Death of Keystone XL boon for rail transport
Crude oil exported by train jumped 23 per cent in April, and may continue growing
Keystone was the great hope for opening U.S. markets further to Canadian crude. Now that it’s dead, railways will not only make a comeback, but transport more oil than ever.
The Keystone XL pipeline was set to carry heavy Canadian crude south from Hardisty, Alta.’s oil hub, before being blocked by U.S. President Barack Obama last November, largely on environmental grounds. In a sign of what’s coming, exports by train rose 23 per cent in April, the biggest year-on-year jump since September 2014, according to Canada’s National Energy Board.
That’s just the beginning. Next year, with about a half-dozen new projects and expansions in the oilsands, rail exports could hit a record by the third quarter, said Eric Peterson, research chief at Denver-based ARB Midstream LLC, an oil-transport investor.
That’s good news for USD Group LLC, Imperial Energy Corp. and Cenovus Energy Inc., all of which invested in new rail terminals or plan to expand older ones this year.
“That production has to find an alternative source of take-away and that’s where rail comes in,” said Brad Sanders, chief commercial officer of USD Group, which plans to double capacity at its Hardisty terminal within 12 months to four trains a day, each of which could carry 65,000 barrels. “We expect from this point on that activity to grow.”
The capacity of existing pipelines is four million barrels a day, opening an opportunity for rail carriers. Crude output is expected to rise about 5 per cent to more than four million barrels a day in 2017, according to the Canadian Association of Petroleum Producers. Keystone XL would have augmented pipeline capacity by 830,000 barrels a day, an addition of more than 20 per cent.
“We are going to have to see some pretty significant volumes move by rail,” Peterson of ARB Midstream said. “Every new incremental barrel of production that comes out of Canada will have to go by rail” once pipelines are full, he said.
After two years of declines, rail transport rose to 109,000 barrels a day in April, a number that Peterson says will double by next year and could reach 450,000 by 2018.
Opposition to shipping crude by rail has grown since accidents such as the Lac Mégantic disaster in Quebec, where an unattended freight train carrying Bakken oil derailed and exploded in July 2013, killing 47 and destroying half of the town’s centre. Canadian oil production will fall to an average of 3.82 million barrels a day this year from 3.85 million in 2015, according to a report last month from the producers association. The drop is due in part to the wildfires that shut in more than a million barrels a day of oilsands output in May and declining production of conventional oil from wells.
Next year will be different. New oilsands expansions that began prior to crude’s slide in 2014 are being completed with no new pipelines planned until at least 2019, when Enbridge Inc. is scheduled to boost the capacity of a line running between Edmonton, Alta., and Superior, Wis.
A single train of about 100 cars can carry crude to the refining centre of the U.S. Gulf Coast from Canada for as little as $14 (U.S.) a barrel, down from more than $18 a barrel two years ago, Peterson said.
Transporting heavy crude from Edmonton to Texas on Enbridge’s pipelines costs between $6.99 and $9.12 a barrel depending on volumes and whether the shipper has a long-term commitment to use the lines, according to the company.