President Joe Biden’s revocation of the March 2019 permit enabling the construction of the Keystone XL pipeline will likely result in more crude-by-rail volumes, according to industry observers. But how much volumes will increase could largely depend on the price that heavy crude oil can fetch in the global market.
“The cancellation of the Keystone pipeline project was inevitable once the government changed. Despite its merits or drawbacks, it is now a deflated political football,” said 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 has to go somewhere.”
But crude-by-rail “has been problematic because with the low price for oil, and the relatively higher price for rail transport, nothing looks very appealing. The problem is not oil supply, it is the reduced demand during the pandemic. Once we come out of this period, demand will return, and $100-per-barrel oil will, too,” Prentice said.
Indeed, the oil markets serve as one highly visible factor determining how much crude gets produced and shipped.
For the production and transport of heavy crude oil from western Canada and the U.S. to be profitable, the pricing 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 typically priced at a discount against WTI crude because of its lower quality and its greater distance from the U.S Gulf Coast refineries.
The COVID-19 pandemic was among the factors that contributed to WTI crude oil prices’ tailspin in 2020.
Why the interest in crude oil production and transport?
The oil market isn’t the only factor that dictates crude oil production and its subsequent transport. Another is the vast oil reserves and the amount of investment already directed into crude oil production, as well as crude oil’s export prospects.
According to the government of Alberta, the province’s oil sands represent the third-largest oil reserves in the world, following Venezuela and Saudi Arabia. Its reserves equal about 165.4 billion barrels, and capital investments to the upstream sector have equaled as much as $28.3 billion in 2016 and $26.5 billion in 2017.
Furthermore, according to Natural Resources Canada, 98% of Canada’s crude oil exports in 2019 went to the U.S.
Those investments and vast oil reserves have also resulted in significant investments in other areas of the energy sector, including investments in pipelines. The pipelines bring Canadian heavy crude south to U.S. refineries because American refineries were built and optimized to mostly handle heavier crude oil, according to Rob Benedict, vice president of chemicals and midstream for the American Fuel and Petrochemical Manufacturers Association.
Crude oil pipelines from Canada to the U.S. have been viewed as an efficient way to transport large amounts of Canadian heavy crude oil to U.S. Gulf Coast refineries.
TC Energy’s 1,210-mile Keystone XL pipeline would have had a capacity of 830,000 barrels per day with crude oil originating from Hardisty, Alberta, and heading to Steele City, Nebraska, where it would then be shipped to U.S. Gulf Coast refineries. Had construction continued, the pipeline would have entered service in 2023.
But TC Energy abandoned the project after Biden revoked an 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, advancement of the project will be suspended.The company will cease capitalizing costs, including interest during construction, effective January 20, 2021, being the date of the decision, and will evaluate the carrying value of its investment in the pipeline, net of project recoveries,” TC Energy said in a release last month.
The Keystone XL pipeline “is an essential piece that would have allowed Canada and the U.S. to continue the very good relationship they have with transporting energy products across the border,” Benedict said.
However, suspending pipeline construction doesn’t necessarily translate into a one-for-one increase in crude-by-rail volumes, according to Benedict.
“The gist of the story is, it’s going to have some impact on crude-by-rail. It’s not going to shift all 830,000 barrels per day onto the rails, but any additional amount is potentially going to have some impact,” Benedict said.
Several factors will influence how much crude moves by rail. In addition to the WCS/WTI price spread, the railways’ capacity to handle crude-by-rail is crucial. Not only are there speed restrictions for crude trains and possible social ramifications, there also capacity issues. The Canadian railways have reported record grain volumes over the past several months, and crude volumes must compete with grain, as well as other commodities, for the same rail track.
There are also other pipelines between Canada and the U.S. that could take some of the volumes that would have been handled by the Keystone XL pipeline, Benedict said. Those include Endbridge’s (NYSE: ENB) Line 3 pipeline, which runs from Canada to Wisconsin; Endbridge’s Line 5 pipeline, which runs under the Strait of Mackinac and Lake Michigan to the Michigan Peninsula; and the Trans Mountain pipeline that’s under development in Canada. It would run from Alberta to the Canadian West Coast and then potentially south to U.S. refineries.
