RBN estimates that midstream companies have built out about 950 Mb/d of crude-by-rail (CBR) loading terminal capacity in Western Canada. Data from the Energy Information Administration (EIA) shows actual CBR shipments from Canada to the U.S. topped out at 195 Mb/d in January 2015 and have fallen by 40% since then. Hard-pressed Canadian producers have been squeezed by lower prices and high transport costs with only limited relief as new pipelines came online. Today we review the fate of Canadian CBR transport capacity.
In Part 1 of this series we noted that CBR volumes are falling across the U.S. and Canada. The decline is mostly in response to narrower spreads between U.S. domestic crude benchmark West Texas Intermediate (WTI) and international equivalent Brent. The lower spreads reduce the incentive to move crude from inland basins to coastal refineries by rail because the latter is a more expensive transport option compared to pipelines (which mostly transport crude to the Midcontinent and Gulf Coast). When WTI was discounted to Brent by upwards of $25/Bbl in 2011 and 2012 because of congestion caused by a lack of pipeline capacity, it made sense to use rail to get stranded crude to market. We described the resulting increase in U.S. CBR shipments from 33 Mb/d in January 2010 to a peak of 928 Mb/d in October 2014 (according to EIA). As new pipelines have been built out to provide less expensive options to get stranded crude to market so the WTI discount has narrowed dramatically and CBR traffic has declined. Primarily in response to the narrowing spread - CBR volumes fell during 2015 but not as fast as you might expect – dropping only 20% between January and November 2015 (latest EIA data) even though the spot market economics often made no sense. As we discussed in Part 2 – looking at the epicenter of the CBR boom in North Dakota – the slower than expected decline in rail shipments is mostly because committed shippers and refiners continue to use rail infrastructure that they invested in and because some routes still do not have pipeline access. In Part 3 we looked at CBR traffic out of the Niobrara shale region in the Rockies. Rail load terminal infrastructure there was built in Colorado and Wyoming in response to increased crude production from the Niobrara shale over the past 4 years. Now although crude production in the region is down from 2014 peaks and expected to only grow slowly in the next 5-years if oil prices stay low – midstream companies continue the build out and expansion of rail terminals as well as new pipelines. This time we look at the fate of CBR load terminals built out in Western Canada in today’s low crude price environment.
Over the past two weeks we detailed the sorry plight of producers in Canada’s oil sands region in the face of record low prices for local benchmark heavy crude Western Canadian Select (WCS) at Hardisty in Alberta. For some producers the transport costs to get these heavy crudes to market are so high that at today’s crude prices they make minimal or even negative netbacks (crude selling price minus transport costs) at the wellhead (see Desperadoes). The high transport costs include a penalty for blending in expensive light hydrocarbon diluent at the wellhead to dilute bitumen crude so that it can flow in pipelines. Producers not only have to pay more for diluent than the value of the blended WCS, but they also have to ship the diluent to markets as far away as the Gulf Coast (over 2000 miles). Nevertheless – as we noted in “Desperadoes” – Oil Sands producers continue to run their steam assisted gravity drainage (SAGD) bitumen plants despite losing money because they otherwise risk damaging these 40-year long-term production assets. And previous investment means that new projects continue to come online so that incredibly, – Canadian crude production is expected to continue growing. The Canadian National Energy Board (NEB) forecasts that total crude production will increase by about 5% during 2016 from 3.9 MMb/d in January to 4.1 MMb/d in December with oil sands SAGD production expected to increase by 9% in 2016. With Canadian market needs already met, almost all new production heads to the U.S. where closer-by Mid-Continent refinery demand for heavy crude is saturated – meaning producers have to ship all the way to the Gulf Coast to find new markets. For Canadian producers the long distances to market in the U.S. have been compounded by delays in the build out of more economic pipeline routes out of Canada – culminating in the November 2015 Presidential cross-border permit rejection of the proposed 800 Mb/d Keystone XL pipeline. The history of CBR in Western Canada is closely entwined with pipeline congestion on routes to the U.S. such that producers turn to more expensive railroad options when they can’t get access to pipeline capacity.
We last looked at the Canadian CBR track record in April 2015 (see CBR Movements Ex-Canada). That was immediately after the first release of monthly EIA data for rail movements became available – reflecting estimated shipments out of Canada to the U.S. by rail up until January 2015. Since then, EIA has updated and revised their estimates based on access to additional information. The chart in Figure #1 shows the data from January 2012 up until November 2015 (the latest month available). The shaded areas represent CBR movements in Mb/d by destination region according to the color legend at the bottom – against the left axis. The black dashed line is total monthly U.S. imports of Canadian crude in MMb/d against the right axis. We will get into the individual destination regions in a minute but first take a look at the top of the shaded area – the total rail movements. These total CBR shipments averaged just 20Mb/d in 2012 increasing rapidly to average 79Mb/d in 2013 and 141Mb/d in 2014 – peaking at 195Mb/d in January 2015. That big run up in 2013 and 2014 tracked the surge in total Canadian crude imports (that increased by 0.8 MMb/d during 2013 and 2014). That’s because the surge in overall imports increased congestion on pipelines out of Canada and pushed crude onto the rails.