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What the Keystone Pipeline cancellation means for crude-by-rail
President Joe Biden’s revocation of the March 2019 permit allowing construction of the Keystone XL pipeline is likely to result in more crude oil on the rails, according to industry observers. How much volume will increase, however, largely depends on the price that heavy crude oil can fetch in the world market. “The cancellation of the Keystone pipeline project was inevitable when the government switched. Despite its merits or disadvantages, it is now a deflated political soccer ball,” said Barry Prentice, professor of supply chain management at the University of Manitoba and former director of the University of Manitoba Transport Institute. “This means more crude oil has to be transported by rail. The huge investment in oil sands is not going to be abandoned and the oil has to go somewhere.” But crude oil by rail “was problematic because nothing looks very attractive given the low oil price and the relatively higher price for rail transport. The problem is not the oil supply, but the lower demand during the pandemic. After this time, demand will return, and so will.” Oil worth $ 100 a barrel, “Prentice said. Indeed, the oil markets serve as a highly visible factor in determining how much crude oil is produced and shipped. For the production and transportation of heavy crude oil from Western Canada and the United States to be profitable, prices must be split between a heavy crude product like Western Canadian Select (WCS) and a light, sweet crude product like West Texas Intermediate (WTI) to be cheap. WCS crude is typically valued at a discount on WTI crude because of its lower quality and greater distance from refineries on the US Gulf Coast. The COVID-19 pandemic was one of the factors that contributed to WTI crude oil prices swaying in 2020. Why the interest in crude oil production and transportation? The oil market is not the only factor that determines crude oil production and subsequent transportation. Another reason is the enormous oil reserves and the investments already made in crude oil production, as well as the export prospects for crude oil. According to the Alberta government, the province’s tar sands are the third largest oil reserves in the world after Venezuela and Saudi Arabia. The reserves are approximately 165.4 billion barrels and capital investments in the upstream sector were 28.3 in 2016 Billion US dollars and 2017 to 26.5 billion US dollars. In addition, according to Natural Resources Canada, 98% of Canada’s crude oil exports went to the US in 2019.These investments and huge oil reserves have also resulted in significant investments in other areas of the energy sector, including investments in pipelines. The pipelines bring Canadian heavy crude south to U.S. refineries, as American refineries have been built and optimized to produce primarily heavy crude, according to Rob Benedict, senior director of petrochemicals, transportation, and infrastructure for the American Fuel and Petrochemical Manufacturers Association. Crude oil pipelines from Canada to the US were seen as an efficient way to move large quantities of Canadian heavy oil to refineries on the US Gulf Coast. TC Energy’s 1,210 mile Keystone XL pipeline would have a capacity of 830,000 barrels per day of crude oil from Hardisty, Alberta, and would be piped to Steele City, Nebraska, where it would then be shipped to refineries on the US Gulf Coast. If construction had continued, the pipeline would have been operational in 2023. However, 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 anticipated revocation of the President’s approval, further development of the project will be suspended. The company will cease capitalizing costs, including interest during construction, with effect from January 20, 2021, the date of the decision, will evaluate the carrying amount of its investment in the pipeline, net of project repayments, “TC Energy said in a press release last month. The Keystone XL pipeline “is an essential element that would have allowed Canada and the US to continue their very good relationship in transporting energy products across the border,” said Benedict. However, according to Benedict, stopping pipeline construction does not necessarily mean a one-on-one increase in crude oil-on-rail volume. “The gist of the story is that it will have some impact on crude oil on the rails. It won’t shift all 830,000 barrels per day onto the rails, but any additional amount will potentially have an impact,” Benedict said. Various factors will affect how much crude oil moves on the rails. In addition to the WCS / WTI price range, the railways’ ability to handle crude oil by rail is vital. Not only are there raw train speed restrictions and potential social implications, but there are also capacity issues. Canadian railways have reported record amounts of grain in recent months, and crude oil volumes have to compete with grain and other raw materials for the same rail line. There are also other pipelines between Canada and the United States that could accommodate some of the volume that would have been handled by the Keystone XL pipeline, Benedict said. This includes Endbridge (NYSE: ENB) Pipeline 3, which runs from Canada to Wisconsin. Endbridge’s pipeline on Line 5, which runs under the Strait of Mackinac and Lake Michigan to the Michigan Peninsula; and the Trans Mountain Pipeline, which is being developed in Canada. It would run from Alberta to Canada’s west coast and then possibly south to US refineries. Another factor that could affect crude oil on the rail is how much crude oil gets into storage, Benedict said. “It is not just a simple question of whether a pipeline that is decommissioned will be transported entirely on the rails. It is complex as it takes into account all the different nodes in the supply chain, including storage that would come into play,” said Benedict. Canadian Railways’ views on crude oil by rail Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) have both announced they will be shipping more volumes of crude oil, but neither has indicated how much volume will grow. CP said during its fourth quarter earnings call on Jan. 27 that it had seen increased activity due to cheap price ranges. The railroad also expects to move volumes of crude oil from a DRU (Diluent Recovery Unit) near Hardisty, Alberta. The US Development Group and Gibson Energy had agreed to build and operate the DRU in December 2019. Under this agreement, ConocoPhillips Canada will process the inlet bitumen mixture from the DRU and ship it to the US Gulf Coast via CP and Kansas City Southern (NYSE: KSU). “These DRU volumes provide shippers with a safer option to compete in the pipeline and help stabilize our crude oil business going forward,” said John Brooks, CP chief marketing officer, during the call for results. Keith Creel, President and CEO of CP, also said he sees benefits for crude rail and DRU volume in US actions on the Keystone pipeline. The measures “represent more strength and more potential demand for crude oil. We believe this will create more support for the expansion and expansion of the DRU. So we are optimistic on this opportunity,” said Creel. He continued, “We’re still seeing short-term, not long-term … pipeline capacity [eventually] catch up [but] We just think there is a longer tail right now. So we believe there will be room for potential upward movement in both areas. “In an interview with Bloomberg on Jan. 27, CN President and CEO JJ Ruest described crude oil by rail as a” question mark “about what energy prospects the railroad sees for 2021. Ruest said that low oil prices mean lower Travel and the Keystone pipeline cancellation are among the factors affecting CN’s energy outlook, but crude oil by rail could be a “slight positive drag on the rail industry,” “Bloomberg quoted Ruest as saying. CP and CN declined to provide FreightWaves with further comments on crude oil by rail, and CN referred FreightWaves to the Bloomberg article. Subscribe to FreightWaves’ e-newsletters and get the latest freight information delivered to your inbox. Click here to read more FreightWaves articles by Joanna Marsh. Related Articles: Social Risk Exceeds Financial Risk For Canada’s Crude Oil Transport Transport Canada Issues New Speed Limits On Trains Carrying Dangerous Goods It Is Not Expected To Start In April. Comment: Rail tank cars become successful. For more information from Benzinga, click here to see how BenzingaForward Air will double up when there is increased interest from activists. Drilling Deep: Fourth Quarter Results Review; How did Werner do so well? © 2021 Benzinga.com. Benzinga does not offer investment advice. All rights reserved.