Crude-by-rail ex­ports jump, nar­row­ing Cana­dian oil dis­counts

National Post (Latest Edition) - - FINANCIAL POST - Dan Heal­ing

CAL­GARY •Rail­way­ex­ports of crude oil from Western Canada are start­ing to in­crease, a wel­come sign for pro­duc­ers who were forced to ac­cept big­ger price dis­counts and, in some cases, cur­tail pro­duc­tion, as ex­port pipe­lines filled to near ca­pac­ity ear­lier this year.

Crude-by-rail ex­ports to the United States jumped to a three-year high in March of just over 170,000 bar­rels per day, the high­est since De­cem­ber 2014 and an in­crease from 134,000 bpd in Fe­bru­ary, the Na­tional En­ergy Board re­ported.

Send­ing oil by rail is gen­er­ally more ex­pen­sive than by pipe­line but is con­sid­ered a vi­tal op­tion to get Cana­dian oil to U.S. re­finer­ies as de­lays con­tinue to plague planned new ex­port pipe­lines.

“We do think (rail ship­ments) will grad­u­ally build,” said Kevin Birn, vice-pres­i­dent of the North Amer­i­can crude oil mar­kets for IHS Markit. “Go­ing into the fall, we ex­pect the pres­sure to build on the sys­tem and you should have a greater uptick in crude-by-rail.”

Mar­ket ac­cess con­straints due to full oil ex­port pipe­lines have been blamed for vo­latil­ity in dis­counts paid for bench­mark Western Cana­dian Se­lect, a blend of oil­sands bi­tu­men and lighter oil. WCS nor­mally sells for US$14 to $16 per bar­rel less than New York-traded West Texas In­ter­me­di­ate — due to qual­ity dif­fer­ences and transport costs — but that dif­fer­ence in price widened to as much as $30 ear­lier this year and av­er­aged about US$23 per bar­rel in March.

The dis­count has nar­rowed re­cently be­cause sev­eral big pro­duc­ers, in­clud­ing Sun­cor En­ergy Inc., re­duced out­put while per­form­ing planned main­te­nance, Birn said.

Mean­while, de­mand fell as re­finer­ies in the U.S. and Canada un­der­went their usual spring main­te­nance shut­downs to pre­pare for peak driv­ing sea­son, he added.

Cana­dian Pa­cific and Cana­dian Na­tional rail­ways have been slow to de­vote more re­sources to pick­ing up oil tankers as they dealt with a back­log of Cana­dian grain and se­vere weather that ham­pered oper­a­tions this past win­ter.

CN Rail ex­pects to de­liver more crude in the sec­ond half of the year as ca­pac­ity be­comes avail­able, said spokesman Pa­trick Wal­dron on Thursday, adding the com­pany has been ask­ing for vol­ume com­mit­ments and 12- to 24-month con­tracts from ship­pers.

He pointed out the rail­way has a $3.4-bil­lion cap­i­tal pro­gram this year to ex­pand ca­pac­ity through track, sid­ing and yard im­prove­ments, par­tic­u­larly in Western Canada. He said the first of 60 new lo­co­mo­tives CN ex­pects to buy this year is to be de­liv­ered this month.

The rail­ways fear the crude-by-rail busi­ness will evap­o­rate as soon as pipe­lines are built be­cause pipe­line tolls are gen­er­ally cheaper, said rail­road an­a­lyst Daniel Sher­man of Ed­ward Jones.

They there­fore want longterm take-or-pay con­tracts, agree­ments that the ship­per will sup­ply the tanker cars and at­trac­tive prices, he said.

“At some point they’re go­ing to get those three stick­ing points re­solved with the peo­ple that want to ship and they’re go­ing to agree on a price and we’re go­ing to see more ship­ments,” he said.

Cal­gary-based Al­tex En­ergy is load­ing about 45,000 bpd these days on rail­cars at its ter­mi­nals in Al­berta and Saskatchewan, up from 35,000 bpd in March, and ex­pec­ta­tions are that will con­tinue to grow as more lo­co­mo­tives are avail­able, said CEO John Za­hary on Thursday.

In the first quar­ter of 2018, about 75 per cent of Cana­dian rail ex­ports were des­tined for the U.S. East Coast and Gulf Coast, the NEB said.

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