New production expected online in December 2017 from the Suncor Fort Hills project in the oil sands region of northern Alberta could increase pipeline congestion from western Canada to the U.S. Gulf Coast market where the oil is in demand. That’s because existing capacity across the Canadian border is running close to full and the only possible capacity addition across before 2019 is Enbridge’s 300-Mb/d Alberta Clipper expansion at the border — assuming it gets a long-sought U.S. Presidential Permit later this year. As a result of this continuing near-term pipeline squeeze, producers are again turning to rail transport to bypass pipeline congestion and ensure their crude gets to market. On June 2 (2017), USD Group announced a new route option for Canadian producers following its purchase of a rail terminal in Stroud, OK, that is connected by pipeline to the Midwest crude trading and storage hub at Cushing, OK; USD will offer direct rail service from its Hardisty, AB, terminal to Cushing. Today we review the economics of this rail transport route for oil sands producers. (This blog is based on a recent note published by Morningstar Commodities and Energy Research.)
As we have documented extensively in the RBN blogosphere, since the beginning of the Shale Era, rail has provided an interim solution for producers looking to ship crude oil over long distances to market where no pipelines existed or where existing pipes were already full (see The Year of The Tank Car). New pipelines take time to plan, justify, permit and build (at least three years, sometimes much longer) so rail offers a flexible alternative that can be up and running in a matter of months. The downside of moving crude by rail is that it is more expensive than pipelines on a per-barrel basis. The upside is that building a crude loading terminal connected to a Class One railroad allows midstream companies to offer producers access to destinations throughout the U.S. (or Canada, for that matter). Unloading terminals are located either at specific refineries or, more often, at terminals with pipeline or barge connections offering access to many refineries. According to data from the Energy Information Administration (EIA), U.S. domestic crude-by-rail (CBR) volumes grew from just over 100 Mb/d in January 2011 to a peak of 944 Mb/d in October 2014 (see I’ve Been Working on the Railroad). Sadly for rail terminal operators, as new pipeline capacity has been built out, U.S. rail use declined to 285 Mb/d as of March 2017 (see Slow Train Coming).