A joint-venture by the midstream players Keyera and Kinder Morgan Energy Partners (KMEP) has placed a solid bet on further growth in Canada’s crude-by-rail activities.
They have announced plans to build a 40,000 barrels per day rail loading terminal in Edmonton to ship crude to “refineries anywhere in North America” and are prepared to expand capacity to 125,000 bpd.
The Alberta Crude Terminal will be operated by Keyera and served by Canada’s two big railways, Canadian Pacific and Canadian National.
Keyera will pay for C$65 million of the initial costs, with Kinder Morgan covering C$433 million.
Assuming regulatory approvals, the facility is scheduled for commissioning in the second quarter of 2014.
Keyera said the terminal will “help address some of the crude oil delivery constraints currently being experienced by the Alberta energy sector,” while KMEP, whose parent company is planning to triple capacity on its Trans Mountain crude pipeline to 890,000 bpd, said the project will help grow its crude-by-rail terminal network.
A spokeswoman for Keyera said the company is counting on continuing demand for rail to access markets which are not available or economic for pipelines.
“Rail is also good at giving shippers the flexibility of redirecting pipelines,” she said, noting that producers have signed on with rail for five-to-seven-year leases, meaning that some pipelines in the U.S. will not go ahead.
The partners said talks to gauge customer support for the expansion phase of the terminal, including a diluents recovery unit, will start soon.
Growing storage demand
The plan lends weight to a report by investment bank Tudor, Pickering, Holt & Co. that Western Canadian crude-by-rail volumes should ramp up and is accompanied by a growing demand for storage capacity in Alberta to keep pace with growing bitumen production, coupled with increased volumes of crude moving by rail.
“Demand will slow down eventually, but we don’t see any signs of that happening in the near-term,” said David Smith, president and chief operating officer of Keyera.
As upgraded crude goes directly into a pipeline, not a lot of storage is required except at the big terminals in Edmonton and Hardisty, where Kinder Morgan and Enbridge use storage capacity for staging, he said.
But, in the case of bitumen, storage is needed for condensate which is blended with bitumen to facilitate its flow through pipelines, he said.
“Then layer on top of that the increased use of rail. Because rail cars do not provide a continuous flow like a pipeline, storage facilities are needed to facilitate the loading and offloading of crude,” Smith noted.
Gibson Energy, a long-term crude storage player at Hardisty, recently announced an agreement with Statoil Canada to construct a 300,000-barrel storage tank at its Edmonton terminal, along with connection infrastructure to multiple major pipelines in the Edmonton area and a new rail loading rack.
Gibson already operates 3.7 million barrels of storage at Hardisty, has customer support for three 400,000-barrel tanks which will come into service by late 2014 and a 500,000-barrel tank due for completion in early 2015.
The company is also involved in “positive” discussions with several customers on a further build out at Edmonton and Hardisty.
TransCanada is also entering the storage field, with plans to provide capacity of 1.9 million barrels, with four tanks each holding 350,000 barrels, that are due in service in the second half of 2015, and two tanks with maximum capacity of 250,000 barrels each.
Rail now, pipelines later
Peter Howard, chief executive officer of the Canadian Energy Research Institute, said the construction of large new storage facilities will not result in Alberta stockpiling crude, but will give producers the chance to invest in storage space to load crude on to rail cars for now and pipelines later on.
Tudor Pickering Holt said Western Canada “is the one area” where rail volumes should grow even as crude price spreads tighten, partly because of continued delays in bringing new pipeline capacity online.
Cowen Securities senior analyst Sam Margolin said rail should remain competitive with pipelines because the need for diluent is eliminated when heavy grade is transported by heated rail cars.
He estimated that Canadian bitumen shipped by pipeline involves a mix of 70 percent crude and 30 percent diluents.
Canadian National said the netbacks for crude-by-rail shippers on its network are more tied to the cost of Canadian benchmark Western Canadian Select.
The Tudor Pickering Holt note said that when the Brent/West Texas Intermediate spread is tight “rail is the clear loser,” estimating that rail volumes out of the North Dakota Bakken are currently down about 40,000 bpd despite rising production in the region.
But the analysts said previously they believe Bakken rail economics will become more viable in the second half of 2013 with “imports/inventories continuing to pressure WTI.”
