Oil production bump could force crude-by-rail surge

Canadian pipelines will CALGARY 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 Morgan Stanley shows Canadian crude oil production has been “more robust than the market expects” and the still-growing supplies will “exceed pipeline takeaway 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 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.

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.