Canada's Oil Producers, in Standoff With Railways, Sit Out Oil-Price Rally
29 January 2018 - 12:29AM
Dow Jones News
By Vipal Monga and David George-Cosh
TORONTO -- Hard-nosed negotiating by railway companies is
keeping Canadian oil producers from cashing in on a world-wide oil
price rally.
Oil producers such as Imperial Oil Ltd., Suncor Energy Inc. and
Cenovus Energy Inc. have few avenues to ship their oil to the U.S.,
their primary market. The pipelines that normally take the crude
are almost at capacity, which leaves railroads as the only option
for larger shipments.
But Canada's largest railway companies, Canadian Pacific Railway
Ltd. and Canadian National Railway Co., in recent weeks have
signaled that they are in no rush to take the oil. They fear oil
companies will fill their cars with shorter-term contracts now but
shift quickly to pipelines when new capacity becomes available in a
few years.
The rail companies want long-term commitments longer than two
years, which the oil companies are loath to give, because shipping
by rail is expensive, analysts say. The producers are pushing for
short-term deals shorter than a year.
"We don't want to ramp up, spend a lot of money and utilize
assets for a market that we know is going to go away," said John
Brooks, chief marketing officer for Canadian Pacific, in an
interview. "Pipelines will eventually pull this capacity and fill
this need. We just want to be diligent in how we grow that
opportunity."
As the price of oil has surged in recent months, hitting $66.25
a barrel on Friday, the price of Canadian crude pulled from the oil
sands of Alberta has remained mired at lower levels. Canada's oil
was priced at a discount of roughly $28 to the benchmark, the
largest spread since 2013.
Western Canadian Select blend trades at a discount to the North
American benchmark West Texas Intermediate because it is more
difficult and more expensive for Canadian oil producers to ship
their oil from wells to U.S. refineries, and those costs come off
the price. The pipelines that normally pump the oil from Western
Canada are almost full.
Compounding the issue: TransCanada Corp.'s Keystone pipeline,
one of the major arteries taking the oil to the U.S. Gulf Coast, is
running at only 80% capacity after suffering a leak late last year
in South Dakota.
These factors have given railroad companies a strong hand in
recent negotiations for capacity.
"They realize they are the shipper of only resort now," said
Michael Tran, global energy analyst for RBC Capital Markets in New
York.
The capacity logjam is also weighing on Canadian rail terminal
operators, which serve as middlemen between oil producers and
railroads. Available rail capacity is about one-half to two-thirds
below what oil producers are currently requesting, according to
some terminal operator executives.
Jarrett Zielinski, chief executive of Calgary-based Torq Energy
Logistics Ltd., which operates six rail terminals, said oil
producers are looking to secure crude shipments well over the
50,000 barrels a day the company can currently handle. "We just
don't have access to rail," he said.
Representatives for Imperial and Suncor declined to comment.
Cenovus CEO Alex Pourbaix said at a conference on Jan. 25 that his
company was negotiating shipping terms with the two rail operators.
He said there was "ample margin" for both sides to come
together.
The railroads are being careful because they were hurt a few
years ago after spending millions of dollars to build new loading
terminals and trains carrying more than 100 railcars of crude
during an oil price surge between 2012 and 2015. But the business
generated by the oil producers ebbed in 2016 after oil prices
tumbled and more pipeline capacity came online in the U.S.
Canadian crude-by-rail shipments peaked in 2014 at 58.7 million
barrels, nearly all of it exported to the U.S., according to
Canada's National Energy Board. The crude-by-rail shipments fell
afterward, but partial data for 2017 indicates a rebound. During
the first nine months of 2017, Canadian trains transported 38.9
million barrels, a 58% increase from the same period the prior
year.
There's no easy fix for oil producers' problem. Pipeline
expansion, a costly and slow process during the best of times, has
become a controversial political issue. TransCanada is being sued
in Nebraska by landowners who want to stop an expansion of the
Keystone pipeline.
TransCanada also announced in October that it had nixed plans to
move ahead with the Energy East and Eastern Mainline pipeline
projects in Eastern Canada, partially because of a tougher
regulatory environment.
Kinder Morgan Canada Ltd., another pipeline operator, is facing
a firestorm in Western Canada as it tries to finalize plans to
build its Trans Mountain pipeline to the Pacific Ocean. Politicians
and environmentalists in the Canadian coastal town of Burnaby, in
British Columbia. oppose the project even though the federal
government, led by Prime Minister Justin Trudeau, has said building
it is in Canada's national interest.
"Producers are looking for a way out, but it's an issue that's
not going to get solved soon," said Chris Bloomer, chief executive
of the Canadian Energy Pipeline Association. He said many in the
industry have seen the capacity problem coming for some time but
were caught off guard by the Keystone leak, which caused supply to
back up at storage facilities.
"There's a big bulge in storage that's got to be worked off,"
said Mr. Bloomer. "Any hiccup in the system will create problems
getting barrels to the market. And we only have one market."
Write to Vipal Monga at vipal.monga@wsj.com and David
George-Cosh at david.george-cosh@wsj.com
(END) Dow Jones Newswires
January 28, 2018 08:14 ET (13:14 GMT)
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