Oil-by-rail surge expected as output in Canada climbs

CALGARY • Canadian pipelines will fill up earlier than expected and, according to a new report, lead to a surge in oil-by-rail shipments as early as this year.

A report from Wall Street heavyweight Morgan Stanley shows Canadian crude oil production has been “more robust than the market expects” and the still-growing supplies will “exceed pipeline take-away capacity sooner than expected in late 2017.”

“The rails — particularly CN and CP — would be the natural solution to pipeline shortages coming out of Alberta,” Morgan Stanley analyst Benny Wong wrote in the report, referring to Canadian transportation giants Canadian National Railway Co. and Canadian Pacific Railway Ltd.

The report, called “Pipeline Bottlenecks Coming; Time For Crude-by-Rail 2.0?,” forecasts a more than 10-per-cent increase in crude-by-rail car movements in 2017 over 2016, rising to 50 per cent year-over-year growth in 2018 and 30 per cent in 2019, when new pipelines begin operating.

Wong said that total Canadian crude oil production would grow by 750,000 barrels per day by 2020, which is more bullish than an average of other analysts’ predictions of 660,000 bpd of production growth.

The bank expects Canadian crude oil production will grow from 3.9 million bpd to average 4.7 million bpd in 2020, thanks to ongoing oilsands expansion projects by Suncor Energy Inc. and Canadian Natural Resources Ltd. and also expected new investments from Cenovus Energy Inc.

CNRL, which spent $12.7 billion to buy oilsands assets last week, also has a host of potential new growth projects in mining and thermal projects. Company president Steve Laut said Thursday the company would evaluate restarting construction on the Carmon Creek project, which its previous owner Royal Dutch Shell PLC paused during the oil price collapse.

As a result, Wong said he expects a bottleneck beginning later this year on Enbridge Inc.’s mainline pipeline between Edmonton and Wisconsin, which is the main export pipeline system for Canadian oil, and a coinciding increase in demand for railway cars until new pipelines are built and shipping crude in 2019.

The prediction of oil production exceeding pipeline supply is in line with previous studies, however the estimated volume of new production would require both Enbridge Inc.’s Line 3 replacement project and Kinder Morgan’s Trans Mountain Expansion project.

Both of those projects are expected to be complete in 2019 and would add 960,000 barrels of incremental capacity when operational.

A February report from Calgary-based Canadian Energy Research Institute also forecast a lack of pipeline capacity for domestic oil producers this year, but showed that the Line 3 replacement project would provide sufficient capacity to the market when it comes online in 2021 through 2025.

Wong said the availability of oil-by-rail loading terminals in Western Canada and in the oilsands will help create a price floor for Western Canada Select, a heavy oil blend that trades at a discount to other oil benchmarks, as pipelines are constrained.

“Given the significant investment in logistics and marketing, we believe there is plenty of capacity to avoid a large increase in differentials again,” he wrote. The report shows the discount between WCS and heavy crudes from Central America will widen to US$15 per barrel in 2019, from between US$5 and US$10 per barrel today.