Western Canadian Select on the fast track to Padd 3

Author Brett Holmes, Bureau Chief and Market Reporter — Crude and Chris Baltimore, Editor, Petroleum Transportation North America

July Canadian crude rail exports to the US Gulf coast grew even though the spread between Houston and Hardisty wasn’t quite back to the typical $15/bl price.

Canadian crude-by-rail exports grew by 9pc in July despite a shrinking arbitrage to the US Gulf coast. The Canada Energy Regulator reported an average 313,000 b/d was exported by rail in the month — the highest volume since January, when the Alberta government’s curtailment order first went into effect.

Canadian crude oil exports by rail


Month

b/d

Jan-19

325,499

Feb-19

130,564

Mar-19

168,483

Apr-19

236,152

May-19

285,131

Jun-19

286,701

Jul-19

313,283

Source: Canada Energy Regulator

The Energy Information Agency (EIA) says even more was received in July at 366,000 b/d, with more than half of that taken by the PADD 3 region. The US Gulf coast has offered the strongest uplift for Canadian crude, and with insufficient pipeline capacity, rail is the best alternative to reach that market, where trade of WCS Houston continues to grow.

While a spread of $15-20/bl for heavy sour crude between Hardisty, Alberta and Houston, Texas is typically needed to incentivise more crude-by-rail, the roughly $13.50/bl spread during the July trade window has been compelling enough for Canadian producers to increase their takeaway capacity by rail despite the thin margins. Crude-by-rail deals done with larger fixed costs but smaller variable costs could still be economic in this price scenario.

Since pipeline congestion persists despite Alberta’s production limits, Alberta’s government is negotiating with rail operators and shippers to privatise C$3.7bn ($2.8bn) in rail commitments made by the previous provincial government. Those negotiations, which have clouded the economic picture for Canadian railed crude shipments, may conclude in the coming weeks.

Alberta is weighing a plan to offer producers a “one-to-one credit” against curtailments in exchange for moving crude on rails.

“We are making good progress in our discussions with upstream companies about a potential exemption for incremental barrels that are moved by rail, if we can find a satisfactory conclusion to privatising the rail contracts,” Alberta premier Jason Kenney said in a speech to the Calgary Chamber of Commerce on 1 October. Those “special production allowances” could increase Canada’s railed crude shipments by up to 250,000 b/d, Kenney said.

Resolution of the privatisation issue could provide some “upside” to railed crude movements in November and December, Canadian Pacific (CP) executive vice president John Brooks told a CIBC investor conference in Montreal on 25 September.

CP clocked its railed crude shipments at 25,000 carloads in the second quarter and at 27,000-28,000 in the third quarter. The fourth quarter could weigh in at 30,000 carloads and contracts in place have “significant upside to that” if the outstanding issues are resolved, Brooks said.

Many Canadian producers endured negative netbacks in the fourth quarter of 2018, when local crude prices fell to record lows, prompting a more serious look at rail as an alternative to the limited pipeline choices.

Canadian oil sands producer Cenovus expects to nearly triple its own crude-by-rail programme by the end of the year, with its focus still on the US Gulf coast. The oil sands producer shipped 36,000 b/d in the second quarter and has intentions to reach 100,000 b/d over the next six months in a bid to capture the spread between Albertan hubs and in and around Houston.

As the market continues to wait for negotiations to conclude in the next few weeks, the government could inadvertently embed itself even more in crude-by-rail byway of a curtailment-rail credit, despite the assurance it would let the market run more independently.

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