A coalition of companies has come together in a creative new way to push more Canadian crude out into the market via rail, even as a long-term threat to Canadian crude-by-rail shipments is starting to see the first steps toward reality.
The project announced this week that will supply more Canadian crude out into the market by rail involves an energy logistics company (US Development) (NYSE: USDP), a Canadian oil infrastructure company (Gibson Energy) (TSX:GEI.TO), a major oil company (ConocoPhillips) and two railroads (Canadian Pacific and Kansas City Southern).
Here’s how it will work, according to an announcement by Gibson and USD. One of the limitations to how much Canadian crude by rail that can be sent into the U.S. is that the usually heavy crude after coming out of the ground needs to be blended with a diluent, a category of products that includes all sorts of light petroleum grades. The diluent enables movement of the crude that would otherwise be problematic due to its thickness.
But there’s a problem with diluent — it’s more flammable. And it has been diluent that has been cited as a key reason why some derailments involving crude by rail shipments led to explosions, some of them tragic such as the Lac-Megantic derailment in Quebec in 2013 that killed almost 50 people and created what has been described as a “tsunami of fire.”
Under the five-company arrangement announced earlier this week, USD and Gibson will build a diluent recovery unit (DRU) near the key oil pipeline terminal city of Hardisty, Alberta. The oil, according to a statement released by the two companies, will come from ConocoPhillips Canada (SONAR: STOCK.COP) at a rate of 50,000 b/d.
According to the companies, the facility will use a DRU technology that is patented by USD. It takes the diluent out of the joint diluent-bitumen product that now gets shipped — current movement could more actively be described as bitumen by rail rather than crude — and creates a product called DRUbit.
In a graphic presentation of the plan, Gibson referred to DRUbit as “a more concentrated heavy oil specifically designed for rail transportation.” The diluent would then stay in the Alberta market, where it is needed to treat crude for shipment on pipelines, and the DRUbit would head south into the U.S.
The two other partners in the five-party arrangement, Kansas City Southern (SONAR: STOCK.KSU) and Canadian Pacific (SONAR: STOCK.CP) , will be handling the shipment of the DRUBit.
The Gibson/USD plan is not the only one aimed at tackling this issue. Cenovus Energy, a large Canadian oil and gas company, said it is “evaluating” building a DRU at its Bruderheim transloading facility north of Alberta. In its statement on its possible plans, Cenovus said Bruderheim now can load and ship 100,000 barrels/day of oil, but it’s on its way to 120,000 b/d.
The statement said that the dilbit it now ships is 70% bitumen and 30% diluents. Theoretically then, elimination of the diluent from the mix would enable the volume of crude by rail to increase a little more than 40%. However, that doesn’t necessarily mean that the number of railcars will increase 40%; it means that what the tank cars are carrying, having eliminated diluent from the mix, will be 40% more crude than previously.
The availability of railcars is a significant issue in Alberta, according to Sandy Fielden, the chief energy analyst at Morningstar. In an email to FreightWaves, Fielden said the availability of railcars “is a big restriction.” At present, the unit trains being loaded up to take crude to the U.S. Gulf are 120 cars, with about 600 barrels per car. Loading takes a day, Fielden said; the journey to the Gulf takes 12 days.
“There have been shortages of compliant tank cars,” Fielden said in his email. That is why the Alberta government last year jumped in and purchased railcars to help move crude out to market.
“Railroads are much more insistent on term agreements before they will ship,” Fielden said. They look for “take or pay” deals that last a year. That’s one of the reasons Alberta made the purchase, he added.
The irony is that all the efforts to increase the shipments of bitumen and crude come as the Trans Mountain Pipeline is getting ready to start laying pipe for its expansion. The Trans Mountain line carries oil from Alberta out to the west coast of Canada, in Burnaby, B.C., for export to world markets. The existing line carries 300,000 b/d and is almost always running full. The expansion would mean another 590,000 b/d of capacity.
Earlier this week, the company — which is government-owned and is considered a Crown Corporation — said it expected to start laying pipe by the end of the year. Actual construction began in August.
There has been significant litigation and regulatory action surrounding the pipeline, and some press reports in Canada view it as far from over. But Trans Mountain this week made no reference to those potential hurdles in its announcement.
Canadian crude-by-rail has gotten another significant boost of late. While the province of Alberta has restricted crude production in order to protect the price of Western Canada Select, the province’s key grade, it recently allowed some restricted production to come back on line under the provision that the crude move to markets on rail. That exemption began this month. There really isn’t much choice given that other pipelines are running full.
In a Reuters story about the exemption, Mark Little, the CEO of Suncor, said he believed there was additional capacity to move 200,000 to 300,000 b/d of oil out of the province by rail.
Canadian crude by rail shipments recorded a record level of about 353,800 b/d last December. For September, the latest month for which National Energy Board figures are complete, the level was 319,600 b/d. The research firm of Genscape reported that November crude-by-rail shipments were 352,000 bpd in November, when a spill on the Keystone Pipeline and a subsequent shut-in forced more oil on to trains.
But note that even if another 200,000 b/d was added onto the record from last December, it’s at about the level of the additional 590,000 b/d of capacity that is being added by the Trans Mountain expansion. But Canadian production will be increasing too. The Canadian Association of Petroleum Producers estimates that production in western Canada will rise to 5.76 million b/d in 2035 from 4.36 million b/d last year. But will the combination of an expanded Trans Mountain and the beleaguered Keystone XL pipeline, if that is ever built, mean there will be enough pipeline capacity for all that growth, leaving little for rail?
Fielden said that “for the most part,” the Trans Mountain expansion could be the end of crude-by-rail “until the new line fills up again.” He also noted that the expansion would go to the West Coast, not to the Gulf Coast, so it wouldn’t necessarily kill the crude-by-rail movements to the south.