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Cenovus Energy Inc., an Alberta company that produces oil in Alberta – as well as in B.C. from the Deep Basin – has inked a three-year deal to ship 100,000 barrels of oil per day to the U.S. Gulf Coast.
The deal underscores the problem that oil producers in Canada face over a lack of pipeline capacity. It also demonstrates that the demand for Alberta oil remains high, despite it being characterized by pipeline opponents as being an inferior type of oil.
Cenovus has signed agreements with Canadian National Railway Co. and Canadian Pacific Railway Ltd. to move 100,000 barrels per day (bpd) of heavy crude to refineries in the U.S. Gulf Coast. The agreement is for three years.
It appears to be a stopgap measure, since the Keystone XL pipeline and Line 3 expansion would eventually provide access for Alberta oil to get to heavy oil refineries in the U.S. Gulf Coast.
“Our rail strategy provides a means of mitigating the price impact of pipeline congestion,” said Cenovus CEO Alex Pourbaix. “While we remain confident new pipeline capacity will be constructed, these rail agreements will help get our oil to higher-price markets.”
Moving oil by rail is more expensive and can pose even greater environmental risks than pipelines. Cenovus says the cost will be in “the high teens.” In other words, it will cost between $15 and $19 per barrel to ship by rail, compared to about $7 per barrel by pipeline.
Pipeline projects like the Line 3 project, the Trans Mountain pipeline expansion and the Keystone XL projects have all experienced regulatory gridlock, forcing oil producers, both in Canada and the U.S., to move more and more oil by rail.
Morgan Stanley had predicted that Canadian oil by rail shipments would double this year over 2017, and Dan McTeague, an analyst for GasBuddy, expects it to triple in the coming years.
Canadian crude exports by rail hit a record 206,624 bpd in July this year, according to the National Energy Board. In July of 2017, it was 92,551 bpd.
“Look for that now to triple,” McTeague said, “from 200,000 to 600,000 by 2021.”
Although it is more expensive to ship oil by rail, producers get a better price, if they can get their product to the U.S. Gulf Coast, where there is a growing demand for heavy crude.
Some independent economists have argued that there is no demand for Alberta oil, which has been described as somehow inferior to the lighter crudes produced in the U.S. through shale oil production. McTeague said the Cenovus deal proves how wrong they are.
“It just does prove, in spades, that there is a desire for Canadian heavy oil,” McTeague said. “American refineries in the Midwest and the U.S. Gulf Coast are configured for heavy Canadian or Mayan oil. Right now the Mexicans don’t have the ability to crank out that much oil.”
Cenovus has two oil sands operations in Alberta. It also produces 120,000 bpd of oil and other liquids from its Deep Basin operations in Alberta and northeastern B.C.
