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Benzinga
What the Keystone Railroad Crude Pipeline Cancellation Means
President Joe Biden’s revocation of the March 2019 permit allowing the construction of the Keystone XL pipeline will likely result in higher volumes of crude by rail, industry watchers say. But the extent of the increase in volumes could largely depend on the price that heavy crude oil can reach in the world market. “The cancellation of the Keystone pipeline project was inevitable once the government changed. Despite its merits or its drawbacks, it is now deflated political football,” said Barry Prentice, professor of supply chain management. at the University of Manitoba and former director of the Transport Institute. “This means more crude will have to be transported by rail. The huge investments in the oil sands will not be abandoned and the oil has to go somewhere.” But crude by rail “has been problematic because with the low price of oil and the relatively higher price of rail transport, nothing looks very attractive. The problem is not the supply of oil, it is the reduced demand during the pandemic. Once we get out of this period, demand will return, and so will $ 100 a barrel of oil, “said Prentice. Indeed, oil markets are a very visible determining factor. the amount of crude produced and shipped.For the production and transportation of heavy crude oil in western Canada and the United States to be profitable, prices are split between a heavy crude product like Western Canadian Select (WCS) and a light unsweetened crude like West Texas Intermediate (WTI). to be favorable. The price of WCS crude is generally reduced compared to WTI crude due to its inferior quality and its greater distance from refineries on the US coast of Gulf of Mexico. The COVID-19 pandemic was one of the factors that contributed to the fall in prices of WTI crude oil in 2020. Why the interest in the production and transportation of crude oil? The oil market is not the only factor that dictates the production of crude oil and its subsequent transportation. Another is the vast oil reserves and the amount of investment already made in the production of crude oil, as well as the prospects for exporting crude oil. According to the Government of Alberta, the province’s oil sands represent the third largest oil reserve in the world, after Venezuela and Saudi Arabia. Its reserves stand at around 165.4 billion barrels and capital investments in the upstream sector reached up to $ 28.3 billion in 2016 and $ 26.5 billion in 2017. In addition, according to Natural Resources Canada, 98% of Canadian crude oil exports in 2019 went to the United States.These investments and these vast oil reserves have also resulted in significant investments in other areas of the energy sector, including investments in pipelines. According to Rob Benedict, senior director of petrochemicals, transportation, and infrastructure for the American Fuel and Petrochemical Manufacturers Association, pipelines move Canadian heavy crude south to U.S. refineries because U.S. refineries were built and optimized to process primarily heavier crude oil. Pipelines from Canada to the United States were seen as an efficient means of transporting large quantities of Canadian heavy crude oil to refineries on the US Gulf Coast. TC Energy’s 1,210-mile Keystone XL pipeline would have had a capacity of 830,000 barrels per day with crude oil coming from Hardisty, Alta., And heading to Steele City, Nebraska, where it would then be shipped to refineries in the US coast of the Gulf of Mexico. Had construction continued, the pipeline would have entered service in 2023. But TC Energy abandoned the project after Biden revoked an existing presidential permit for the pipeline in January. TC Energy will review the decision, assess its implications and consider its options. However, due to the planned revocation of the presidential permit, the progress of the project will be put on hold. The company will stop capitalizing costs, including interest during construction. ., effective January 20, 2021, the date of the decision, and will assess the carrying amount of its investment in the pipeline, net of project recoveries, “TC Energy said in a statement last month. The Keystone Pipeline XL “is an essential element that would have allowed Canada and the United States to maintain their very good relations with the transport of energy products across the border,” Benedict said. However, the suspension of construction of the pipeline doesn’t necessarily translate into a one-to-one increase in crude-per-rail volumes, according to Benedict. “The gist of the story is that this is going to have an impact on crude by rail. It’s not going to move the 830,000 barrels per day on the rails, but any additional amount will potentially have an impact, “Benedict said. Several factors will influence the amount of crude transported by rail. In addition to the spread of WCS / WTI price, the ability of railways to handle crude by rail is crucial. Not only are there speed restrictions for crude trains and possible social ramifications, but there are also capacity issues. Canadian railways have reported record grain volumes in recent months, and crude volumes must compete with grain, as well as other commodities, for the same line. There are also other pipelines between Canada and the United States which could absorb some of the volumes that would have been handled by the Keystone XL pipeline, said Benedict. These include the Endbridge Line 3 (NYSE: ENB), which connects Canada to Wisc onsin; Endbridge Line 5, which runs under the Straits of Mackinac and Lake Michigan to the Michigan Peninsula; and the Trans Mountain pipeline which is under development in Canada. It would go from Alberta to the west coast of Canada, then eventually south to the American refineries. And another factor that could influence crude oil by rail is the amount of crude oil stored, Benedict said. “It’s not just a simple question of whether a pipeline being closed is going to rail? It’s complex because you have to take into account all the different nodes in the supply chain, including the storage that would come into play, ”Benedict said. Canadian Railways’ Perspective on Crude by Rail For their part, Canadian Pacific Railway (NYSE: CP) and CN (NYSE: CNI) have both said they plan to ship more crude, but none indicated how much the volumes would increase. CP said in its fourth quarter earnings call on Jan. 27 that it saw increased activity as price differentials turned favorable. The railway also plans to begin transporting volumes of crude from a diluent recovery unit (DRU) near Hardisty, Alta. US Development Group and Gibson Energy had agreed to build and operate the DRU in December 2019. As part of this agreement, ConocoPhillips Canada will process the input bitumen mix from the DRU and ship it through CP and Kansas City Southern ( NYSE: KSU) to the US Gulf Coast. “These DRU volumes will provide shippers with a more secure competitive option for pipelines and help stabilize our crude business in the future,” CP Director of Marketing John Brooks said on the earnings call. CP President and CEO Keith Creel also said he viewed U.S. stocks on the Keystone pipeline as beneficial for crude by rail and DRU volumes. The stocks “bode well for more strength and more potential demand for crude. We believe this creates more support for the intensification and expansion of the DRU. So, we are optimistic about this opportunity,” Creel said. . He continued, “We always see the capacity of the pipeline in the short term, not the long term. [eventually] catch up [but] we just think there’s a longer tail on it right now. So, we believe there will be room for upside potential in both spaces. Meanwhile, in a Jan. 27 interview with Bloomberg, CN President and CEO JJ Ruest called crude by rail a “question mark” in terms of what energy outlook the railroad will take. he plans for 2021. Mr. Ruest said low oil prices, reduced travel and the cancellation of the Keystone pipeline are among the factors influencing CN’s energy outlook. Mr. Ruest said, quoted by Bloomberg. CP and CN declined to comment further on FreightWaves on crude oil by rail, and CN pointed FreightWaves to the Bloomberg article. Subscribe to FreightWaves email newsletters and get the latest freight information straight to your Click here for more FreightWaves articles from Joanna Marsh. Nit is slated to start in April Comment: Railroad tank cars take a hit See more BenzingaClick here for BenzingaForward Air options trades double down amid increased activist interestDrilling Deep: Profits Review fourth trimester; How did Werner do so well? © 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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