For the production and transport of heavy crude oil from western Canada and the U.S. to be profitable, the pricing spread in 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. WCS crude is normally priced at a discount rate against 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 huge oil reserves and the quantity of investment already directed into crude oil production, as well as crude oils export potential customers. The pipelines bring Canadian heavy crude south to U.S. refineries because American refineries were developed and enhanced to primarily deal with much 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 way to carry large quantities of Canadian heavy crude oil to U.S. Gulf Coast refineries.
BenzingaWhat Keystone Pipeline Cancellation Means For Crude-by-railPresident Joe Bidens cancellation of the March 2019 license making it possible for the construction of the Keystone XL pipeline will likely lead to more crude-by-rail volumes, according to market observers. How much volumes will increase could largely depend on the rate that heavy crude oil can bring in the global market. “The cancellation of the Keystone pipeline job was unavoidable once the federal government changed. Regardless of its merits or drawbacks, it is now a deflated political football,” stated Barry Prentice, University of Manitoba supply chain management teacher and former director of the Transport Institute there. “This indicates that more crude will need to move by rail. The substantial financial investments in the oil sands will not be abandoned, and the oil needs to go someplace.” But crude-by-rail “has actually been problematic due to the fact that with the low rate for oil, and the fairly greater rate for rail transport, absolutely nothing looks really enticing. The issue is not oil supply, it is the lowered need during the pandemic. Once we come out of this period, need will return, and $100-per-barrel oil will, too,” Prentice said. Certainly, the oil markets serve as one highly visible factor figuring out how much crude gets produced and delivered. For the production and transport of heavy unrefined oil from western Canada and the U.S. to be successful, the prices spread in 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 beneficial. Because of its lower quality and its greater distance from the U.S Gulf Coast refineries, wcs crude is usually priced at a discount against WTI crude. The COVID-19 pandemic was among the factors that contributed to WTI crude oil costs tailspin in 2020. Why the interest in unrefined oil production and transportation? The oil market isnt the only aspect that dictates unrefined oil production and its subsequent transportation. Another is the vast oil reserves and the amount of investment currently directed into unrefined oil production, as well as petroleums export prospects. According to the federal government of Alberta, the provinces oil sands represent the third-largest oil reserves worldwide, following Venezuela and Saudi Arabia. Its reserves equal about 165.4 billion barrels, and capital expense to the upstream sector have actually equated to as much as $28.3 billion in 2016 and $26.5 billion in 2017. In addition, according to Natural Resources Canada, 98% of Canadas crude oil exports in 2019 went to the U.S. Those investments and large oil reserves have likewise resulted in significant financial investments in other locations of the energy sector, consisting of financial investments in pipelines. The pipelines bring Canadian heavy crude south to U.S. refineries because American refineries were constructed and optimized to mostly handle heavier petroleum, according to Rob Benedict, senior director of petrochemicals, transportation and facilities for the American Fuel and Petrochemical Manufacturers Association. Petroleum pipelines from Canada to the U.S. have actually been deemed an effective method to transport large quantities of Canadian heavy petroleum 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 unrefined oil originating from Hardisty, Alberta, and heading to Steele City, Nebraska, where it would then be delivered to U.S. Gulf Coast refineries. Had building continued, the pipeline would have gone into service in 2023. TC Energy abandoned the job after Biden withdrawed an existing governmental authorization for the pipeline in January. “TC Energy will evaluate the decision, evaluate its implications, and consider its choices. As a result of the expected cancellation of the Presidential Permit, improvement of the job will be suspended.The business will stop capitalizing costs, consisting of interest during building and construction, efficient January 20, 2021, being the date of the choice, and will evaluate the bring worth of its investment in the pipeline, net of task recoveries,” TC Energy said in a release last month. The Keystone XL pipeline “is an essential piece that would have permitted Canada and the U.S. to continue the excellent relationship they have with carrying energy products throughout the border,” Benedict stated. However, suspending pipeline building and construction does not always translate 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 effect on crude-by-rail. Its not going to shift all 830,000 barrels each day onto the rails, but any additional quantity is possibly going to have some impact,” Benedict stated. A number of factors will influence just how much crude moves by rail. In addition to the WCS/WTI rate spread, the trains capacity to deal with crude-by-rail is important. Not just exist speed limitations for unrefined trains and possible social implications, there also capability issues. The Canadian railways have reported record grain volumes over the previous a number of months, and crude volumes must take on grain, as well as other products, for the very same rail track. There are also other pipelines in between Canada and the U.S. that could take a few of the volumes that would have been dealt with by the Keystone XL pipeline, Benedict said. Those consist of Endbridges (NYSE: ENB) Line 3 pipeline, which ranges 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 advancement in Canada. It would run from Alberta to the Canadian West Coast and after that possibly south to U.S. refineries. And another aspect that might influence crude-by-rail is just how much petroleum volumes go into storage, Benedict said. “Its not just an easy concern of, does one pipeline being closed down ship all to rail? Its complex since you have to think about all the different nodes of the supply chain, consisting of storage that would enter play,” Benedict stated. The Canadian railways views on crude-by-rail For their part, Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) have both said they anticipate to ship more crude volumes, but neither has suggested simply how much volumes will grow. CP stated throughout its fourth-quarter earnings contact Jan. 27 that it has been seeing increased activity as rate spreads have ended up being favorable. The railway also expects to begin moving crude volumes from a diluent healing system (DRU) near Hardisty, Alberta. US Development Group and Gibson Energy had actually consented to construct and operate 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 offer a more secure pipeline-competitive alternative for carriers and will help to stabilize our unrefined company into the future,” CP Chief Marketing Officer John Brooks stated throughout the earnings call. CP President and CEO Keith Creel also 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 possible demand for crude. We believe it creates more assistance for scaling up and growth of the DRU. So, were bullish on that chance,” Creel said. He continued, “We still see the short-term, not long-lasting … pipeline capacity [eventually] capture up  we just think there is a longer tail on it right now. So, we think theres going to be an area for some possible upside in both areas.” 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 railway is seeing for 2021. Ruest said low oil rates, reduced travel and the Keystone pipeline cancellation are among the elements affecting CNs energy outlook. Crude-by-rail might be a “small favorable bump on the rail market,” Bloomberg priced quote Ruest as stating. CP and CN declined to comment even more to FreightWaves about crude-by-rail, and CN directed FreightWaves to the Bloomberg short article. Register for FreightWaves e-newsletters and get the latest insights on freight right in your inbox. Click on this link for more FreightWaves short articles by Joanna Marsh. 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