For the production and transportation of heavy unrefined oil from western Canada and the U.S. to be lucrative, the rates spread between a heavy crude product such as Western Canadian Select (WCS) and a light, sweet crude such as West Texas Intermediate (WTI) needs to be favorable. WCS crude is generally priced at a discount versus WTI crude due to the fact that of its lower quality and its higher range from the U.S Gulf Coast refineries. Another is the large oil reserves and the amount of investment already directed into unrefined oil production, as well as unrefined oils export potential customers. The pipelines bring Canadian heavy crude south to U.S. refineries since American refineries were developed and optimized to mainly handle heavier crude oil, according to Rob Benedict, senior director of petrochemicals, transportation and facilities for the American Fuel and Petrochemical Manufacturers Association. Unrefined oil pipelines from Canada to the U.S. have actually been seen as an efficient method to transfer big quantities of Canadian heavy crude oil to U.S. Gulf Coast refineries.
BenzingaWhat Keystone Pipeline Cancellation Means For Crude-by-railPresident Joe Bidens revocation of the March 2019 license enabling the building and construction of the Keystone XL pipeline will likely lead to more crude-by-rail volumes, according to industry observers. How much volumes will increase might mostly depend on the cost that heavy crude oil can fetch in the global market. “The cancellation of the Keystone pipeline project was inescapable once the federal government altered. Despite its drawbacks or benefits, it is now a deflated political football,” stated Barry Prentice, University of Manitoba supply chain management professor and former director of the Transport Institute there. “This means that more crude will have to move by rail. The huge investments in the oil sands will not be abandoned, and the oil needs to go somewhere.” However crude-by-rail “has been troublesome since with the low price for oil, and the relatively greater rate for rail transport, nothing looks extremely enticing. The problem is not oil supply, it is the lowered demand throughout the pandemic. When we come out of this period, need will return, and $100-per-barrel oil will, too,” Prentice stated. Indeed, the oil markets function as one extremely visible aspect identifying how much crude gets produced and delivered. For the production and transport of heavy crude oil from western Canada and the U.S. to be rewarding, the prices spread between a heavy crude product such as Western Canadian Select (WCS) and a light, sweet crude such as West Texas Intermediate (WTI) requires to be favorable. Since of its lower quality and its greater distance from the U.S Gulf Coast refineries, wcs crude is generally priced at a discount rate versus WTI crude. The COVID-19 pandemic was amongst the elements that contributed to WTI petroleum prices tailspin in 2020. Why the interest in petroleum production and transportation? The oil market isnt the only element that dictates petroleum production and its subsequent transportation. Another is the huge oil reserves and the quantity of financial investment currently directed into unrefined oil production, as well as crude oils export prospects. According to the government of Alberta, the provinces oil sands represent the third-largest oil reserves in the world, following Venezuela and Saudi Arabia. Its reserves equivalent about 165.4 billion barrels, and capital investments to the upstream sector have equated to as much as $28.3 billion in 2016 and $26.5 billion in 2017. Furthermore, according to Natural Resources Canada, 98% of Canadas crude oil exports in 2019 went to the U.S. Those investments and vast oil reserves have likewise resulted in substantial financial investments in other areas of the energy sector, including financial investments in pipelines. The pipelines bring Canadian heavy crude south to U.S. refineries since American refineries were constructed and enhanced to mainly handle much heavier unrefined oil, according to Rob Benedict, senior director of petrochemicals, transport and infrastructure for the American Fuel and Petrochemical Manufacturers Association. Petroleum pipelines from Canada to the U.S. have actually been deemed an efficient way to carry large amounts of Canadian heavy crude oil to U.S. Gulf Coast refineries. TC Energys 1,210-mile Keystone XL pipeline would have had a capacity of 830,000 barrels each day with petroleum originating from Hardisty, Alberta, and heading to Steele City, Nebraska, where it would then be delivered to U.S. Gulf Coast refineries. Had construction continued, the pipeline would have entered service in 2023. But TC Energy abandoned the task after Biden withdrawed an existing governmental license for the pipeline in January. “TC