CP units at rest - Date unknown Peter J. Thompson.

9 January 2013

CP Rail Oil Shipment Deal Signals Rail Transport No Longer Stopgap Measure

Stampede North Dakota USA - Canadian Pacific Railway Ltd., fresh from a tumultuous year of management and board shakeups that saw veteran railroader Hunter Harrison installed as chief executive officer after a bitter proxy battle, is hitching a ride on the great U.S. petroleum revival.
 
The Calgary-based company has emerged as the middleman in a five-year deal between Phillips 66, the refining arm of Conoco Phillips Co., and Massachusetts-based logistics provider Global Partners LP, to ship roughly 50,000 barrels of crude oil per day from North Dakota's roaring Bakken oil field to a refinery in Linden, New Jersey.
 
Over five years, the equivalent of roughly 91 million barrels of oil will be transported via CP's rail network from a loading facility in Stampede, N.D., to a Global terminal in Albany, N.Y., potentially generating an additional $78 million in revenue this year for CP plus $90 million in 2014, First Energy Capital Corp. analyst Steven Paget calculates.
 
"I may even be low on that," he said in an interview Wednesday. "Remember, CP is not putting up much in the way of capital for this. They're not building loading terminals. They're not leasing rail cars. That's up to Global Partners."
 
North American oil producers have turned increasingly to rail to reach key markets on the U.S. East and Gulf coasts as pipeline infrastructure struggles to keep pace with soaring production from previously uneconomic reservoirs of tight oil.
 
The shipments, long considered a stopgap measure, are fast emerging as a permanent fixture in the oil business as pipelines encounter stiff resistance from environmental groups and producers seek to capitalize on the gaping spread between North American and world oil prices.
 
"We seem to be in this new oil and gas world where we don't know what things are going to look like in five years," said Mr. Paget, who raised his 12-month price target on CP to $110 from $105. For producers, "having flexibility is a great option in and of itself."
 
CP, which declined an interview ahead of a quarterly conference call scheduled for 29 Jan 2013, has spent $80-million bolstering rail infrastructure and secured $300-million in customer commitments with an eye to shipping 70,000 carloads of crude by the first quarter of this year, it said in a December presentation to investors.
 
The company has positioned itself as "the only North American railroad to serve the Bakken formation, the Alberta Industrial Heartland, and other energy formations in the United States and Canada directly to the Northeast U.S.," Jane O'Hagan, CP's executive vice-president and chief marketing officer, said in a statement.
 
Interest in hauling crude by train has grown steadily since 2009. That year, CP moved just 500 carloads of oil. By 2011, the figure had climbed to 13,000 carloads. A tank car holds between 600 and 650 barrels of oil.
 
In the U.S., Bakken production surpassed 740,000 barrels per day in October, government data show. Fully one-half of it was transported by rail, part of an estimated 400,000 barrels per day of crude shipped by train in 2012, according to the Association of American Railroads.
 
"Rail has proven itself to be a very efficient mode of transport with certainty around delivery, whereas I think if you went back 30 or 40 years ago perhaps that wasn't the truth," said Eric Slifka, president and chief executive officer of Global Partners.
 
In a telephone interview, he touted Global's "virtual pipeline" service, including a loading facility in North Dakota, rail cars and an unloading terminal in Albany, as a competitive alternative to pipelines in a market that has been upended by the rapid ascent of tight oil.
 
So-called unit trains of between 50 and 120 cars, he said, give producers flexibility pipelines have a tough time matching. As part of its deal, announced Tuesday, with Global Partners, Phillips 66, which owns a rail car fleet, agreed to a five-year contract to transport what it calls "advantaged crude" out of North Dakota to its Bayway refinery in New Jersey.
 
Pipeline transportation agreements typically span much longer, making it harder for producers that lock in to a 20-year agreement to capitalize on changing market conditions.
 
"That's not to say pipelines don't get built," Mr. Slifka said. "But as a producer you've got to be nervous putting all your eggs in one basket when you know the market around you is really going to develop and flows are going to change."
 
Jeff Lewis.

Vancouver Island
British Columbia
Canada