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Guest Post: "Peak Rail" – Has The Crude Shipping Train Left The Station?

Tyler Durden's picture




 

Submitted by Keith Schaefer of OilPrice.com,

Some call it the “holy rail.”

In Alberta Canada, an estimated 120,000 barrels of oil per day are shipped out by train to the U.S. east coast and Gulf coast region.

By the end of the year - when several terminals are completed - that number could reach 200,000 barrels a day.

Despite rail costs doubling pipeline tariffs, the logistics have often been worth the time for producers - those that have been able to get a better price railing it past the mid-continent refineries all the way to the US East Coast and Gulf Coast.

But just as Canadian rail use is set to soar again, say analysts - rail may no longer be economic. 

In fact, rail could be a victim of its own success.

“In May or June, producers that have traditional access to pipe may see better netbacks than rail,” one oil and gas marketer told me last week.  Netback is the industry word for profit per barrel.

Railing oil has been more profitable than transporting by pipe for a lot of Canadian producers since last summer--when the difference between US and Canadian oil prices widened.  It has also been necessary, as producers have had to find alternate routes to market—rising oil volumes competed for limited pipeline space.

And while pipeline tariffs might be cheaper than rail, the additional fees add up: producers often have to shell out trucking fees to a pipeline-connected battery, plus diluent fees (diluent makes heavy oil flow in the pipe better) and perhaps a fee to remove water from the oil to bring it up to pipeline spec.

“The netback has been greater by rail—usually more than 10% better than the pipeline-connected alternative,” says Chris Cooper, CEO of Aroway Energy, a 1000 bopd producer in southern Saskatchewan. “In some months it can exceed 20%.”

Smaller producers without access to the financing needed for long-term (10-20 years) contracts on pipelines, make every penny count when marketing their barrels. Cooper’s savings are diluent costs of $6/b and pipeline fee/tariffs of almost $1.50/barrel.

“The price paid for the crude shipped to the rail facility fluctuates on WCS prices,” Cooper says. “We were getting $45-$50 in Jan, we’re getting $66.72 today.”

Last year the rail rush was driven by limited pipeline capacity and the wide gap between the price for US oil and the price for Canadian oil.  The difference between the two (or the difference in oil price between any two places) is called the “differential."

There was some BIG differentials at Christmas 2012—Canadian light oil traded as low as $68/barrel and heavy oil at $48/barrel.

At the same time, refiners on the U.S. Gulf Coast and northeast were paying overseas prices for their heavy oil feedstock, around $110/barrel.  That’s a big differential! So there was lots of room to spend $14-$18/barrel to rail it to a much higher priced market.

Fast forward to late April 2013.  Light oil only has $3/bbl discount to WTI, trading at $86.13/bbl and heavy oil (WCS, or Western Canada Select) gets $71.431.  Part of the reason for higher prices is seasonal; less oil gets produced in Canada in Q2 because of spring break up, so supply is less.  But another reason is that rail has created a bigger demand by making Canadian oil available to more US refineries.

When Canadian crude was selling $40 less than its U.S. counterpart, rail made sense; producers paid $14/bbl to hit northeast refineries or $14-$18 to the U.S. Gulf Coast, where refineries paid Brent prices of up to $119/barrel.

However, when the Canadian-US arb tightens to $12-$14/bbl, like it is now, it may not be worth it.

In addition to the narrow differential, the cost to ship crude by rail, from loading prices to rental fees, has jumped in a classical supply-demand imbalance response.

Shipping oil by rail used to be the answer to tight pipeline capacity and cheap Canadian crude.  But the question now is… has that train left the station?

WIDE DIFFERENTIALS MAKE RAIL SENSE

Analysts and producers say shipping crude by rail, usually an expensive choice, made sense when West Texas Intermediate (WTI) was $20 per barrel less than Brent priced crude, and Western Canada Select was about $15 under WTI.

