CN locking in oil contracts as crude volume leaps 50 percent

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Canadian National power leads a westbound empty oil unit train through River Forest, Ill., on the Union Pacific on Aug. 25, 2018. CN is seeing increased crude-by-rail business.
TRAINS: David Lassen

DANA POINT, Calif. – Canadian National’s crude oil traffic is up 50 percent so far in the third quarter and will rise further this fall as the railway completes mainline capacity projects and places new conductors in service in Western Canada.

“Crude by rail is very positive,” CN Chief Financial Officer Ghislain Houle told an investor conference Wednesday.

CN is on a pace to haul 70,000 carloads of crude oil this year, he says. That’s down from 120,000 at the peak in 2014, but well above the low point in 2016.

“We are locking in customers with multi-year contracts that have volume commitments. We are locking in customers at very favorable rates. And we’re doing this prudently as we are bringing on capacity,” Houle told the Morgan Stanley Sixth Annual Laguna Conference.

Cenovus Energy, a Canadian oil producer, signed a deal with CN that would boost crude shipments by 50 percent. [See “New deal could increase Canadian crude-by-rail shipments by 50 percent,” Trains News Wire, Sept. 10, 2018.] And this summer, Canadian oil exports by rail to the U.S. hit record levels.

CN’s crude volume, which it measures in revenue ton-miles, would have been higher had not it been for the railway’s capacity challenges in Western Canada, particularly on its spine between Edmonton, Alberta, and Winnipeg, Manitoba.

The railway was swamped by stronger-than-expected traffic growth a year ago and is spending $400 million this year to add sections of double track, extend and add passing sidings, and boost yard capacity. It also has leased locomotives, ordered 260 units from General Electric, and stepped up hiring of conductors.

“Could we lock in more business? Yes we could. There’s more demand than actually what we are providing today. But we are being prudent,” Houle says.

Capacity projects should be complete later this fall. And CN will continue adding capacity in Western Canada next year amid expectations for growth in intermodal and energy-related traffic.

CN will bring on more crude oil traffic as long as it can do so without affecting service to its longer-term customers who ship grain, lumber, and intermodal, among other things, Houle says.

Crude oil wants to move via pipeline. But pipeline capacity is maxed out in Canada, and a recent court decision was a setback for the Trans Mountain pipeline project that would have provided oil producers with an outlet to Vancouver and export to Asian markets.

The pipeline decision has extended the crude-by-rail opportunity to four or five years, CN officials say.

The longer timeline for adding pipeline capacity also has led to talk of oil producers building diluent facilities that would enable railroads to handle pure bitumen, Paul Butcher, CN’s vice president of investor relations, told the investor conference.

Diluent is added to bitumen, which comes from Canada’s oil sands, to turn it into a liquid for transport.

In light of the boom-and-bust of oil traffic, CN and Canadian Pacific have been cautious about bringing on new crude oil contracts.

The volatile, short-term nature of crude oil traffic has prompted both railways to seek longer-term deals that include volume commitments that will essentially protect the railways’ investments in locomotives, crews, and track capacity needed to handle unit oil trains.

NEWSWIRETrains News Wire

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