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What Keystone Pipeline Cancellation Means For Crude-by-rail

President Joe Biden’s revocation of the March 2019 allow enabling the development of the Keystone XL pipeline will possible end in extra crude-by-rail volumes, in accordance to trade observers. But how a lot volumes will enhance might largely rely on the value that heavy crude oil can fetch within the international 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,” stated Barry Prentice, University of Manitoba provide chain administration 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 stated. Indeed, the oil markets function one extremely seen issue figuring out how a lot crude will get produced and shipped. For the manufacturing and transport of heavy crude oil from western Canada and the U.S. to be worthwhile, the pricing unfold between a heavy crude product equivalent to Western Canadian Select (WCS) and a light-weight, candy crude equivalent to West Texas Intermediate (WTI) wants to be favorable. WCS crude is often priced at a reduction towards WTI crude due to its decrease high quality and its better distance from the U.S Gulf Coast refineries. The COVID-19 pandemic was among the many components that contributed to WTI crude oil costs’ tailspin in 2020. Why the curiosity in crude oil manufacturing and transport? The oil market is not the one issue that dictates crude oil manufacturing and its subsequent transport. Another is the huge oil reserves and the quantity of funding already directed into crude oil manufacturing, in addition to crude oil’s export prospects. According to the federal government of Alberta, the province’s oil sands symbolize the third-largest oil reserves on this planet, following Venezuela and Saudi Arabia. Its reserves equal about 165.4 billion barrels, and capital investments to the upstream sector have equaled as a lot as $28.3 billion in 2016 and $26.5 billion in 2017. Furthermore, in accordance to Natural Resources Canada, 98% of Canada’s crude oil exports in 2019 went to the U.S. Those investments and huge oil reserves have additionally resulted in important investments in different areas of the power sector, together with investments in pipelines. The pipelines deliver Canadian heavy crude south to U.S. refineries as a result of American refineries have been constructed and optimized to largely deal with heavier crude oil, in accordance to Rob Benedict, senior director of petrochemicals, transportation and infrastructure for the American Fuel and Petrochemical Manufacturers Association. Crude oil pipelines from Canada to the U.S. have been seen as an environment friendly means to transport massive quantities of Canadian heavy crude oil to U.S. Gulf Coast refineries. TC Energy’s 1,210-mile Keystone XL pipeline would have had a capability of 830,000 barrels per day with crude oil originating from Hardisty, Alberta, and heading to Steele City, Nebraska, the place it will then be shipped to U.S. Gulf Coast refineries. Had development continued, the pipeline would have entered service in 2023. But TC Energy deserted the challenge after Biden revoked an current presidential allow 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 stated in a launch final 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 stated. However, suspending pipeline development would not essentially translate right into a one-for-one enhance in crude-by-rail volumes, in accordance 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 stated. Several components will affect how a lot crude strikes by rail. In addition to the WCS/WTI value unfold, the railways’ capability to deal with crude-by-rail is essential. Not solely are there velocity restrictions for crude trains and doable social ramifications, there additionally capability points. The Canadian railways have reported document grain volumes over the previous a number of months, and crude volumes should compete with grain, in addition to different commodities, for a similar rail observe. There are additionally different pipelines between Canada and the U.S. that might take among the volumes that will have been dealt with by the Keystone XL pipeline, Benedict stated. Those embody Endbridge’s (NYSE: ENB) Line 3 pipeline, which runs from Canada to Wisconsin; Endbridge’s Line 5 pipeline, which runs below the Strait of Mackinac and Lake Michigan to the Michigan Peninsula; and the Trans Mountain pipeline that is below improvement in Canada. It would run from Alberta to the Canadian West Coast after which probably south to U.S. refineries. And one different issue that might affect crude-by-rail is how a lot crude oil volumes go into storage, Benedict stated. “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 stated. The Canadian railways’ views on crude-by-rail For their half, Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) have each stated they anticipate to ship extra crude volumes, however neither has indicated simply how a lot volumes will develop. CP stated throughout its fourth-quarter earnings name on Jan. 27 that it has been seeing elevated exercise as value spreads have grow to be favorable. The railway additionally expects to start shifting crude volumes from a diluent restoration unit (DRU) close to Hardisty, Alberta. US Development Group and Gibson Energy had agreed to assemble and function the DRU in December 2019. As a part of that settlement, ConocoPhillips Canada will course of the inlet bitumen mix from the DRU and ship it by way of 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 stated throughout the earnings name. CP President and CEO Keith Creel additionally stated 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 stated. 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 referred to as crude-by-rail a “question mark” when it comes to what power outlook the railway is seeing for 2021. Ruest stated low oil costs, decreased journey and the Keystone pipeline cancellation are among the many components influencing CN’s power outlook. However, crude-by-rail could possibly be a “slight positive bump on the rail industry,” Bloomberg quoted Ruest as saying. CP and CN declined to remark additional to FreightWaves about crude-by-rail, and CN directed FreightWaves to the Bloomberg article. Subscribe to FreightWaves’ e-newsletters and get the newest insights on freight proper in your inbox. Click right here for extra FreightWaves articles by Joanna Marsh. 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