28 February 2013

Crude Via Rail Not a Fleeting Business

Toronto Ontario - Gibson Energy Inc. has moved millions of barrels of energy products across North America via injection stations, pipelines, and a fleet of more than 1,900 trucks, but it never felt the need to build a freight, or unit train, to carry crude.
 
Until now.
 
"It is new for us. We are looking at building a unit train with our partners U.S. Development outside our Hardisty, Alberta, terminal," said Ken Hall, vice-president at the company. "We are talking to several producers and it looks quite positive but we haven't announced anything until we get signed contracts."
 
Gibson's investment in the rail business highlights how capacity constraints have emboldened other midstream companies to encroach on the territory of pipeline companies.
 
The Calgary-based operator is planning one or two unit trains, depending on commitment, which could mean up to 160,000 barrels per day being shipped from its terminal at Hardisty in east-central Alberta, to refiners across North America.
 
The company is not just looking at capturing the short-term crude-related bump before pipeline companies come roaring back to reclaim their business.
 
Gibson plans to use its tankage facilities and land around the Hardisty terminal to mix and blend a variety of crude types and cater to the needs of refineries.
 
"Right now it's heavy to light differentials, but in five to ten years it might be something different," said Mr. Hall. "It might be, for example, California refineries may need an Alaskan blend look alike that we could harvest."
 
While companies such as Gibson are biting off small chunks of the pipeline business away from Trans-Canada Corporation and Enbridge Incorporated, others such as Canadian Pacific and Canadian National Railway are taking increasingly large mouthfuls.
 
Investment bank Peters & Company estimates that 120,000 of Canada's 3.4 million barrels per day (bpd) output is currently being carried by rail. That figure could rise 200,000 bpd by the end of 2013.
 
The crude-via-rail phenomenon is North America-wide as railway giants such as Warren Buffett's BNSF Railway, Union Pacific, CSX Corporation, and Canadian operators have been shipping more than 400,000 barrels per day or more than 4 percent of total North American production.
 
In Canada, volumes being transported by rail have increased rapidly in recent months and are expected to rise further as producers access more rail cars and finalize loading facilities, Peters said in a note.
 
"The last two years have proven that rail is a model that works for the movement of crude oil into the refinery marketplace," Tracy Robinson, CP energy and merchandise vice-president said in an interview.
 
"We started at a very small level, but there is considerable scale that's coming to this model. We have capacity. We can get crude into any marketplace in North America including those markets that pipelines don't serve now and may never serve."
 
While railway companies are enjoying a nice profit bump at the pipeline operators' expense, they are eying the bigger prize of expanding their network and entrenching rail firmly into the business of shipping crude.
 
Union Pacific estimates the industry has invested more than US$1-billion to build and expand rail terminal capacity and new tank cars.
 
"This substantial investment has been put forward as evidence that rail transportation has earned a permanent seat at the head of the table in the transportation of crude oil," says Bernstein senior analyst David Vernon.
 
Canadian Pacific shipped 53,000 carloads in 2012 and expects to triple that volume in the long term. The company has also sealed deals with producers including a five-year contract with Phillips 66 and Global Partners to ship 50,000 barrels per day from the Bakken region to Phillips' Bayway, New Jersey, refinery.
 
Canadian National Railway also sees a huge opportunity if the railway companies "play their cards right," Jean-Jacques Ruest, CN's chief marketing officer, told investors in a recent earnings call.
 
"There is clearly a huge opportunity. Canada is an energy powerhouse, if you look at it, I mean we have gas, we have oil, and if we play our cards right and develop the proper transportation solution, pipeline and rail to open up the export market, and to open up the supply chains that provides good net backs. There is a huge potential for transportation and infrastructure companies to help this booming oil and energy market for many years to come."
 
Southern Pacific, Tundra Energy, and Arc Terminals have all signed deals with CN to facilitate crude shipments.
 
"Our network provides direct access to the Bakken as well as heavy oil and bitumen production areas in the Lloydminster, Peace River, Cold Lake, and Athabasca regions," said Mark Hallman, CN director of communications and public affairs.
 
First Energy Capital expects CN to move 100,000 barrels of crude oil per day by rail in 2013, plus fracking sand and drill pipe. The company told investors crude shipments contributed $50-million of incremental revenues during the fourth quarter with an incremental 9,000 carload.
 
Despite the surge in rail shipments, some analysts remain unconvinced that crude-by-rail is a long-term proposition for shippers.
 
Industry estimates vary, but Bernstein estimates that pipelines are 65 percent cheaper than rail.
 
But as long as Western Canada Select and West Texas Intermediate trade well below Brent crude benchmark prices, it remains a viable option.
 
Southern Pacific, which is shipping its entire bitumen via CN, sees its transportation cost at US$31 per barrel, but it is fetching higher prices in the Gulf Coast than it would from Western Canada.
 
Rail becomes more expensive as differentials between Canadian crude and other benchmarks start to tighten, CN's Mr. Ruest told investors. "It's a question of depending where you're going and how that works out," he said. "Rail is not the cheapest mode for the crude but it's a very good mode to get to a more profitable market."
 
In December, Ottawa passed its long-awaited Fair Rail Freight Service Act bill that hopes to level the playing field between shippers and the railway companies.
 
"Shippers will have more power in their negotiations with the railways, and the railways now have additional government regulations with which to contend," Steven Paget, analyst at First Energy Capital, said in a note.
 
Savings can also come from dilutents. Bitumen, which has the consistency of sticky tar, needs to be mixed with condensate to be shipped via pipelines, but is not a necessity in rail shipments.
 
Mr. Vernon is still not convinced rail can retain that business, once new pipelines eventually come on line.
 
"Historically, the most efficient form of transportation has been pipeline, and while the use of newer, higher-capacity, tank cars will erode that cost disadvantage, we don't believe it will diminish to the point where rail will make economic sense when looked at on the basis of direct cash operating costs alone."
 
Mr. Paget disagrees, arguing that pipelines don't reach a number of energy hubs across North America, especially west to east.
 
"We think there are particular sections of the Gulf Coast that aren't going to be immediately connected to Canada even if Keystone XL is built. Bitumen delivered to refineries in Louisiana and Mississippi has significant staying power as well. And consider that there really is no real West-to-East oil pipeline both in Canada and the United States."
 
CP's Ms. Robinson thinks every barrel should have an option, citing Gibson Energy's move to increase capacity on its pipeline terminal and its decision to build a unit train.
 
"We believe there is room for both pipeline and rail in this marketplace," she said. "Long term, and the industry increasingly is seeing value in having that option."
 
Yadullah Hussain.

Vancouver Island
British Columbia
Canada