And one other factor that could influence crude-by-rail is how much crude oil volumes go into storage, Benedict said.
“It’s not just a simple question of, does one pipeline being shut down ship all to rail? It’s complex because you have to consider all the different nodes of the supply chain, including storage that would come 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 crude volumes, but neither has indicated just how much volumes will grow.
CP said during its fourth-quarter earnings call on Jan. 27 that it has been seeing increased activity as price spreads have become favorable.
The railway also expects to begin moving crude volumes from a diluent recovery unit (DRU) near Hardisty, Alberta. US Development Group and Gibson Energy had agreed to construct and operate the DRU in December 2019. As part of that agreement, ConocoPhillips Canada will process the inlet bitumen blend 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 safer pipeline-competitive option for shippers and will help to stabilize our crude business into the future,” CP Chief Marketing Officer John Brooks said during 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 potential demand for crude. We think it creates more support for scaling up and expansion of the DRU. So, we’re bullish on that opportunity,” Creel said.
He continued, “We still see the short-term, not long-term … pipeline capacity [eventually] catch up [but] we just think there is a longer tail on it right now. So, we think there’s going to be a space for some potential upside in both spaces.”
Meanwhile, 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 prices, decreased travel and the Keystone pipeline cancellation are among the factors influencing CN’s energy outlook.
However, crude-by-rail could be a “slight positive bump on the rail industry,” Bloomberg quoted Ruest as saying.
CP and CN declined to comment further to FreightWaves about crude-by-rail, and CN directed FreightWaves to the Bloomberg article.
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Matt McDonald
With the new builds and retrofits over the past 10 years are there enough tank cars in service to support this or will additional new cars be needed?
Papa Lee
Hey you nitwits, how much cleaner will our air be and how much energy will we save by shipping the oil via rail or trucks versus by pipeline? Joe Biden has his head in the sand with this ridiculous action. He is repaying all of his cronies that helped pay for the printing and shipping of the bogus votes that got him elected.
Congratulations to all of the useful idiots that voted against Trump. Way to go (down the old proverbial toilet).
Larry C
Right or wrong the focus now in DC is toward reducing fossil fuel use.
Subsection – does aiding a partner in the fight against global warming sell oil make sense?
Subsection 2 – does subsidizing oil with tax breaks fit the new priorities?
Subsection 3 – the age of America being the replacement for the colonial powers in the middle east as under the bushes is also not consistent with the way ahead, right?
Subsection 4 – for oil were to return to $100 per barrel doesn’t that require failure of the alt-fuel future? Plus the more oil costs, the more economical other options become.
mrbigr504
I know $100.00 leads us making life decisions at the fuel pump with $4.00 a gallon for fuel! Personally I was glad Russia and Brazil and the US Gulf of Mexico was producing oil because that kept us from getting held by the short’n curls by the Saudis! Even though we have our own oil reserves and production, why do we (the consumer) keep getting between the back pockets? I’m far from an industrial economics major so please forgive my ignorance! But this some fk’d up sh-t!
William
I like to see the facts, not fighting
Rickey Smith
Warren Buffett lined Biden’s pockets with millions of dollars for this, since he owns BNSF. Interesting how the media doesn’t mention this fact
G C Gomez
Why don’t you do an article about how many billions of dollars Warren Buffet is set to gain since he owns BNSF and has a controlling interest in most other carriers AND is a major Democratic donor.
Earl Richards
The Keystone XL pipeline had to be stopped, because a toxic bitumen spill down into the Ogallala Aquifer would poison the drinking water for millions, which is worse than a weapon of mass destruction and would destroy the agriculture of the Great Plains states.
Bobabooey
Sure, a train full of oil doesn’t cross any bodies of water, right?
William
Yes dumb ass it does