Revival - The Rollicking Return of Crude-by-Rail in Western Canada

Rising crude oil production in Western Canada, filled-to-the-brim pipelines out of the region, and yet another blowout in the price spread between Western Canadian Select (WCS) and West Texas Intermediate (WTI) are combining to spur a genuine revival in crude-by-rail (CBR) shipments from Canada to the U.S. CBR has helped out Western Canadian producers before, moving increasing volumes south through 2011-14 until new pipeline capacity came online. But this time, the number of barrels being moved out of Western Canada by rail is already moving into record territory, and — with the addition of incremental pipeline capacity still at least a year away, and maybe more — railed volumes are likely to continue rising in the months to come. Today, we discuss recent developments and what producers, shippers and railroads see coming in the months ahead.

Producers and shippers in the Permian Basin and the Western Canadian Sedimentary Basin (WCSB) are facing a very similar problem: a combination of rising crude production, pipeline takeaway constraints likely to last another year or more, and a big and volatile spread between the prices paid for crude at local hubs and at destination markets hundreds of miles away. We’ve covered the Permian story in several blogs this spring and summer, including those in our No Time and All Dressed Up With Nowhere to Go series. Earlier this year, we took a big-picture look at Western Canadian crude production and takeaway constraints in a Drill Down Report called The Shape I’m In.

What Western Canada has going for it — aside from generally milder summer weather (the average August daytime high in Edmonton, AB, is 74 degrees Fahrenheit, versus 95 degrees in Midland, TX) — is a number of rail terminals where crude can be loaded into long lines of tankcars and pulled by locomotives to refineries in the U.S. In what turned out to be a major over-build, nearly 1 MMb/d of CBR loading capacity was built in Western Canada in the 2010-16 period, mostly in 2014-15. Most of those rail terminals were never used (or used at only a small fraction of their capacity), and many were mothballed when it became apparent they weren’t needed — at least until now.

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