Refiners on the U.S. Gulf Coast and the northeast U.S. and Canada pay higher international prices based on Brent, so when the difference between coastal and inland crude widens, the netback from rail is higher, especially if you can’t get pipeline capacity.

Last November, Southern Pacific was raking in $20-$30/bbl more by railing and barging its bitumen to Louisiana than it would have at the congested Cushing, Oklahoma hub. The junior oil sands producer paid $31/bbl to rail and barge its oil to a Louisiana refinery, compared to $8/bbl by pipeline. But a $20 differential from Brent and lower diluent costs made the move profitable.

Cooper says that typically, a company’s oil marketer negotiates and lines up rail loading space for crude trucking shipments out of the field. Even so, high demand has translated into waits of up to six months for rail loading space. Once at the terminal the custody transfer is made and the producer gets paid a single price for its crude.

“If you’re bigger, doing like 10,000 barrels of oil per day, those operators probably have an ability to rent rail cars somewhere from somebody to get it to the right refinery; we’re too small to do that. Others have rail agreements and agreements to bring back diluent in the same cars.”

Approximately 19,000 tank cars were ordered by Canadian companies, according to Rail Theory Forecasts. The railcars are insulated to carry heavy crude but will not be delivered until 2014.

Most producers have opted to lease tank cars, for term contracts of up to five years on average, rather than build. They are taking advantage of the thousands of kilometres of railroad tracks which already exist, crisscrossing North America, connecting to industrial hubs, pipelines and waterways.

In Western Canada, transportation companies have been busy expanding and building new transload terminals to total about 16 facilities run by six major players - Canadian Pacific Railway, Altex Energy, Canadian National Railways, Torq Transload, Gibson Energy, Canexus Corp. and Keyera/Enbridge.

CP said in December it would be shipping 70,000 carloads of crude by the first quarter of 2013, out of Canada and the U.S. That’s up from 500 in 2009.

The company expects to transport 44.8 million barrels this year, based on about 640 barrels for each rail car, up from 8.3 million barrels of crude oil in 2011.

Three years ago rival Canadian National didn’t even ship oil. The railway firm moved some 3.2 million barrels of crude in 2011, an estimated 19.2 million barrels by the end of 2012, and could eventually handle 200,000 barrels a day or more.

The run for rail started in North Dakota when producers untapped tight oil reserves with horizontal drilling and multi-staged fracturing. Volumes exploded without enough pipeline capacity to move product to market.

By 2012 the number of U.S. trains moving oil soared to 233,811 carloads, up from 9,500 carloads just five years prior.

Keep in mind those numbers look to be derailed as the price of Canadian crude climbs and the netback to shipping by train drops.

 

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Fri, 04/26/2013 - 17:26 | 3503577 CitizenPete
CitizenPete's picture

too much minutiae -- really, can't we just say -- Hey look over here, just when you caught your breath your still going to be getting fucked.  It's not Torture by bunda -- its Death by bunda. 

 

BTW, if you really want a big big penis in your hamburger bun story ... look at the spot price of coal at the mine ... and the price of coal after the good ol' boys (ulimatley working for the "Oracle of Omaha") deliver it to the GenCo. 

Fri, 04/26/2013 - 18:00 | 3504044 BobPaulson
BobPaulson's picture

The arb come from the issues transporting lignite which has a nasty habit of auto-combustion en route. Build your steam plant close to the mine.

Fri, 04/26/2013 - 15:32 | 3503585 ILikeBoats
ILikeBoats's picture

So what does Warren Buffett's purchase of the railroads mean, then?

Fri, 04/26/2013 - 15:56 | 3503621 autofixer
autofixer's picture

It means he opposes the Keystone Pipeline on environmental grounds. (sarc)

Fri, 04/26/2013 - 16:06 | 3503681 francis_sawyer
francis_sawyer's picture

WWCD ~ <What Would Cornelius Do>

Fri, 04/26/2013 - 16:33 | 3503754 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

WWCD – “he’d go ape-shit on you”,  “ why he’d come at you like a Spyder Monkey”

Please reference;

Talladega Ricky Bobby Dinner scene http://www.youtube.com/watch?v=vuAUI_0knfk

 

On a more serious note;

Didn’t Standard Oil make a play on lands surrounding cities like LA so as to keep rail out?