Energy will evaluate the decision, assess its ramifications, and consider its options. As a result of the expected cancellation of the Presidential Permit, advancement of the job will be suspended.The business will cease capitalizing costs, consisting of interest throughout building, reliable January 20, 2021, being the date of the choice, and will evaluate the bring worth of its financial investment in the pipeline, internet of task recoveries,” TC Energy said in a release last month. The Keystone XL pipeline “is an essential piece that would have enabled Canada and the U.S. to continue the excellent relationship they have with transporting energy items across the border,” Benedict stated. Suspending pipeline construction does not always equate into a one-for-one boost in crude-by-rail volumes, according to Benedict. “The essence of the story is, its going to have some impact on crude-by-rail. Its not going to shift all 830,000 barrels daily onto the rails, but any extra quantity is potentially going to have some effect,” Benedict said. Several factors will influence just how much crude moves by rail. In addition to the WCS/WTI cost spread, the railways capacity to deal with crude-by-rail is vital. Not just exist speed constraints for crude trains and possible social ramifications, there likewise capacity issues. The Canadian trains have reported record grain volumes over the previous several months, and unrefined volumes must take on grain, in addition to other products, for the same rail track. There are likewise other pipelines in between Canada and the U.S. that might take some of the volumes that would have been handled by the Keystone XL pipeline, Benedict stated. Those consist of Endbridges (NYSE: ENB) Line 3 pipeline, which runs from Canada to Wisconsin; Endbridges Line 5 pipeline, which runs under the Strait of Mackinac and Lake Michigan to the Michigan Peninsula; and the Trans Mountain pipeline thats under development in Canada. It would run from Alberta to the Canadian West Coast and after that potentially south to U.S. refineries. And one other element that could affect crude-by-rail is how much unrefined oil volumes enter into storage, Benedict stated. “Its not just a simple question of, does one pipeline being closed down ship all to rail? Its complex due to the fact that you need to consider all the different nodes of the supply chain, consisting of storage that would enter into play,” Benedict said. The Canadian railways views on crude-by-rail For their part, Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) have both said they expect to ship more unrefined volumes, but neither has suggested just how much volumes will grow. CP stated during its fourth-quarter incomes contact Jan. 27 that it has been seeing increased activity as price spreads have actually ended up being beneficial. The railway also anticipates to begin moving crude volumes from a diluent recovery system (DRU) near Hardisty, Alberta. United States Development Group and Gibson Energy had actually accepted construct and run the DRU in December 2019. As part of that agreement, ConocoPhillips Canada will process the inlet bitumen mix from the DRU and ship it via CP and Kansas City Southern (NYSE: KSU) to the U.S. Gulf Coast. “These DRU volumes will provide a more secure pipeline-competitive option for carriers and will assist to stabilize our unrefined service into the future,” CP Chief Marketing Officer John Brooks stated throughout the profits call. CP President and CEO Keith Creel likewise said he sees U.S. actions on the Keystone pipeline as benefiting crude-by-rail and the DRU volumes. The actions “bode for more strength and more prospective demand for crude. We think it develops more support for scaling up and growth of the DRU. Were bullish on that opportunity,” Creel stated. He continued, “We still see the short-term, not long-term … pipeline capacity [ultimately] catch up  we simply believe there is a longer tail on it right now. We believe theres going to be an area for some prospective upside in both spaces.” On the other hand, in a Jan. 27 interview with Bloomberg, CN President and CEO JJ Ruest called crude-by-rail a “question mark” in terms of what energy outlook the train is seeing for 2021. Ruest stated low oil prices, decreased travel and the Keystone pipeline cancellation are amongst the aspects influencing CNs energy outlook. However, crude-by-rail might be a “slight favorable bump on the rail industry,” Bloomberg priced quote Ruest as stating. CP and CN decreased to comment further to FreightWaves about crude-by-rail, and CN directed FreightWaves to the Bloomberg article. Register for FreightWaves e-newsletters and get the current insights on freight right in your inbox. Click here for more FreightWaves posts by Joanna Marsh. 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