For the last three years, Canada has lagged the United States in using its rail system to haul crude oil, hindered by a lack of loading terminals and a shortage of specially built rail cars that reheat viscous oil sands crude.
Now it?s on the brink of catching up. Over the next 12 months, producers like Cenovus Energy Inc and logistics firms like Gibson Energy Inc will load up mile-long dedicated trains with ultra-heavy bitumen oil and move them thousands of miles in heated and coiled rail cars that eliminate the need to dilute the crude for pipeline shipments.
Yet they are opening up a new phase in the oil-by-rail boom at a moment of deepening uncertainty. An oil-train derailment that killed 50 people in Quebec has cast a shadow over the controversial practice and could raise new hurdles.
For the moment, the handful of new projects to potentially quadruple the amount of oil sands crude shipped by rail are moving ahead. Exports could soon rival U.S. shale oil rail shipments, currently three times greater than Canada?s.
James Cairns, vice president of petroleum and chemicals at Canadian National Railway Co, said in Calgary this week that companies were moving at ?breakneck speed? to overcome nationwide shortages of both infrastructure and rolling stock.
?In my 26 years in the rail business I have never seen this much massive investment in CN lines by our customers to get their products onto our railways,? Cairns said. CN, the nation?s largest carrier, expects to more than double last year?s 30,000 carloads of raw bitumen and crude this year.
It is still too early to say how the derailment in the small town of Lac-Megantic will affect the oil-by-rail trend. The runaway 72-car oil train derailed and exploded in the center of the town in the worst North American rail disaster in two decades. The company that operated the train said the sole engineer on duty failed to adequately secure it.
Environmentalists and local groups have already expressed deep concerns about oil trains crisscrossing the continent, mirroring the vigorous campaigns against new pipelines.
Early this year, China-owned oil sands producer Nexen faced objections to a proposed project to move crude by rail to the Port of Prince Rupert on the West Coast.
Mike Hudema, climate and energy campaigner at Greenpeace, says many groups have expressed concerns, ?especially in the wake of Lac-Megantic.? The main worry is an older model tank car that regulators say is flawed. Cars ordered after October 2011, which include most heated cars, are better protected from accidents. Nexen says the project has not advanced for months.
Still, oil executives say the Quebec disaster should not slow progress.
?This won?t have an impact,? said Lyle Stevens, senior vice president of North American exploitation at Canadian Natural Resources Ltd, which intends to continue shipping an estimated 15,000 bpd of Canadian crude by rail.
CATCH-UP
Canada is entering a trade that has upended U.S. crude oil markets for three years. As hydraulic fracturing and horizontal drilling boosted Bakken oil output, a shortage of pipeline capacity in North Dakota and significant price discrepancies turned producers and traders toward trains, boosting shipments from zero to more than 500,000 bpd in that period.
Canadian rail loadings have risen more modestly, according to data. Despite discounts of as much as $40 a barrel between Western Canada Select heavy blend and U.S. crude, a lack of logistics and railcars has limited growth. Pipelines, while nearly full, remained a viable, typically cheaper, option.
?We could be seeing a shift in Bakken by rail to Canadian crude by rail?
This year, the Railway Association of Canada expects up to 140,000 carloads of crude to be shipped, equivalent to about 230,000 barrels per day (bpd) in the 600-barrel tank cars that are standard for Canada. In 2009, only 500 cars were loaded.
In the United States, shipments swelled to almost 100,000 cars in the first quarter, some 760,000 bpd based on the 700-barrel cars that are standard for lighter oil shipments, according to American Association of Railroads data.
Canada is poised to catch up. Although Gulf Coast refiners are starting to replace Bakken rail shipments with nearby Texas shale oil, they are eager to buy Canadian heavy crude instead of costlier imports.
?We could be seeing a shift in Bakken by rail to Canadian crude by rail,? said Wood Mackenzie analyst Anna Temple.
Canada exported an average of 46,000 bpd of crude by rail to the United States in 2012, only 2 percent of total crude exports, according to National Energy Board data. But it reached 120,000 bpd in December, and many industry players estimated more than 200,000 bpd by the end of 2013.
