CN, CP optimistic about prospects for more crude oil traffic

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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.
TRAINS: David Lassen
Canadian National and Canadian Pacific are cautiously optimistic that Alberta crude oil shipments will rise significantly this year if production curtailments are eased and the province’s crude-by-rail contracts are shifted to the private sector.

The Alberta government-imposed production curtailments in January, and in February reached a $3.7-billion deal with CN and CP to haul the province’s landlocked crude oil to markets in the U.S. and Canada starting this summer. 

The New Democratic Party was ousted in elections in April, however, and the new provincial government, led by the United Conservative Party, aims to privatize those contracts and may ease the production quotas for rail-hauled crude.

“We're actually, I think, more optimistic today than we have been that these issues are going to get resolved and there could be significant upside in crude by rail,” CP Chief Marketing Officer John Brooks said on the railway’s earnings call this month.

“Our crude oil shipments have increased significantly in the quarter and we are optimistic that the Alberta government will enable that momentum to continue for the balance of the year,” CN Chief Financial Officer Ghislain Houle said on the railway’s earnings call this week.

Some of Alberta’s largest oil producers are seeking to wiggle out of the production quotas on the condition that excess crude move via rail. They’re also willing to take over the contracts the province signed with CN and CP.

By the end of the year, Suncor could send 250,000 to 300,000 barrels of crude per day to railroads if it’s allowed to ramp up production, CEO Mark Little said on the company’s earnings call on Thursday.

CN was handling a total of 198,000 barrels per day in June, up from 86,000 barrels per day at the low point in February, while CP was hauling about 160,000 barrels per day during the second quarter.

CN has crew and locomotive capacity to handle up to 300,000 barrels per day, CEO Jean-Jacques Ruest says. The railway currently has 200 train and engine employees furloughed in Western Canada due to the slower than expected rise in crude oil shipments.

Another major oil producer, Cenovus, says easing the production curtailments would be an incentive for oil companies to take over the contracts the province signed with the railways.

The pace of the ramp up may depend on whether the transfer of contracts is timed to match an easing of production quotas or an exception for rail-hauled oil, says James Cairns, CN’s senior vice president of rail centric supply chain.

“We are very hopeful that’s going to happen and could see some very positive news here this summer,” Cairns says.

“Fundamentals for crude remained strong for the second half of 2019,” he says. “August spreads are challenging for rail, but we have a few new contracts starting in August that will ramp up through the balance of 2019. A change in government curtailment policy could impact demand moving forward.”

CN and CP executives say they expect Alberta to shift its oil contracts to the private sector by fall.

Most of the oil will be destined for refineries on the U.S. Gulf Coast, where it can be sold at higher prices. The balance of the oil will head to refineries on Canada’s west and east coasts.

Alberta produces about 190,000 more barrels per day than can squeeze into existing pipelines.

Last year, Canadian crude exports to the U.S. reached record levels, but shipments sank earlier this year amid the production curtailments and unfavorable price differences between Alberta crude and other sources of oil.

The cost of shipping a barrel of oil to the Gulf Coast via rail is $9 to $12 more than sending crude via pipeline. But pipeline capacity is maxed out and new and expanded pipelines are a few years away after being dealt setbacks in Canadian courts.

“The fundamentals are we've got a lot more oil being produced than pipeline capacity to take it away, and there's a demand for it in the market,” CP CEO Keith Creel says. “We’ve just got to work through this and we'll continue to work in lockstep with the government to get this issue resolved.”
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