TransCanada Corp’s decision this week to scrap its $12 billion Energy East pipeline and delays to other export pipeline projects look set to increase producers’ reliance on costly crude-by-rail to bring barrels to market. The run-up to oil-shipment levels last seen four years ago, when Canada’s benchmark crude price reached almost $90/bbl, comes as producers endure record discounts for their crude because of a dramatic lack of pipeline space. Western Canada Select crude is trading in the $20s now, with the discount to the U.S. benchmark widening to $50/bbl last week, the most on record in Bloomberg data stretching back to 2008. “The demand is there,” Creel said. “Maybe a 100,000 run-rate goes to 110 or 120. There’s a bit of a range between 100,000 and 120,000, but I wouldn’t expect anything above that.”
Calgary-based TransCanada said on Thursday it will abandon Energy East, which would have taken crude from Alberta to the Atlantic Coast. Producers are being forced to sell their oil for less largely because of the higher costs of shipping it by train to U.S. fuel producers, but also because an abundance of American supplies and the start of refinery maintenance season on the Gulf Coast are undercutting demand for the imports. Canadian Pacific, the country’s second-largest railroad, handled about 23,000 carloads of crude in the third quarter, executives told analysts Thursday, almost tripling the tally from the same period a year ago. That fueled a 63% quarterly climb in revenue from energy, chemicals and plastics — the fastest increase among major commodities at the railroad.
Shipping crude by rail is more expensive than by pipeline for producers already struggling with weak global oil prices. That would put Creel’s most optimistic outlook for next year at a rate of about 230,000 bpd, the equivalent of 8.5% of last year’s daily average production from the oil sands and more than OPEC member Gabon can produce. Rival Canadian National Railway is on pace to carry about 70,000 carloads of crude annually, CFO Ghislain Houle told an investor conference last month. The Trans Mountain ruling was “definitely material in the discussion” with oil producers, Creel said Thursday.
Oil industry participants say regulatory requirements for major energy projects in Canada are now so stringent it is unlikely any company will try to build a new export pipeline. Last month, Cenovus Energy Inc. announced arrangements with Canadian National and Canadian Pacific to transport about 100,000 bpd from Alberta to the U.S. Gulf Coast.