Crude by rail shows signs of life after losing steam in first half
Even Canadian crude oil producers who have entered the railway terminal business wish they didn’t have to load their barrels on trains.
“If I was just a rail player, I would hope the [the discounts] stay wide,” said Bob Pease, executive vicepresident, corporate strategy and president, downstream at Cenovus Energy Inc. “But as a producer I hope they are as narrow as they can be and I don’t move a lot by rail.”
Interesting from a company that just bought a rail terminal, but such are the travails of the western Canadian oil transportation business that rail serves as an insurance policy against pipeline bottlenecks and wide discounts between Canadian and U.S. oil benchmark.
On Monday, the Calgary-based Cenovus completed its $75-million purchase of Canexus Corp.’s Bruderheim Energy Terminal, giving it ready access to 70,000bpd rail capacity. Canexus had sunk $360-million on the project northeast of Edmonton, compelling at least one analyst to call it a “distressed sale.”
“We love pipeline deliveries,” Pease said. “We think pipeline growth is essential, but we also recognize that there could be periods of time when pipeline capacity is not efficient. That was the main motivation [for the terminal deal]. But we also see that rail can stand on its own, even when there is sufficient pipeline capacity.”
The oil-by-rail phenomenon has emerged over the past few years as pipelines clogged up in Western Canada and new projects began stalling. As discounts between Western Canada Select and West Texas Intermediate rose as high as $20-25 per barrel, it made economic sense for companies to load barrels on rail and ship to, say, the Gulf Coast for around $12 per barrel and still turn a profit. During this time, Western Canada’s rail capacity has shot up to 776,000 bpd and more terminals are being planned.
But rail economic started derailing as the oil differentials narrowed considerably to around $11 per barrel on average in the first half of 2015.
Canadian rail shipments of oil also fell in tandem to 83,000 bpd in the second quarter, half of its peak in the third quarter of 2014, and considerably lower than the 250,00-bpd estimated by the industry for this year.
Canadian Pacific Railway Ltd. saw its crude carloads drop 24 per cent in the second quarter, while Canadian National Railway Co. witnessed a 27 per cent decline compared to the same period last year.
“Industry-wide, crude-by-rail economics were challenged by narrowing crude spreads and by improved pipeline supply/demand balance,” CN spokesman Mark Hallman said in an email.
Indeed, the start of Enbridge Inc.’s Illinois-to-Oklahoma Flanagan South pipeline, and Enterprise Products Partners’ Oklahoma-to-Texas Seaway conduit, that opened up another one-million bpd of pipeline capacity, cooled producers’ interest in trains. Enbridge’s Alberta Clipper expansion of 100,000 bpd was also seen as a direct hit to rail.
But as Flanagan and another pipeline, Spearhead, went out of service in August, rail began making a comeback, with CP’s latest data showing weekly crude carloads exceeding 2,000 units in the last two weeks of August — the first time this year since January.
“When pipeline outages happen, everybody turns to their friendly neighbourhood railway man,” said John Zahary, president of Altex Energy, who runs five rail terminal facilities in Western Canada with a combined capacity of 100,000 bpd.
Amid oil volatility, WCS discounts have widened to around US$15.6 per barrel over the past six weeks, allowing companies to jump back on to rail.
“We have started to see flows pick up again,” said Jeffrey Kerr, senior oil editor at Genscape, which tracks oil movements. “The new Canadian and U.S. rail regulations went into effect in April, and it took the industry a little bit of time to rationalize.”