Progress on pipelines could mean less oil will be transported by rail
Big moves by the Canadian and U.S. governments on oil pipelines in recent months are threatening the long-term future of the main alternative: crude shipped by rail.
First the federal government approved both Enbridge’s Line 3 replacement and Kinder Morgan’s Trans Mountain expansion last November.
TransCanada has also reapplied to have its Keystone XL project approved after being invited to do so by U.S. President Donald Trump in one of his first moves as the new U.S. President.
All of the projects still face significant environmental opposition, but if built, the combined extra capacity of nearly 1.8 million barrels a day would provide enough room for all of western Canadian production expected by 2030.
“Down the road, if all those pipelines get built, then crude by rail becomes probably a moot point,” said Dirk Lever, managing director at AltaCorp Capital. “Given a choice, the economics are always better by pipeline.”
The potential swing away from rail comes only a few years after it took off. Canadian Pacific Railway and Canadian National Railway only got into the crude oil shipping game in 2010 as pipeline capacity started to run out in North Dakota’s Bakken region and Alberta’s oilsands.
Crude quickly became a major revenue stream for both railways, with CP going from no reported revenue on crude in 2010 to almost half a billion dollars in 2014, and CN’s petroleum and chemicals revenue jumping by about a billion dollars to $2.35 billion over the same time.
The revenue increases came as crude exports by rail from Canada went from under 10,000 barrels a day in January 2012 to a peak of 179,000 barrels a day by September 2014, just as the oil price started to fall.
But last year saw an average of 89,000 barrels a day of crude-by-rail exports up until November, a 45 per cent drop from the 161,000 barrels a day average of 2014, as continued low oil prices compounded by lost production in the Fort McMurray wildfire bit into shipments.
Both railways have taken a hit from dropping crude shipments, but see at least stability in the market as a whole for the current year.
“Crude certainly was a huge headwind for us in the fourth quarter as it will still be in the first quarter of 2017, and then we can stop talking about it at least in those terms,” said CP chief executive Keith Creel on an analyst call.
The drop in rail exports came despite a significant increase in capacity built to match the expected demand, with Canadian Association of Petroleum Producers (CAPP) estimating Western Canada rail loading capacity stands at about 754,000 barrels a day.
“When everyone got concerned that we were going to run out of pipeline space, every Tom, Dick, and Harry came running up to Canada to build a crude on rail terminal,” said John Zahary, CEO of crude rail operator Altex Energy.
He doubts capacity is nearly as high as CAPP’s estimate, with several announced projects not actually carried through to completion, but he still doesn’t expect to see more built any time soon.
“A lot of guys built them without contracts and they lost their shirt. So I don’t know that in a relatively short period of time that somebody would want to lose their shirt twice,” he said.
The safety of crude-by-rail has also been an issue, especially after the deadly Lac-Megantic train derailment in 2013.
Zahary said the heavy crude produced in Canada is much safer than the light oil produced out of North Dakota’s Bakken oil fields, while safety practices have also improved industry-wide since the disaster.
While the long-term future is in question, rising oil prices and a continued short-term crunch on pipeline capacity means there will continue to be shipment spikes, said Chuck Clowdis, managing director of transportation for IHS Economics.
Already there have been significant swings in shipments, with National Energy Board data showing November had an average of about 172,000 barrels a day of oil exported on rail, up from 43,000 barrels a day last July.
And if the pipelines are delayed past the expected 2019 start date, an IHS report released in January said crude by rail volumes could reach 800,000 barrels a day by 2020.
© 2017 The Canadian Press