In smaller markets, gas stations sell fewer than one million litres a year, requiring a margin of 12›.
"Consistently, there is an inverse relationship between the pump price and the outlet volume. The more you sell, the cheaper the gas," Ervin said.
Gasoline retailers are only now earning respectable returns, after years of restructuring that reduced the number of gas stations, refineries and overall costs by $2.5 billion, said Hawley.
Last year, Canada's four integrated oil companies reported record results from refining and marketing because of strong demand. They are also reaping the benefits of expanding revenue from car washes and convenience stores.
"We have taken a lot of cost out of the system. Consumers have benefitted from that," Hawley said.
OIL & GAS REVIEW
NYMEX
Crude Oil
Crude oil futures rose sharply Wednesday, recovering losses made a day earlier on the New York Mercantile Exchange, on market talk Saudi Arabia may propose that it and fellow OPEC countries cut daily output in a move to boost prices that have fallen to four-year lows.
March light sweet crude oil settled up $0.59 to $16.25.
Saudi Arabia's oil minister, Ali bin Irahim al-Naimi, said that country, the largest exporting member of the Organization of Petroleum Exporting Countries, was "deeply worried" about falling oil prices and urged all producers to coordinate efforts to halt the decline. Oil prices have fallen nearly 20 percent, to the lowest since April 1994, since November.
Futures prices rose further on unconfirmed reports the Saudis were considering seeking a cut in OPEC quotas if widespread cheating by other members is reduced. OPEC on Jan. 1 boosted daily output by nearly 10% at a time when many of its members were already cheating by well exceeding their quotas and as Asian nations that had seen growing demand fell deeper into the grips of economic problems.
Natural Gas
Natural gas futures, boosted by strong technical buying, ended up sharply Wednesday in an active session, then on ACCESS traded on either side of unchanged after neutral weekly inventory data.
March jumped 7.2 cents to close at $2.238 per million British thermal units, then on ACCESS traded betweem $2.22 and $2.249 shortly after the AGA report. April settled 7.6 cents higher at $2.283. Other months ended up by 3.2 to 6.5 cents.
"The AGAs were definitely neutral, but there's still no weather ahead, and the year-on-year surplus is bearish," said one East Coast trader, noting stocks were well-above last year.
AGA said Wednesday that U.S. gas stocks fell last week by 93 bcf, about in line with Reuter poll estimates in the 95-100 bcf range. Overall stocks climbed to 298 bcf, or 26 percent, over year-ago levels.
Most agreed today's rally was primarily technical, noting March tested and held support in the $2.15 area three times in two days.
But even those who viewed as bearish the growing stock surplus and mild weather questioned how cash could still be holding 15 cents over index if fundamentals were so negative.
Forecasts still call for mostly above-normal U.S. temperatures into next week, with levels in the Midwest climbing to as much as 25 degrees F above normal for the period. Eastern temperatures should average between normal to 15 degrees F above normal into next week.
Chart traders agreed there was decent March support in the $2.15 area. A close below that level would likely lead to a test of next support in the $2.03 area.
Key resistance was seen at the $2.32-2.35 gap. Above the gap, major selling should emerge at the prominent high of $2.435 and then in the $2.50 area. In the cash Wednesday, Gulf Coast quotes were little changed in the mid-teens. Midcon pipes also held fairly steady in the $2.06-2.11 range. Traders said a big buyer at the Chicago city-gate helped muscle prices there into the low-$2.20s, up several cents on the day. New York was flat on the day in the high-$2.30s.
The NYMEX 12-month Henry Hub strip rose 5.5 cents to $2.409. NYMEX said an estimated 62,934 Hub contracts traded, up sharply from Tuesday's revised tally of 41,147.
CANADA SPOT GAS
Canadian spot natural gas prices remained steady in Alberta on Wednesday as storage withdrawals continued at low volumes amid fears over next year's supply, traders said.
"People are concerned over supply for the November '98 gas year," a Calgary-based marketer said. "Nobody's selling their storage positions -- only about 500 (million cubic feet) a day has come out (of Alberta facilities) over the past few days."
He noted a general concern in Alberta that producers would be hard pressed to pump enough supply to fill 1.1 billion cubic feet a day of new pipeline capacity out of the province coming on stream in November and, at the same time, arrest production declines.
Spot gas at the AECO storage hub in Alberta was discussed at C$1.61/1.63 per gigajoule, up about a cent from Tuesday and down about four cents from last week. March and March-October terms were quoted in the C$1.64/1.67 range, giving storage holders little impetus to sell their positions into the spot market.
Prices in Alberta were remaining strong despite continued warm temperatures in the region.
At the borders, spot gas at the Huntingdon, British Columbia-Sumas, Wash. export point were talked at about US$1.20 per million British thermal units, unchanged from Tuesday and last Wednesday.
In the east, Niagara gas was quoted in the low US$2.30s, about even with Tuesday and down about three cents from last week.
U.S. SPOT GAS
U.S. spot natural gas prices, shrugging off storage concerns and revised forecasts for more mild weather, mostly stayed little changed Wednesday in moderate trade, underpinned by decent gains in NYMEX futures.
"The cash was down early, then chased NYMEX higher," said one Midwest trader.
But with the year-on-year stock surplus again likely to grow after tonight's weekly inventory report and no cold weather on the horizon, few saw much more upside near-term.
Swing gas at Henry Hub, the NYMEX delivery point in Louisiana, was quoted today between $2.15 and $2.22 per mmBtu, with most deals done in the $2.20 area, up one cent on the day and still about 15 cents over index.
Forecasts still call for mostly above-normal U.S. temperatures into next week, with levels in the Midwest climbing to as much as 25 degrees F above normal for the period. Eastern temperatures should average between normal to 15 degrees F above normal into next week.
A Reuters poll showed most expected a weekly AGA stock draw in the 95-100 bcf range when the data are released later today. For the same week last year, stocks declined 147 bcf, meaning a draw today in the expected range would increase the year-on-year surplus to about 280 bcf.
In the Midcontinent, prices held fairly steady in the $2.06-2.11 area, about 15 cents over Feb indices. But a big buyer at the Chicago city-gate helped muscle prices there into the low-$2.20s, up several cents on the day.
South Texas gas, helped by firmer western prices, firmed a penny to $2.06-2.11. West Texas gas on El Paso Permian gained four or five cents to the $2.05 area.
In the East, New York city gate prices were unchanged in the high-$2.30s, while Appalachian prices on Columbia eased slightly but were still in the mid-to-high $2.20s.
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