Could rail be Alberta’s ticket to ride?
Canadian Pacific eyes West Coast bitumen deliveries modeled on business in Dakotas
Kevin Hatfield describes growth in North Dakota’s oilfields in terms befitting an oil driller’s fantasy. “Never-ending,” the senior director of gathering systems at Calgary-based pipeline giant Enbridge Inc. says. “It’s amazing,” he adds. “There’s no end in sight.”
The surge in production from tight oil pools in the sprawling Williston basin, although remarkable, has a downside. As daily output from the region climbed past 500,000 barrels late last year, producers there have been forced to confront a vexing challenge. Legions of workers have descended on the Midwestern state – unemployment hovered near three per cent as 2012 dawned, compared to a national average of 8.5 per cent – to help close an infrastructure gap so wide that associated natural gas is regularly burned off as a waste product for want of available pipeline capacity.
The shortfall has left oil producers scrambling and led to a mini-boom for railways as pipeline capacity struggles to match accelerated production forecasts. “Clearly there’s an element of distress in the infrastructure if you’re down to relying on rail as a major source” of transportation, Paul Horsnell, head of commodities research at Barclays Capital, told reporters as the London-based bank released its capital spending forecast for 2012. “I think you’re looking at rail being a stop-gap solution.”
Others (notably rail companies) read the signposts differently. Among U.S. shale plays rich in oil and natural gas liquids, the Bakken ranks third behind only the Permian basin in West Texas and the Mid-continent region as a draw for estimated North American capital expenditures in 2012, according to a survey of 350 companies conducted by Barclays. The rush to tap new supply pools embedded in dense rock has put the U.S. on track to become the second-largest contributor to global oil production growth between 2012 and 2013, accounting for a quarter of new supplies, Calgary-based investment bank Peters & Co. predicted in a winter market overview.
Such rosy forecasting has some convinced that North America, recalling days before the continent was crisscrossed by pipeline, is on the cusp of a great revival in shipments of crude oil by railroad. “We’re never going to displace pipelines, but I think we’re a very good option for contingent capacity,” says Tracy Robinson, vice-president of energy and merchandise at Canadian Pacific Railway Ltd. “We can get crude very quickly right now into marketplaces where pipelines don’t currently go and probably have no plans to go.”
It is a throwback with potentially grand implications. What began as a peripheral response to explosive growth in North Dakota’s oilfields, the thinking goes, might ultimately serve as a template for giving oil sands producers access to new markets they have long sought, but thus far failed to secure. The stakes are equally high for embattled CP, whose escalating war with activist shareholder Bill Ackman has exposed the staid railroad to withering, and unusually public, attacks on its operating performance.
In January, as tensions with Ackman’s Pershing Square Capital Management LP worsened, long-haul train loads of ethanol and oil were singled out in an open letter to CP shareholders written by company chairman and former Royal Bank of Canada chief executive John Cleghorn. He called them “innovative products” investors could count on for growth. “CP shareholders have benefited – and will continue to benefit – from the long-term contracts that management has negotiated with industry-leading companies,” the letter said.
One of those companies is Cenovus Energy Inc., which has contracted CP to load and transport up to 48 railcars – good for an additional 31,200 barrels of oil – from a terminal facility in Estevan, Saskatchewan, once every 20 to 35 days to markets not currently served by pipeline. For CP, the deal with Cenovus is an extension of a business model the railroader has already rolled out in the U.S., based on deliveries of Bakken crude to refiners in the Midwest, the Northeast and on the highly prized Gulf Coast. “This is a model that works, and it’s been demonstrated to work,” Robinson says.
Indeed, growth in the U.S. Bakken has accelerated so quickly that CP was forced to revisit mid-year forecasts last year that anticipated a near-term potential for just 8,000 carloads of crude per year. By January, 2011 volumes were expected to have hit 13,000 carloads, and the long-term potential the company sees for rail shipments has now doubled, from 35,000 to 70,000 carloads per year.
“Rail’s not a perfect solution,” cautions Martin King, vice-president of institutional research at FirstEnergy Capital. The Calgary investment bank estimated late last year that the proportion of railcars used to ship crude in the U.S. had increased from two to 11 per cent between 2008 and 2011, as producers eager to capitalize on a record differential between West Texas intermediate and Brent looked for any and all ways to get around a storage bottleneck at Cushing, Oklahoma. Still, railways are far from simpatico to an oil boom. “There are only so many volumes you can get on there,” King says.
Other drawbacks include the fact that trainloads consume oil, do not run continuously and are subject to mechanical issues and scheduling slowdowns. “You don’t really worry about that kind of stuff on a pipeline,” King says.
Robinson declined to discuss specific revenues – the firm typically charges a per-car fee based on distance to market and whether or not railcars carrying crude travel alone or as part of a larger unit – but she clearly sees a bright future for the business. “We’ve seen a lot faster growth in the U.S. than we had expected,” she enthuses. “We continue to be surprised on the upside of what’s possible and how quickly it’s coming.”
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