Bullish outlook for rail cap-ex

Gary Park

For Petroleum News

Capital spending on new oil rail terminals in Western Canada will reach about US$1 billion over the next two years, according to a report by Calgary-based investment dealer Peters & Co.

In addition, another US$4 billion-US$5 billion is expected to be spent on new rail cars, the report said, without delving into whether changes to U.S. and Canadian safety standards for the cars following the Quebec derailment could force an extensive phasing out of old rolling stock.

The investment “highlights that capital is and will be deployed to take advantage of inefficiencies in the physical pricing market for crudes, which are positive developments for the longer-term view on Canadian crude pricing,” the report said.

Increase in rail shipments

The firm expects price differentials between Western Canada Select and West Texas Intermediate will narrow from US$24 per barrel this year to US$21 by 2015, but warns that Canadian heavy crude prices will remain sensitive to short-term delays in introducing new shipping options as 250,000 barrels per day of incremental production comes on stream over the next year alone.

The report said delays in modernizing BP’s Whiting refinery or expanding Enbridge’s Line 62 and Line 6A in the U.S. could see a widening of the price gap between WCS and WTI.

Rail capacity out of Western Canada has been forecast to grow from its current 200,000 bpd to 900,000 bpd by the end of 2013.

However, Peters said delays and inefficiencies in ramping up volumes could reduce the year-end goal to 500,000 bpd.

“A key question is whether the pace of growth can continue as rapidly as required,” the report said. “The pace of growth in the short term is being impacted by the ability to access heated rail cars (to carry heavy crudes).”