The battle between pipeline and rail transport alternatives to get growing crude supplies out of Western Canada is heating up. On Thursday (August 1, 2013) TransCanada confirmed plans to proceed with repurposing their Mainline gas pipeline into the Energy East crude pipeline that will now carry up to 1.1 MMb/d from Alberta to Eastern Canadian refiners and the export market. A day earlier Kinder Morgan and Keyera announced plans to build a unit train loading terminal in Alberta to increase crude by rail capacity to the US. Today we review Canadian rail infrastructure investment plans.
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If you are new to the topic of moving heavy Canadian crude (bitumen) by rail you can bring yourself up-to-speed by looking at previous posts on growing Canadian bitumen production (see Heat it! Bitumen Economics Part 1) and the options for moving heavy bitumen crude by rail – including various levels of dilution with light hydrocarbons known as “diluent” (see Heat it! Bitumen Economics Part 2).
In the first episode in this series we attempted to answer two key questions that determine the fate of Canadian heavy crude shipments by rail (see Go Your Own Way – The Rail vs. Pipeline Bitumen Challenge). First - is rail capacity needed to supplant a shortfall in available pipeline space now or in the future? The answer to that question is that although takeaway capacity is tight today, new pipeline construction coming online by early next year should free up enough space for incremental deliveries of Canadian crude to the US Gulf Coast. Further down the road a parade of new pipeline capacity is planned that (if built) will exceed Canadian production over at least the next 5 years. Second we asked if the cost of bitumen by rail transport can compete against pipeline delivery when both options are available to producers? The answer to that question appears to depend who you talk to. Investors in new rail capacity from Alberta are suggesting they can make the economics work. Today we begin a review of these rail terminal investment plans.
NuStar Asphalt & PBF Energy
Nustar Asphalt, a subsidiary of Nustar Energy Partners, own two Asphalt refineries on the US East Coast at Paulsboro, NJ (72 Mb/d) and Savannah, GA (32 Mb/d). The two asphalt refineries process heavy crude with a typical API gravity between 10 and 14 to produce a 70 percent asphalt yield. Asphalt is primarily used for road surfacing. The refineries currently process mostly Venezuelan heavy Boscan and Bachequero 13 crude but are looking to Canadian heavy crude for a lower priced alternative. To that end, NuStar has developed rail infrastructure in partnership with Canadian Pacific (CP) railroad and Torq Transload at Lloydminster, AB to currently load 9 Mb/d of heavy crude for rail shipment to their refineries. Nustar has purchased a fleet of 1200 dedicated coiled and heated tank cars to ship raw bitumen and has built unload facilities at both refineries with a combined capacity of 40 cars/day. The loading operation is currently only manifest but NuStar plans to expand to unit trains in 2014. NuStar data indicates that the all-in freight cost to the refineries is between $18/Bbl and $24/Bbl depending on destination. Another East Coast refiner, PBF Energy is also shipping heavy crude by rail from Western Canada – at least 35 Mb/d this quarter at an estimated shipping cost of $18/Bbl (3Q 2013) to their two Delaware River refineries according to their investor presentations (see Masterpiece Refining for more on PBF Energy). PBF had set a more aggressive target of 40 Mb/d of heavy crude this quarter but are experiencing some delays in the build out of loading infrastructure in Canada although they are not forthcoming about the origin load point. For both NuStar and PBF, shipping Canadian heavy crude by rail is the only alternative to the East Coast in the absence of existing or planned pipelines. By 2017 the TransCanada Energy East pipeline may offer an alternative route for waterborne crude to reach the East Coast (more about that project in a later episode).