Benzinga
What the Keystone pipeline cancellation means for rail oil
President Joe Biden’s revocation of the March 2019 license, allowing construction of the Keystone XL pipeline, is likely to result in more volumes of crude oil per rail, according to industry observers. But how much the volumes will increase may depend largely on the price that heavy crude oil can reach in the global market. “The cancellation of the Keystone pipeline project was inevitable when the government changed. Despite its merits or disadvantages, it is now deflated political football,” said Barry Prentice, professor of supply chain management at the University of Manitoba and former director of the Transport Institute there. “This means that more oil will have to be transported by rail. The huge investments in oil sands will not be abandoned, and the oil has to go somewhere.” But crude oil “has been problematic because with the low price of oil and the relatively high price of rail transport nothing seems very attractive. The problem is not the supply of oil, it is the reduction of demand during the pandemic. demand will return and oil at $ 100 a barrel too, “said Prentice. In fact, oil markets act as a highly visible factor that determines the amount of crude oil produced and shipped. For the production and transportation of heavy crude oil from western Canada and the U.S. to be profitable, the price differs between a heavy crude product, such as Western Canadian Select (WCS) and a light, sweet oil such as West Texas Intermediate (WTI), needs to be favorable. WCS oil is typically discounted from WTI oil due to its inferior quality and its greater distance from the United States Gulf Coast refineries. The COVID-19 pandemic was among the factors that contributed to the drop in prices of WTI crude oil in 2020. Why the interest in the production and transport of crude oil? The oil market is not the only factor that dictates the production of crude oil and its subsequent transportation. Another is the vast oil reserves and the amount of investment already directed towards the production of crude oil, as well as the prospects for exporting crude oil. According to the Alberta government, the province’s oil sands represent the world’s third largest oil reserve, behind only Venezuela and Saudi Arabia. Its reserves are equivalent to around 165.4 billion barrels, and capital investments for the upstream sector reached $ 28.3 billion in 2016 and $ 26.5 billion in 2017. In addition, according to Natural Resources Canada, 98% of Canada’s crude oil exports in 2019 went to the USA These investments and vast oil reserves have also resulted in significant investments in other areas of the energy sector, including investments in pipelines. The pipelines bring Canadian heavy oil south to US refineries because American refineries were built and optimized to handle mostly heavier crude oil, according to Rob Benedict, senior director of petrochemical, transportation and infrastructure at American Fuel and Petrochemical Manufacturers Association. Canada’s crude oil pipelines to the US have been seen as an efficient way to transport large quantities of Canadian heavy crude oil to U.S. Gulf Coast refineries. TC Energy’s 1,210-mile Keystone XL pipeline would have a capacity of 830,000 barrels a day of crude oil from Hardisty, Alberta, and going to Steele City, Nebraska, where it would then be sent to U.S. Gulf Coast refineries. If construction had continued, the pipeline would have entered service in 2023. But TC Energy abandoned the project after Biden revoked an existing presidential license for the pipeline in January. “TC Energy will review the decision, assess its implications and consider its options. However, due to the expected revocation of the Presidential License, the progress of the project will be suspended. The company will no longer capitalize costs, including interest during construction, effective on January 20, 2021, being the date of the decision, and will evaluate the book value of its investment in the pipeline, net of project recoveries, “said TC Energy in a statement last month. The Keystone XL pipeline “is an essential piece that would have allowed Canada and the United States to continue their excellent relationship with the transportation of energy products across the border,” said Benedict XVI. the construction of the pipeline does not necessarily translate into a one-by-one increase in oil volumes by rail, according to Benedict. “The essence of the story is that this will have some impact on crude oil. It will not transfer all 830,000 barrels per day to the tracks, but any additional quantity will potentially have some impact, “said Benedict XVI. Several factors will influence the amount of oil moving by rail. In addition to the WCS / WTI price spread, railroads’ ability to handle crude oil is crucial. Not only are there speed restrictions for crude trains and possible social ramifications, but also capacity problems. Canadian railways have reported record volumes of grain in recent months, and crude oil volumes are expected to compete with grains, as well as with other commodities, on the same tracks. There are also other pipelines between Canada and the United States that can carry some of the volumes that would be handled by the Keystone XL pipeline, said Benedict XVI. 3 from Endbridge (NYSE: ENB), which runs from Canada to Wisconsin; the Endbridge Line 5 pipeline, which passes under the Mackinac Strait and Lake Michigan to the Michigan Peninsula; and the Trans Mountain pipeline that is under development in Canada. It would go from Alberta to the Canadian west coast and then potentially south to US refineries. And another factor that can influence oil by rail is the amount of oil that goes into storage, said Benedict. “Isn’t it just a simple question of whether a pipeline that is being closed transports everything to the railroad? It’s complex because you have to consider all the different nodes in the supply chain, including the storage that would come into play,” said Benedict. Canadian railroads’ view of oil by rail In turn, Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) said they expect to ship more volumes of oil, but none has indicated how many volumes will grow. CP said during its fourth quarter earnings conference call on January 27 that it has seen an increase in activity as price spreads have become favorable. The railroad also hopes to begin moving volumes of crude oil from a diluent recovery unit (DRU) near Hardisty, Alberta. The US Development Group and Gibson Energy agreed to build and operate the DRU in December 2019. As part of this agreement, ConocoPhillips Canada will process the DRU incoming bitumen mix and ship it via CP and Kansas City Southern (NYSE: KSU ) for the U.S. Gulf Coast. “These DRU volumes will provide a safer competitive pipeline option for carriers and will help to stabilize our oil business in the future,” said CP director of marketing John Brooks during the conference call. CP President and CEO Keith Creel also said that he sees US shares in the Keystone pipeline as benefiting volumes of crude oil and DRU. The actions “portend more strength and more potential demand for oil. We think it creates more support for the scaling and expansion of the DRU. So we are optimistic about this opportunity,” said Creel. He continued: “We still see short-term, not long-term pipeline capacity [eventually] catch up [but] we just think there’s a longer tail on it now. Therefore, we think there will be room for some growth potential in both spaces. “Meanwhile, in a January 27 interview with Bloomberg, CN President and CEO JJ Ruest called crude oil a” question mark “in terms of what energy prospects the railroad is looking at in 2021. Ruest said low oil prices, reduced travel and the cancellation of the Keystone pipeline are among the factors influencing CN’s energy prospects. However, crude by rail could be a “slight positive bump in the railway industry,” Bloomberg cited Ruest as saying: CP and CN declined to comment further to FreightWaves on crude oil by rail, and CN directed FreightWaves to the Bloomberg article. Subscribe to FreightWaves e-newsletters and get the latest shipping information directly at yours Click here for more FreightWaves articles by Joanna Marsh. 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