March 21, 2018
Discounts for western Canadian oil sands crude will remain high as railroads crank up their crude-by-rail rates in return for adding locomotives and crews to the transport constrained sector, according to a recent energy analyst’s report.
Barclays Capital analyst Paul Cheng said he is increasing by US$4.50 per barrel his forecast for the difference between Western Canadian Select oil sands blend and U.S. benchmark West Texas Intermediate from 2019 to 2022, when new pipelines are expected to come on stream to relieve transportation headaches.
“Based on our conversations with the industry, recent negotiations between rail operators and oil producers seem to suggest the all-in rail cost from Western Canada to the Gulf Coast may now settle toward (US)$20 per barrel, much higher than our previous assumption,” he told Canadian Press.
Barclays’ forecast for the WCS-WTI differential for this year was raised to US$24.60 per barrel from US$18.40 per barrel, he said. The differential was at about US$21.70 on Monday, down from peaks of nearly US$30 in February.
Both Canadian Pacific and Canadian National railways have said they are demanding long-term take-or-pay contracts and higher rates to add locomotives and train crews to move oil because they fear the business will evaporate once new export pipelines come on stream.
CN, which has been criticized for poor service recently, said it cut back on serving the oil industry in the fourth quarter of 2017 to free up more capacity for grain shipping in Canada and it doesn’t expect to ramp up oil shipments until the second half of this year.
It’s not surprising that rates are set to rise because demand is exceeding supply, railroad analyst Dan Sherman of Edward Jones told Canadian Press.
“Canadian rail operators understand that transporting crude by rail is a short-term business for them, a business that likely dries up as the various pipelines come on line,” he said. “Therefore, the rail operators are trying to get better terms, meaning higher rates and longer-term contracts.”
Calgary-based Altex Energy has room to load 160,000 barrels per day of crude at its Western Canada terminals but it is actually only handling about 35,000 bpd because of congestion on the rails and a lack of available locomotives, CEO John Zahary told Canadian Press on Tuesday.
“The coastal refineries want some of this cheap inland crude oil and the Canadian producers want to get it on the rails,” he said.
He said prices are higher than they were a year ago for terminal fees and railcar rentals but average all-in prices, depending on what’s included, are currently much lower than US$20 per barrel for an Alberta-Gulf Coast trip.
The International Energy Agency said earlier this month it expects crude-by-rail shipments to more than double over the next two years as a lack of pipeline capacity forces Canadian producers to look to alternatives.
The Paris-based agency forecasts crude-by-rail exports will grow from 150,000 barrels a day in late 2017 to 250,000 barrels a day this year and then to 390,000 barrels a day in 2019.