As shipments of oil sands from landlocked Alberta to lucrative U.S. markets grow, they may also play into the debate over the contentious northern leg of TransCanada Corp?s Keystone XL pipeline. U.S. President Barack Obama is expected to make a final decision on whether to allow the project this year.
In a preliminary report, the U.S. State Department said rejecting the pipeline would not necessarily slow production since rail shipments would increase. But experts question whether there will be enough rail capacity.
GIVE A HOOT, DON?T DILUTE
Compared to the first wave of rail shipments from the Bakken, the new Canada boom is being driven by more complicated and potentially longer-lasting economics: the opportunity for producers to avoid blending bitumen with imported oil.
Raw bitumen straight out of the ground is hard and too viscous to move by pipeline or in a general-purpose railcars unless it is diluted. Current pipeline shipments have to be diluted with 30 percent condensate so they flow easily.
But the heated and coiled tank cars designed to carry bitumen require less or no diluent at all. As a result, more bitumen fills the car, reducing the cost of purchasing diluent, a growing share of which needs to be imported.
Smaller than standard oil tank cars, they are equipped with insulation to keep the bitumen warm during transit. When the car is ready to be unloaded, steam is pumped into special heater coils on the exterior to raise the temperature to around 150 degrees centigrade, allowing the bitumen to be pumped out.
?Rail is not just a stopgap. As producers become more accustomed to using this type of transport and as investments are made, it?s not going to disappear overnight,? said Mark Pinney, manager of markets and transportation at the Canadian Association of Petroleum Producers.
Diluent imports to Canada have risen five-fold since 2007 to 260,000 bpd, according to industry data. The Canadian Energy Research Institute forecasts demand at 670,000 bpd by 2020.
North American tank car makers such as Trinity Industries, Inc are racing to roll out cars to meet demand. An estimated 50,000 tank cars were on back order for crude oil shipping at the end of the first quarter.
Although companies do not provide data on the types of cars they are making, UBS analyst Eric Crawford says 60 percent of the backlog is for insulated cars that can transport bitumen.
Retrofitting some of the existing 300,000 oil tank car fleet is ?not practical due to the costs,? said Dennis Nuss, a spokesman for refiner Phillips 66. Phillips will take delivery of 2,000 larger general purpose railcars this year.
TERMINAL TRAINS
Companies including Gibson Energy and Canexus are building or expanding four terminals in western Canada that can load so-called ?unit trains,? with 120 cars carrying 70,000 barrels. These could cut the cost of a Gulf Coast shipment by 20 percent.
?The real bang for our buck is from the unit train and that comes in next year,? says Don Swystun, vice president at Cenovus, which is counting on new terminals that will expand rail shipments five-fold to 30,000 bpd next year.
Gibson, which is signing up customers for a 60,000-bpd terminal in Hardisty, Alberta, estimates using a unit train would cut the cost of moving crude to the Gulf Coast to $14-$17 per barrel, compared with $17-$21 per barrel on a manifest train hauling mixed cargo.
Shippers are confident that rail trade will be profitable in the long term, even though the discount of benchmark U.S. crude prices to European Brent has slumped this month to a 2-1/2 year low, a disincentive for U.S. refiners to buy North American crude. Last week the number of rail cars loaded with oil in the United States and Canada fell to the lowest in six months.
U.S. refiners are also investing. Tesoro Corp is ordering an undisclosed number of the cars for its rail-to-barge project in Vancouver, Washington. PBF Energy has insulated cars on order to increase shipments to its Delaware refinery.
?Every time we bring in another barrel of Canadian heavy crude, we make enormous progress with regard to reducing our raw material cost,? PBF Chairman Tom O?Malley recently told analysts. The refiner aims to triple deliveries to 80,000 bpd by year?s end with new rail cars. ?That is the game.?
? Thomson Reuters 2013
Source: http://feedproxy.google.com/~r/FP_TopStories/~3/Rj4JlVZTXyc/
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