Viewpoint: Rail to support Canadian crude prices
Canadian crude producers are looking to avoid a repeat of the price freefall of late 2018 after embarking on large crude-by-rail commitments over the past year.
Major oil sands producers spent much of 2019 tying together a safety net in rail — a response to sagging profits, pipeline upsets and a seemingly insatiable demand for heavy crude in the US Gulf coast.
Crude-by-rail terminals in Alberta can accommodate up to 600,000 b/d of shipments, but had been significantly underutilized in the years prior to 2018. Price spreads between Canada and the US Gulf coast that were too tight for rail economics to be profitable kept a lid on movements between 2014 and much of 2018. But that changed when increasing oil sands production could not be accommodated by the preferred pipeline option. Inventories in Alberta swelled in October 2018 to 76mn bl, a 33pc increase year-over-year, and discounts for Alberta crude reached record highs greater than $50/bl.
The railroads had been burned by some shippers in 2015 after making large commitments of their own to accommodate a growing crude-by-rail appetite, only to see that demand plunge as falling global prices compressed the arbitrage between Alberta and the US Gulf coast. With other commodities keeping the railroads preoccupied in 2018, crude producers needed to show a willingness to commit to sizable contracts in order to grab the railroads' attention. And they did.
Calgary-based producer Cenovus Energy made a commitment to ship 100,000 b/d via rail by the end of 2019, about six times what it shipped in the first quarter of 2019. This includes railcar leases stretching out five to 10 years as the company eyes growth plans in a market that has struggled to get pipelines built. Cenovus has been adding rail cars to its portfolio throughout 2019 with more expected in 2020.
Some producers appear determined to ship by rail despite razor thin — at times negative — margins, in a bid to not be at the mercy of pipelines. Getting their product to the US Gulf coast is top of mind for company executives, as it is not only the largest demand center for heavy crude in the US, but provides the option of exporting globally.
Fellow oil sands producer, MEG Energy, has 30,000 b/d of capacity at the Bruderheim rail terminal near Edmonton, Alberta, which it has been increasingly utilizing each quarter. MEG said it costs over $20/bl for crude-by-rail shipments to reach the US Gulf coast, which would normally be cost-prohibitive with average prices in Houston, Texas, only around $12/bl higher than prices in Hardisty, Alberta, in 2019. However, prices have recently eclipsed that $20/bl threshold following a pipeline upset, indicating how sensitive prices can be and how close crude-by-rail is to the cusp of being lucrative — or at least offering a handy floor for Canadian crude prices.
The government of Alberta made a 120,000 b/d crude-by-rail commitment earlier in 2019 which is expected to be divested to the private sector soon. This, along with Cenovus' and MEG's commitments, represent the same egress as a mid-sized pipeline in an industry desperate for takeaway capacity.
Past pipeline outages have contributed to deep discounts at Albertan trading hubs, but the readiness and ability of today's producer to ship by rail muted the impact of the most recent disruption. This is expected to continue into 2020 and an increase in crude-by-rail will keep margins tight, even keeping local prices so high that the rail arbitrage will remain uneconomical for many shippers. This is a cost that some will be willing to bare to maintain ratable production and diversify transportation options out of Canada.
By Brett Holmes
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Oman’s PDO to hit 700,000 b/d crude before 2030 target
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US reimposes Venezuela oil sanctions
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