President Joe Biden’s revocation of the March 2019 permit, which allows the construction of the Keystone XL pipeline, is likely to result in more raw rail volumes, according to industry observers. But how much volumes will increase may largely depend on the price that heavy crude oil can get in the global market. “The cancellation of the Keystone pipeline project was inevitable when the government changed. Despite its pros and cons, it is now a deflated political football,” said Barry Prentice, professor of supply chain management at the University of Manitoba and former director of transportation Institute of. “This means more crude oil will have to move by rail. The huge investment in oil sands will not be abandoned and the oil will have to go somewhere.” But raw rail “has been problematic, because with the low oil price and the relatively higher price of rail transport, nothing looks very appealing. The problem is not oil supply, it is the reduced demand during the pandemic. When we get out of this period, demand will reverse back, and $ 100 per barrel of oil will too, “Prentice said. In fact, the oil markets serve as a very visible factor that determines how much crude is produced and shipped. For the production and transportation of heavy crude oil from Western Canada and the United States to be profitable, the price difference between a heavy crude product like Western Canadian Select (WCS) and a light, sweet crude like West Texas Intermediate (WTI) needs to be favorable. WCS crude is typically priced at a discount to WTI crude oil due to its lower quality and its greater distance from the U.S. Gulf Coast refineries. The COVID-19 pandemic was among the factors that contributed to the tailspin of the WTI crude oil price in 2020. Why the interest in crude oil production and transportation? The oil market is not the only factor dictating the production of crude oil and its subsequent transportation. Another is the huge oil reserves and the amount of investment already directed at crude oil production as well as the crude oil export prospects. According to the Alberta government, the province’s oil sands represent the third largest oil reserves in the world after Venezuela and Saudi Arabia. Its reserves correspond to approximately 165.4 billion. Barrels, and capital investment for the upstream sector is equal to as much as 28.3 billion. Dollars in 2016 and 26.5 billion. Dollar in 2017. According to Natural Resources Canada, 98% of Canada’s crude oil exports in 2019 also went to the United States. These investments and large 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 oil south to U.S. refineries because U.S. refineries were built and optimized to mostly handle heavier crude oil, according to Rob Benedict, senior director of petrochemical products, transportation and infrastructure for the American Fuel and Petrochemical Manufacturers Association. Pipe oil pipelines from Canada to the United States have been considered an efficient way to transport large quantities of Canadian heavy crude oil to US Gulf Coast refineries. TC Energy’s 1,210 km long Keystone XL pipeline would have had a capacity of 830,000 barrels per day of crude oil originating in Hardisty, Alberta and en route to Steele City, Nebraska, where it would then be shipped to US Gulf Coast refineries. Had construction continued, the pipeline would have been taken into use 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. As a result of the expected revocation of the presidential permit, progress of the project will be suspended. The company will cease capitalizing costs including interest under construction, with effect from January 20, 2021, which is the date of the decision, and will evaluate the carrying amount of its investment in the pipeline, minus project restorations, “said TC Energy in a release last month. The Keystone XL pipeline” is an important piece that would have enabled Canada and the United States to continue the very good relationship they have with transporting energy products across the border, “Benedict said. However, suspension of pipeline construction does not necessarily translate into a one-to-one increase in raw volume, according to Benedict.” The crux of the story is that it will have some impact on raw-for-rail. It will not move all 830,000 barrels a day on the rails, but any extra amount will potentially have some impact, “Benedict said.” Several factors will affect how much raw movement by rail. In addition to the WCS / WTI price difference, the capacity of the railways to handle raw-by-rail crucially.There are not only speed limits for raw trains and possible social consequences, there are also capacity issues.Canadian railways have reported record volumes over the last several months and raw volumes have to compete with grain as well as other goods on the same railroad track.There are also other pipelines between Canada and the United States that could take some of the quantities that would have been handled by the Keystone XL pipeline, Benedict said.These include Endbridge’s (NYSE: ENB) Line 3- pipeline running from Canada to Wisconsin; Endbridge’s Line 5 pipeline running under Mackinac Strait and Lake Michigan to the Michigan Peninsula; and Trans Mountain pipeline the development under development in Canada. It would run from Alberta to the west coast of Canada and then potentially south to U.S. refineries. And another factor that could affect crude-by-rail is how much crude oil is stored, Benedict said. “It’s not just a simple matter of sending a pipeline that closes, all to rail? It’s complicated because you have to consider all the different nodes in the supply chain, including storage, that would come into play,” Benedict said. Canadian Railways’ Raw-by-Rail Views For their part, Canadian Pacific (NYSE: CP) and CN (NYSE: CNI) have both said they expect to send more raw volumes, but neither has indicated how much volume that will grow. CP said during its earnings call in the fourth quarter on January 27 that it has seen increased activity as price differences have become favorable. The railroad also expects to begin moving raw volumes from a dilution recovery unit near Hardisty, Alberta. US Development Group and Gibson Energy had agreed to design and operate DRU in December 2019. As part of the agreement, ConocoPhillips Canada processes the inlet bitumen mixture from DRU and sends it via CP and Kansas City Southern (NYSE: KSU) to the US Gulf Coast. “These DRU volumes will provide a more secure pipeline-competitive opportunity for shippers and will help stabilize our raw business into the future,” CP Chief Marketing Officer John Brooks said during the earnings call. CP President and CEO Keith Creel also said he sees U.S. actions on the Keystone pipeline as benefiting crude rail and DRU volumes. The actions “promise more strength and more potential demand for crude oil. We believe it creates more support for the upscaling and expansion of DRU. So we are positive on this opportunity,” Creel said. He continued: “We are still seeing the short, not long term … pipeline capacity [eventually] catch up [but] we just think there’s a longer tail to it right now. So we think there will be room for something potentially upward in both spaces. Meanwhile, in an interview with Bloomberg on January 27, CN President and CEO JJ Ruest called a “question mark” regarding what energy forecasts the railroad sees in 2021. Ruest said low oil prices, reduced travel and cancellation of the Keystone pipeline are among the factors influencing CN’s energy predictions. However, raw-for-rail could be a “small positive bump in the rail industry,” Bloomberg quoted Ruest as saying. CP and CN declined to comment further to FreightWaves on raw-with-rail, and CN directed FreightWaves to Bloomberg article Subscribe to FreightWaves’ e-newsletters and get the latest insights into freight in your Click here for more FreightWaves articles by Joanna Marsh Related articles: Social risk trumps economic risk for Canadian raw rail transportation Canada issues new speed limits for trains hauling dangerous goods Construction of Alberta raw u nit is expected to start in April Comment: Railway tankers take a hit See more from Benzinga Click here for option transactions from Benzinga Fremad Air doubles down among increased interest from activists Drilling Deep: Review Q4 Earnings; How did Werner do so well? © 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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