Railroads put squeeze on shippers

Gary Park

for Petroleum News

Canadian National and Canadian Pacific, Canada’s two largest railroads, are requiring oil shippers to sign long-term volume commitments of 12 to 24 months to secure space on their systems to bypass pipelines and access domestic and United States markets.

Ghislain Houle, chief finance officer with CN Rail, told an investors’ conference in California, that his company is “locking in customers at very favorable rates and we’re doing this prudently as we bring on capacity,” he said, adding “there’s more demand than what we’re providing today.”

The company is investing C$3.4 billion this year on expanding capacity through track, siding and yard improvements in Western Canada and expects to acquire 60 new locomotives this year.

Daniel Sherman, a railroad analyst with Edward Jones, said that because railways fear the crude-by-rail business will shrink as soon as pipelines are built they insist on long-term, take-or-pay contracts in return for an assurance that the shipper will supply tank cars and attractive prices.

By most estimates, pipeline tolls average about C$5 per barrel, compared with C$12 by rail.

Canada’s National Energy Board said crude-by-rail exports to the U.S. jumped to a three-year high in March of just over 170,000 barrels per day, the highest since December 2014, and added another 34,000 bpd in June, reinforcing forecasts that volumes will top 200,000 bpd before the end of 2018.

Energy consultant Greg Stringham said that total could even reach 300,000 bpd over the next four months.

“Pipelines are in the future, but rail is something that can accelerate relatively quickly,” he said.

Kent Fellows, with the University of Calgary’s School of Public Policy, said railroads are working to build shipping volumes by purchasing more locomotives.

“Going back over the last decade, you’re going from pretty minimal levels to something that is now a fairly significant chunk of total car loadings,” he said.

Fellows said that only the rail industry is in position to take up the transportation slack if oil production in Alberta meets projections.

- GARY PARK