RBN Energy: Western Canada CBR load capacity "overbuilt and underutilized"

According to an analysis conducted by Sandy Fielden of RBN Energy LLC, based on current demand, rail load capacity for crude by rail (CBR) in Western Canada is “vastly overbuilt and underutilized.”

“As we have said, Canadian CBR has been a marginal utility to help get producers past severe congestion on the pipelines,” writes Fielden in Slow Train Coming: Canadian Crude Rail Load Terminals Overbuilt and Underutilized. “In the current price environment, rail is certainly not an attractive alternative if pipeline capacity is available. But remember that Canadian crude production is still set to expand in the next two years, and major pipeline projects out of Canada appear mired in permitting difficulties at the moment. That means rail may well come into play sooner rather than later in order to get new barrels to market. The challenge then will be using CBR while still maintaining positive netbacks at the least if, as expected, oil prices stay lower for a lot longer.”

A few key takeaways:

• The U.S. EIA (Energy Information Administration) has updated and revised its estimates based on access to additional information. The chart (pictured) shows the data from January 2012 up until November 2015, the latest month available. . . . [R]ail volumes out of Canada have not recovered anywhere close to 2014 levels. That is not only because of increased pipeline capacity but also because of worsening transport economics during 2015 as the spread between prices for WCS (Western Canadian Select) crude and U.S. benchmark WTI (West Texas Intermediate) narrowed from an average $18.50/Bbl in 2014 to $13.25/Bbl in 2015, at the same time as overall crude prices were in a downward free-fall. The lower WCS/WTI spread made rail freight costs much harder to justify, especially if pipeline capacity was available. . . . [T]he lower the crude price the higher the relative cost of rail transport, meaning rail transport has fast become a last-ditch option for Canadian producers.

• Historical CBR movements out of Canada . . . have never been particularly significant in the overall picture of Canadian crude imports to the U.S. At their peak in 2014, CBR shipments from Canada represented just 5% (on average) of U.S. crude imports. The falloff during 2015 meant that CBR shipments fell to an average 3.5% of imports between January and November 2015. Those numbers emphasize that, unlike North Dakota, where we saw CBR shipments peak at 75% of total takeaway crude in April 2013, Canadian CBR has performed a marginal rather than a major crude transport service. However, if we look at that marginal service from another perspective—the amount of CBR loading infrastructure that was actually built out in Canada during the past three years—it suggests that expectations were a great deal higher than the volumes shipped so far have justified. RBN Energy’s latest listing of 29 CBR load terminals in Western Canada (Alberta and Saskatchewan) provides details of terminal operators, railroad, location, facility type and capacity. (A PDF version of the table can be downloaded via the link at the bottom of this article.) As anyone who works with CBR will tell you, the theoretical capacity of a CBR terminal is well above what terminals actually expect, given train delays, loading volume snafus, and all the other complex operational issues that go along with CBR transportation. Nevertheless, even if you cut the theoretical capacity by 50%, there is still a lot of capacity that has been built [but] is not being used.

• Many of the 29CBR load terminals are small transload facilities located far north of Edmonton, close to the oil sands-producing regions where they specialize in moving small volumes of heavy bitumen crude blended with less diluent than pipeline-equivalent crudes. . . . Back in 2014, it made sense to cut back the volume of expensive diluent blend by shipping heavier bitumen by rail. Nowadays, the economics don’t work because rail freight costs are too high and infrastructure added to heat the bitumen for loading and unloading just adds to the cost, instead of improving the netback enough to make the economics work.

• About half a dozen of the terminals in the table were designed to be large-scale unit train facilities that can handle 100 tank cars or more of pipeline-quality blended crude. Of these, only three are currently operating, and only two have shipped meaningful volumes of crude in the past few months.