A rise in oil shipments by rail out of Western Canada to 120,000 barrels per day from 70,000 bpd in fall 2011 may be short-lived said a research note by Calgary-based investment bank Peters & Co.
It said the economic justification underpinning the increase could start to fade over the next two years as new pipelines start operations to the U.S. Gulf Coast and Eastern Canada.
The report said the use of rail to transport crude from Western Canada will have a “longer term function” of serving refineries in Eastern Canada that are not currently connected by pipelines to producing fields.
“But the economics will become marginalized for the majority of volumes when new pipeline capacity comes into service,” Peters said.
The report said the use of rail currently represents about 4 percent of Western Canada’s output of 3.4 million barrels per day, roughly equally divided between light and heavy crude, adding that level is expected to reach 200,000 bpd by the end of 2013, or 6 percent of output.
Pipeline capacity expected to growIn comparison, Peters said North Dakota has 700,000 bpd of rail capacity and expects to add 180,000 bpd this year, adding that the state moved about 435,000 bpd in October.
It said the state’s pipeline capacity is anticipated to grow to 660,000 bpd in 2013 from the current 465,000 bpd, while production will increase to 1 million bpd from 800,000 bpd.
Peters argues that rail shipping makes sense when West Texas Intermediate is fetching $20 per barrel less than Brent priced crude, and when Western Canada Select is about $15 under WTI.
It estimates shipping by rail costs $15-$20 per barrel, but notes that the higher prices paid by refineries returns about $3-$10 per barrel more to producers than they collect from using pipelines.
Peters listed Western Canada’s top rail shippers as Crescent Point Energy (16,000 bpd and forecast to reach 50,000 bpd this year), Baytex Energy (15,000 bpd) and Connacher Oil and Gas (10,000 bpd). Oil sands giant Suncor Energy is targeting 20,000-25,000 bpd by mid-2013.