Now rail is playing with oil or is it?

Fri, 04/26/2013 - 17:32 | 3503962 Mark Carney
Mark Carney's picture

WERE WORKING ON IT, were building so many damn pipelines we do not have enough competent workers.  Our company just got another contract from Enbridge, cannot handle the work load here.

Fri, 04/26/2013 - 15:38 | 3503592 Dr. Engali
Dr. Engali's picture
By 2012 the number of U.S. trains moving oil soared to 233,811 carloads, up from 9,500 carloads just five years prior. Warren Stuffit would like to thank the administration and his fellow cronies for helping his bottom line.
Fri, 04/26/2013 - 15:39 | 3503603 orangegeek
orangegeek's picture

Hollywood helped too - all the "stop keystone" crap.

Fri, 04/26/2013 - 15:43 | 3503607 Dr. Engali
Dr. Engali's picture

Yep as paid actors they are in on it too.

Fri, 04/26/2013 - 16:06 | 3503672 adr
adr's picture

and for letting him cross the border 100x to rack up duties.

Fri, 04/26/2013 - 15:34 | 3503594 orangegeek
orangegeek's picture

And if the price of oil falls, this will all be for not.  WTI Monthly looks bearish.

 

http://bullandbearmash.com/chart/monthly-spot-wti-oil-climbs-sharply-mar...

 

For what its worth, WTI is down about 4% in April.

Fri, 04/26/2013 - 15:35 | 3503596 Kirk2NCC1701
Kirk2NCC1701's picture

Not to worry, Prime Minsiter Harper's conservatives will sort it out.  After consulting with Obama's energy+environment Czar. /s

Fri, 04/26/2013 - 15:49 | 3503601 Floodmaster
Floodmaster's picture

The future is electric, in the long run, the Military-Petroleum Complex is doomed. Fossil fuel is energy for cavemans.

Fri, 04/26/2013 - 15:58 | 3503645 NotApplicable
NotApplicable's picture

Tesla, is that you?

Fri, 04/26/2013 - 17:25 | 3503936 Citxmech
Citxmech's picture

Phhht.

F'n Boeing can't even get the batteries to work on it's latest dino-powered rig - which should be about as proven as you can get right now.  I shudder to think what an "all-electric" version would be like (if that was even possible).

Fri, 04/26/2013 - 16:05 | 3503669 adr
adr's picture

Yep, because the US power grid can handle even 10% of the cars switching to electric.

All is relative. If all cars were electric, electric rates would increase to the point where you would save no money over a gasoline powered car. As an added bonus running everything else in your house would cost 400% more.

Unless you welcome $900 a month electric bills.

-----

OHHHH I FORGOT!!! Solar panels and wind turbines!!!!!

I guess I can only drive my car on the 100 days of sunshine I get a year. I'll also need to figure out how to turn my house 90o

 

Fri, 04/26/2013 - 16:16 | 3503692 Floodmaster
Floodmaster's picture

tesla, bumper car technology, airless maglev(4,000 MPH), Swissmetro ... it's all about efficiency

Fri, 04/26/2013 - 16:39 | 3503778 negative rates
negative rates's picture

Which once again begs the question, are yeast smarter than humans? And too a large extent, yes they are!

Fri, 04/26/2013 - 16:28 | 3503741 WillBest
WillBest's picture

just replace all cars with driverless cars and watch fuel consumption plummet 60% per passenger mile due to lack of accel/decel and use of drafting

Fri, 04/26/2013 - 16:45 | 3503781 DaveyJones
DaveyJones's picture

and the part that really sucks is that none of those facts change the fact that more and more energy is necessary to extract oil. The bottom line is that energy, no matter what form will become "more expensive" or more accurately, current solar energy will gradually replace condensed, stored solar energy.  

