By ERIC ATKINS
Thursday, September 13, 2018
The amount of oil moving on Canadian National Railway Co.'s network has soared, and the country's largest rail carrier is locking in energy customers to new contracts to exploit a lack of pipeline capacity made worse by a recent court ruling.
The lack of pipeline capacity has plagued Canada's oil patch for years, with rising output from new oil sands projects adding to the pinch.
And a number of major pipeline projects have been cancelled or tied up in legal battles, extending the bottleneck.
Ghislain Houle, finance chief of Montreal-based CN, said on Wednesday a federal court's decision in August to stop the expansion of the Trans Mountain pipeline from Edmonton to B.C.'s coast "has added some years to crude by rail."
The lack of space on pipelines, particularly to the coast, has resulted in a large discount in what Western Canadian oil producers can command for their product. The discount, or spread, on Western Canadian Select crude versus West Texas Intermediate widened to US$31.50 a barrel on Wednesday, the biggest difference since December, 2013, according to Bloomberg. WTI closed just above US$70 a barrel. The discount reflects the fact it is more expensive for refiners to process Alberta heavy oil as well as the high cost of shipping it outside of the province.
Mr. Houle said CN is getting oil customers to sign volume commitments as producers seek ways to move their growing crude supplies to refiners in the U.S. and overseas.
Mr. Houle said CN's crude-by-rail business is up by 50 per cent in the quarter to date, and is on pace to reach 70,000 carloads for the full year. CN moved about 60,000 tank cars in 2017, down from the 2014 peak of 120,000.
Combined, CN and its Calgary-based rival Canadian Pacific Railway Ltd. have seen a 16-per-cent increase in petroleum carloads in 2018, according to data from the American Association of Railroads, which includes the Canadian company's U.S. operations. The rise is the biggest of the product groups tracked by the AAR.
The mercurial nature of the oil business, prone to price swings that destroy shippers' profits and keep crude off the rails, means CN is being cautious about allocating locomotives and resources to meet the new demand, he said.
"We are locking in customers at very favourable rates and we're doing this prudently as we're bringing on capacity," Mr.
Houle told a roomful of investors at a conference in Laguna Beach, Calif. "We have locked in customers. Could we lock in more business? Yes. We could. There's more demand than actually what we're providing today, but we're being prudent."
The Federal Court of Appeal on Aug. 30 blocked the expansion of the Trans Mountain pipeline, which Ottawa bought in May for $4.5-billion. The project, started by Kinder Morgan, would pipe Alberta oil to the West Coast of B.C. for export by tanker.
Capacity-starved oil shippers have faced other recent setbacks, including the cancellations of two major pipeline projects, Enbridge Inc.'s Northern Gateway and TransCanada Corp.'s Energy East.
"Rail shipments of petroleum products are nearly at five-year highs in Canada while producers wait for pipelines like Enbridge's Line 3 replacement and Trans Mountain expansion to come online," Height Capital Markets analyst Katie Bays said.
"However, the railways haven't forgotten when producers [abandoned] them in 2016 - driven by low prices and cheaper, available pipeline capacity - and are pushing for longer term, take-or-pay agreements to avoid a familiar fate."
In a note to clients, Ms. Bays said U.S. railway BNSF's move to refuse to haul some older and retrofitted tank cars has tightened supplies.
However, the move by the biggest U.S. shipper of oil has sent some of the banned tank cars to Alberta, where they are being leased at a discount. This is adding to oil capacity on the Canadian railways, she said.
CANADIAN NATIONAL RAILWAY (CNR) CLOSE: $112.10, DOWN $1.79