Rail sector deals with slowdown

GARY PARK

For Petroleum News

The economics of the crude-by-rail business have lost traction in Canada, with shipments this year falling drastically short of capacity, but some participants don’t rule out a turnaround.

The National Energy Board reports that volumes fell from an average 120,000 barrels per day in the first quarter to 83,000 bpd in the second - a far cry from the 250,000 bpd projected by the rail industry, with more terminals being planned, and last year’s quarterly shipments that ranged from 155,000 bpd-165,000 bpd.

The heaviest blow occurred early this year when Suncor Energy, Canada’s largest oil sands shipper, said the economics of using rail forced it to stop all shipments to the U.S. Gulf Coast.

The state of the terminal business was reflected at the end of August when oil sands producer Cenovus Energy completed the purchase of Canexus Corp.’s Bruderheim Energy Terminal near Edmonton for a mere C$75 million, compared with the C$360 million that Canexus had invested on the 70,000 bpd facility.

Cenovus Executive Vice President Bob Pease said that although his company prefers pipelines, it accepts there are times when pipeline capacity is not sufficient, while there are times when “rail can stand on its own.”

He said Cenovus has already handled about a dozen calls from producers to discuss transporting their crude through the Bruderheim terminal, one of them resulting in a deal with Inter Pipeline to ship up to 100,000 bpd of Cold Lake Blend crude from Alberta.

Pease said another positive for rail is the opportunity to expand facilities at a relatively low cost, along with the flexibility to reach more markets than pipelines.

But the rapid growth of rail in Western Canada at a time when pipelines in the region were operating at capacity has stalled out at a time when moving barrels by rail and barge to the U.S. Gulf Coast is costing about US$12 a barrel and price differentials between Western Canada Select and West Texas Intermediate narrowed to US$11 a barrel.

However, a widening of those discounts to US$15.60 over the past six weeks has allowed some producers to return to rail.

Of Canada’s two big railroads, Canadian National has seen its tanker loads of crude drop by 27 percent over the same time last year and Canadian Pacific has reported a 24 percent decline.

A Canadian National spokesman said crude-by-rail economics have been challenged across the industry “by narrowing crude spreads and improved pipeline supply/demand balance.”

Two major pipeline additions - Enbridge’s Flanagan South from Illinois to Oklahoma and Enterprise Products Partner Oklahoma-to-Texas Seaway conduit - have contributed another 1 million bpd of capacity.

But the importance of rail was demonstrated in the last two weeks of August when Flanagan and Spearhead were forced to shut down for maintenance, boosting Canadian Pacific’s weekly crude carloads by about 1.3 million barrels.

John Zahary, president of Altex Energy, which ships about 100,000 bpd through five terminals in Western Canada, remains upbeat about his industry.

He said that five years ago, before the surge in rail business, only 10 of 50 refineries in the United States were able to process heavy Canadian crude. Now, because of rail, most are able to or have considered modifications to their facilities.