Fri, 04/26/2013 - 17:31 | 3503958 balz
balz's picture

Cars are doomed as well. Check where you live:if you live farther than 10 miles away from everything you need for your daily life, you will be in big trouble.

Fri, 04/26/2013 - 18:29 | 3504116 WillBest
WillBest's picture

Everything you need still has to get within 10 mi from where you live

Fri, 04/26/2013 - 15:38 | 3503604 SilverDOG
SilverDOG's picture

 

 

Who gives a shit.

They are making money.

Ship it; and STFU Bitchez!

Fri, 04/26/2013 - 15:40 | 3503608 CrashisOptimistic
CrashisOptimistic's picture

FYI factoid, when oil is refined, the output is thinner liquid (gasoline).  The volume thereby expands.  So a barrel of oil input may yield 1.3 barrels of gasoline.

That 0.3 barrels "refinery gain" is counted by the EIA as "oil production".  Just about the only country in the world that does this.  So the heavier and thicker the crude, the more refinery gain there will be for that parameter.

And now the ultimate bullshit -- if Venuzuela ships in some crude, and gasoline is shipped back to Venezuela, the refinery gain is called "US oil production".

Fri, 04/26/2013 - 16:48 | 3503809 DaveyJones
DaveyJones's picture

I can't believe the US oil industry lies

Fri, 04/26/2013 - 17:12 | 3503899 Clycntct
Clycntct's picture

Not sure of the facts or the physics but not sure of your statement.

http://energyalmanac.ca.gov/gasoline/whats_in_barrel_oil.html

At your rate it would =55.86 gal.

Fri, 04/26/2013 - 17:45 | 3504005 CrashisOptimistic
CrashisOptimistic's picture

Nod.  Intended to be approximate.  But also it's somewhat dependent on the API rating of the crude.  All crude is not the same.  We might nudge up to 0.3 with the right weight input.  And I meant all the outputs, not just the gasoline portion -- but it's good you checked and see how refinery gain exists.

Fri, 04/26/2013 - 18:42 | 3504161 machineh
machineh's picture

EIA shows refinery gain is consistently negative:

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mpgryus3&f=m

 

 

Fri, 04/26/2013 - 20:05 | 3504388 CrashisOptimistic
CrashisOptimistic's picture

You are misunderstanding their convention, and it is easy to do.  Here's the definition:

 

Refinery Processing Gain
The amount by which total volume of products output is greater than the volume of crude oil and other feed stocks. This difference is due to the processing of crude oil into products that, in total, have lower specific gravity than the crude oil processed. Therefore, in terms of volume, the total output of products is greater than input.
Fri, 04/26/2013 - 15:58 | 3503653 adr
adr's picture

So the refineries in my area were paying $60 for a barrel of oil but I was paying $3.60 a gallon for gas?

Thanks WALL STREET!!!!

RBOB has completely disconnected from reality. It trades like a penny stock now.

competition in producers = good

competition by speculators for a limited number of contracts = bad

Since 2000 the competition in production has been decimated, the speculator competition is red hot with more entering the market every day.

 

Fri, 04/26/2013 - 16:41 | 3503788 negative rates
negative rates's picture

Most of that stuff gets sent to brazil and used as asphault so they can expand the whole 16,000 miles of paved road they have down there. Gasoline comes from a whole nother place.

Fri, 04/26/2013 - 22:01 | 3504732 otto skorzeny
otto skorzeny's picture

never mistake millions of miles of paved roads and millions of square miles of parking lots and millions of SUVs and minivans as being a sign of a "civilized" society.

Fri, 04/26/2013 - 16:18 | 3503702 Ignorance is bliss
Ignorance is bliss's picture

Why all the oil from Canada? Haven't you heard the U.S. is energy independent and may soon become a net exporter....really I heard it on CNBC.

Fri, 04/26/2013 - 16:40 | 3503774 Smuckers
Smuckers's picture

Somewhere, a muppet is screaming.

 

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