Results of the fourth quarter and full 2020


What a key pipeline failure means for the raw railway

The revocation of President Joe Biden’s March 2019 permit allowing the construction of the Keystone XL pipeline is likely to result in more crude oil, according to industry observers. But how much the volumes will increase can largely depend on the price that heavy crude oil can achieve in the global market. “The cancellation of the Keystone pipeline project was inevitable after the change of government. Despite its merits or shortcomings, it is now a drained political football,” said Barry Prentice, a professor of supply chain management at the University of Manitoba and former director of the Transportation Institute there. “That means more crude oil will have to travel by rail. Huge investments in oil sands will not be abandoned, and oil has to go somewhere.” But the oil-rail “was problematic, because with the low price of oil and the relatively higher price of rail transport, nothing looks attractive. The problem is not oil supply, but reduced demand during a pandemic. Once out of this period, demand will return, and $ 100 a barrel of oil will also return, “Prentice said. Indeed, oil markets serve as one very visible factor that determines how much crude oil is produced and shipped. To make the production and transportation of heavy crude oil from Western Canada and the U.S. cost-effective, prices have expanded between heavy crude oil such as Western Canadian Select (WCS) and light, sweet crude oil such as West Texas Intermediate (WTI). be favorable. WCS oil usually has a discount compared to WTI crude oil due to its lower quality and greater distance from U.S. Gulf refineries. The COVID-19 pandemic was among the factors that contributed to the reduction in WTI 2020 crude oil prices. Why the interest in crude oil production and transportation? The oil market is not the only factor that dictates crude oil production and its subsequent transport. Others are large oil reserves and the amount of investment already focused on crude oil production, as well as the prospects for crude oil exports. According to the Alberta government, the oil sands in the province represent the third largest oil reserves in the world, after Venezuela and Saudi Arabia. Its reserves amount to about 165.4 billion barrels, and capital investments in the upstream sector amount to as much as $ 28.3 billion in 2016 and $ 26.5 billion in 2017. Furthermore, according to Natural Resources Canada, 98% of Canadian crude oil exports to In 2019, it went to the United States. These investments and huge oil reserves also resulted in significant investments in other areas of the energy sector, including investments in pipelines. Canadian heavy crude oil pipelines lead to U.S. refineries because U.S. refineries are built and optimized to mainly handle heavier crude oil, says Rob Benedict, senior director of petrochemistry, transportation and infrastructure at the American Fuel and Petrochemicals Association. Crude oil pipelines from Canada to the United States were considered an efficient way to transport large quantities of Canadian heavy crude oil to US Gulf refineries. TC Energy’s Keystone XL pipeline of 1,210 miles per day would have a capacity of 830,000 barrels per day of crude oil originating from Hardisty in Alberta and heading to Steele City, Nebraska, where it would then be shipped to U.S. Gulf of Mexico refineries. If construction continued, the pipeline would start operating in 2023. But TC Energy left the project after Biden revoked the existing presidential permit for the pipeline in January. “TC Energy will review the decision, assess its implications and consider its options. However, as a result of the expected revocation of the presidential permit, project progress will be suspended. The company will stop capitalizing costs, including interest during construction, which takes effect January 20, 2021. The date of the decision, and will assess the carrying amount of its investment in the pipeline, less project recovery, “TC Energy said last month.” The Keystone XL pipeline is an important part that would allow Canada and the United States to continue very well. the relationship they have with transporting energy products across the border, “Benedict said. However, halting the construction of the pipeline does not necessarily lead to an increase in the amount of raw rail one by one, according to Benedict.” The crux of the story is that it will have some impact on the rail. It will not shift all 830,000 barrels a day to the rails, but any additional amount will potentially have an impact, “Benedict said. Several factors will affect how much crude will travel by rail. In addition to expanding WCS / WTI prices, rail capacity is crucial. not only are there speed limits for crude trains and possible social consequences, there are also capacity problems.Canadian Railways has reported record grain quantities in recent months, and crude oil quantities must compete with grain as well as other There are other pipelines between Canada and the United States that could take some of the quantities handled by the Keystone XL pipeline, Benedict said, including the Endbridge Line 3 (NYSE: ENB) pipeline, which runs from Canada to Wisconsin, Final Bridge 5, which runs under the Mackinac Strait and Lake Michigan to the Michigan Peninsula, and the Trans Mountain pipeline, which is under construction in Canada. It would lead from Alberta to the western Canadian coast, and then potentially south to American refineries. And another factor that could affect the crude rail is how much crude oil goes to storage, Benedict said. “It’s not just a simple question, does one pipeline that closes deliver everything to the railroad? It’s complicated because you have to consider all the different nodes of the supply chain, including the warehouse that might come into consideration,” Benedict said. Canadian Railways’ views on crude railways For their part, the Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) said they expected more crude oil to be delivered, but neither indicated how much the quantities would grow. During a call for earnings in the fourth quarter on January 27, CP said it was recording increased activity as price ranges became favorable. The railroad also expects to launch quantities of crude oil from a recuperation unit (DRU) near Hardisty, Alberta. The US Development Group and Gibson Energy agreed to build and manage the DRU in December 2019. As part of that agreement, ConocoPhillips Canada will process the input bituminous mixture from the DRU and deliver it via CP and Kansas City Southern (NYSE: KSU) to the American Gulf Coast. “These volumes of DRU will provide a safer pipeline competitive option to shipowners and help stabilize our raw business in the future,” CP Chief Marketing Officer John Brooks said during the earnings call. CP President and CEO Keith Creel also said he is using U.S. actions on the Keystone pipeline to benefit crude rail and DRU volumes. The shares “serve for greater strength and greater potential demand for raw materials. We think this creates greater support for increasing and expanding the DRU. So we are ready for the opportunity,” Creel said. He continued, “We still see short-term, not long-term … pipeline capacity [eventually] catch up [but] we just think it has a longer tail on it now. So we think there will be room for some upside in both spaces. Meanwhile, in an interview with Bloomberg on January 27, CN President and CEO JJ Ruest called the crude line a “question mark” in terms of what energy prospects the railways expect for 2021. Ruest said low oil prices have been reduced passengers and pipeline failure Keystone factors affecting CN’s energy prospects. However, the oil-rail could be a “mild positive blow to the rail industry,” Bloomberg quoted Ruesta as saying. CP and CN declined to comment further on FreightWaves on raw rail transportation, and CN directed FreightWaves to a Bloomberg article. Subscribe to FreightWaves e-newsletters and get the latest insights into freight traffic directly in your inbox. Click here for more Jowan Marsh articles on FreightWaves. 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