Oil-by-rail gathers steam as new capacity comes on line – by Yadullah Hussain (National Post – January 10, 2014)

The National Post is Canada’s second largest national paper.

Canada’s first oil-sands unit train, loaded with MEG Energy Inc. crude, rolled out of Canexus Corp.’s Bruderheim, Alta. terminal just before Christmas, marking a new chapter in the country’s crude-by-rail phenomenon.

The 100,000-bpd terminal northeast of Edmonton is the first of many large-scale crude-loading terminals planned for Western Canada that will have a combined capacity of 890,000-bpd — more than the 830,00-bpd Keystone XL pipeline — as crude-by-rail terminal operators slowly embed themselves in the oil patch and expand their services to move away from being mere arbitrage plays.

The moves are viewed by some as a vote of confidence in the moving oil by rail, despite the increasing scrutiny the sector is under in the wake of numerous derailments of crude-carrying trains.

“There is no question the lack of pipeline capacity and with questions about Keystone, Trans Mountain and Northern Gateway, most people believe we are at least in a three- to five-year period of limited pipeline capacity, and therefore you will see persistent differentials that will justify rail,” said Gary Kubera, CEO of Canexus, who worries about an excess of oil-by-rail capacity.

“Down the road, we will have a mix of services and many of those services will not be dependent on differentials,” Mr. Kubera said in a phone interview from his Houston office. “We will enable the Bruderheim terminal site to handle condensate or diluent, as the oil sands growth continues.”

Oil sands, which has the consistency of peanut butter, must be mixed with diluents — lighter blends or condensates — before it can be transported via pipelines. But rail does not necessarily require diluents, cutting costs by as much as 30%.

“Depending on the cost of diluent at any given time, and the density of the crude, the cost associated with diluent per barrel is between $5 and $8,” said Jarrett Zielinski, CEO of Torq Transloading Inc., which is building a $100-million facility in Kerrobert, Sask. The terminal, set to be built by the the third quarter, will feature two, 120-car unit trains carrying up to 168,000 bpd.

A barrel of Canadian heavy blend can cost $17 to $21 to ship to the Gulf Coast via regular ‘manifest’ trains, compared to $7 to $11 via pipeline. However, unit — or dedicated — trains can help shave off between $3 and $4, according to industry data. Transporting condensates back to the original destinations also helps margins.

Large-scale, long-term contracts with terminal operators also help producers rein in costs and improve access to destinations under served by pipelines.

Shipments of Canadian crude by rail have reached 175,000 barrels per day, compared to just under 24,000 bpd at the start of 2012, as light and heavy oil producers seek ways to overcome pipeline capacity issues plaguing the Canadian energy sector.

Mr. Zielinski expects to ship 100,000 bpd of Canadian heavy oil this year compared to 30,000 to 40,000 bpd averaged last year. The company’s six facilities dotted across Saskatchewan and Alberta have either been upgraded or are in the middle of expansion, as it expects heavy sour Western Canadian “neat barrel” demand to grow as Western Canadian grades replace declining and more expensive blends imported by tanker.

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