CALGARY — Railway exports of crude oil from Western Canada are starting to increase, a welcome sign for producers who were forced to accept bigger price discounts and, in some cases, curtail production, as export pipelines filled to near capacity earlier this year.
Crude-by-rail exports to the United States jumped to a three-year high in March of just over 170,000 barrels per day, the highest since December 2014 and an increase from 134,000 bpd in February, the National Energy Board reported.
Sending oil by rail is generally more expensive than by pipeline but is considered a vital option to get Canadian oil to U.S. refineries as delays continue to plague planned new export pipelines.
"We do think (rail shipments) will gradually build," said Kevin Birn, vice-president of the North American crude oil markets for IHS Markit.
"Going into the fall, we expect the pressure to build on the system and you should have a greater uptick in crude-by-rail."
Market access constraints due to full oil export pipelines have been blamed for volatility in discounts paid for benchmark Western Canadian Select, a blend of oilsands bitumen and lighter oil.
WCS normally sells for US$14 to $16 per barrel less than New York-traded West Texas Intermediate — due to quality differences and transport costs — but that difference in price widened to as much as $30 earlier this year and averaged about US$23 per barrel in March.
The discount has narrowed recently because several big producers, including Suncor Energy Inc., reduced output while performing planned maintenance, Birn said.
Meanwhile, demand fell as refineries in the U.S. and Canada underwent their usual spring maintenance shutdowns to prepare for peak driving season, he added.
Canadian Pacific and Canadian National railways have been slow to devote more resources to picking up oil tankers as they dealt with a backlog of Canadian grain and severe weather that hampered operations this past winter.
CN Rail expects to deliver more crude in the second half of the year as capacity becomes available, said spokesman Patrick Waldron on Thursday, adding the company has been asking for volume commitments and 12- to 24-month contracts from shippers.
He pointed out the railway has a $3.4-billion capital program this year to expand capacity through track, siding and yard improvements, particularly in Western Canada. He said the first of 60 new locomotives CN expects to buy this year is to be delivered this month.
The railways fear the crude-by-rail business will evaporate as soon as pipelines are built because pipeline tolls are generally cheaper, said railroad analyst Daniel Sherman of Edward Jones.
They therefore want long-term take-or-pay contracts, agreements that the shipper will supply the tanker cars and attractive prices, he said.
"At some point they're going to get those three sticking points resolved with the people that want to ship and they're going to agree on a price and we're going to see more shipments," he said.
Calgary-based Altex Energy is loading about 45,000 bpd these days on railcars at its terminals in Alberta and Saskatchewan, up from 35,000 bpd in March, and expectations are that will continue to grow as more locomotives are available, said CEO John Zahary on Thursday.
In the first quarter of 2018, about 75 per cent of Canadian rail exports were destined for the U.S. East Coast and Gulf Coast, the National Energy Board said.
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Companies mentioned in this article include: (TSX:CPR, TSX:CN, TSX:SU)
Dan Healing, The Canadian Press