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Rail to the rescue; Alberta premier
urges more tanker car purchases
Gary Park for Petroleum News
Alberta Premier Rachel Notley is calling for an “extraordinary intervention” by the Canadian government to purchase new locomotives and at least 200 tanker cars to get stranded heavy crude to port in Vancouver for shipment to Asia.
She told reporters that “tens of millions of dollars extra are being pulled out of the Canadian economy because we can’t get our act together to get our product to market,” referring to the freeze in new pipeline construction.
Notley said rail is one means of tackling the punishing differential between the price Canada receives for its oil in North America and the product’s trading value on the global market.
That spread has recently climbed as high as US$46 a barrel and is heading for US$50 compared with the historic discount of US$10.
Plan submitted The Notley administration has opened the door to negotiations by submitting a plan to the federal government that lays out the specific costs and options of overcoming Alberta’s stranded oil problem.
Tim McMillan, president of the Canadian Association of Petroleum Producers, said the Canadian government has stymied private-sector investment in pipelines, including the Northern Gateway project that could have solved the bottleneck, it “needs to help correct some of the distortions it has created.”
Even at a US$30 differential, the 3.5 million barrels per day of total Western Canadian oil output is costing producers about C$100 million in daily revenues, said GMP FirstEnergy analyst Michael Dunn.
However, not all of the 1.8 million bpd of heavy Canadian crude that moved on Enbridge’s mainline to the U.S. and Eastern Canada is subject to the record-setting discount. Some of those volumes are shipped on firm, committed contracts, fetching prices closer to the West Texas Intermediate benchmark.
Scotiabank commodity economist Rory Johnston said, “there are layered discounts throughout the entire chain,” adding he was not sure how much of the barrels are subject to the large discounts.
Kevin Birn, vice president of North American crude oil markets at IHS Markit, said that at current price differentials even oil-by-truck could be an economic choice for some companies.
Pressure for answers But the situation is putting pressure on all players to find answers, with discussions between Western Canadian producers, U.S. refineries and Enbridge to change the way the pipeline company operates its mainline pipe in 2020, including a possible switch from the established nomination system when producers bid for pipeline capacity to one that runs on long-term contracts.
Notley said that regardless of “the ideas out there” rail offers the most immediate answer as pressure builds on storage.
“We need to get more tanker cars on to rail. That’s the bottom line,” she said.
A spokeswoman for Notley said “we are suggesting that a (federal government) investment in two unit trains a day would help alleviate the pressure.”
A unit train usually contains 100 tanker cars, which can deliver about 65,000 barrels - not enough to keep pace with Scotiabank forecasts that crude-by-rail volumes will rise 50 percent by the end of 2018 to 300,000 bpd and that energy consultant Greg Stringham said could reach 450,000 bpd in 2019.
Underscoring the urgency, Stringham said it usually takes about a year for railroads to order new locomotives, at up to C$400 million each, but the railroads show little desire to spend millions of dollars on short-term capital that would take years to repay, especially if new pipelines are introduced during the working life of new locomotives.
Canadian Pacific Railway Chief Executive Officer Keith Creel told a conference call in mid-October that “pipelines will come - it’s not a matter of if, it’s when.”
- GARY PARK
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