What the Keystone Pipeline cancellation means for crude-by-rail
President Joe Biden's revocation of the March 2019 permit allowing the construction of the Keystone XL pipeline is likely to result in more crude oil on the rails, industry observers say. 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 football,” 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 period, demand will return and so will.” $ 100 a barrel of oil, “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 due to 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 in 2017 to 26.5 billion US dollars. In addition, according to Natural Resources Canada, 98% of Canada's 2019 crude oil exports went to the United States.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 fuel 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. Had construction continued, the pipeline would have gone into operation in 2023. However, TC Energy abandoned the project after Biden revoked an existing presidential approval for the pipeline in January. “TC Energy will review the decision, assess its impact and review 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.” Effective January 20, 2021, the date of the decision, the carrying amount of its investment in the pipeline will be assessed, net of project repayments, “TC Energy said in a press release last month. The Keystone XL pipeline” is an essential element of it It would have allowed Canada and the US to continue their very good relations of transporting energy products across the border, “Benedict said. 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 by rail. 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. Aside from the WCS / WTI price range is the ability In addition to raw train speed restrictions and potential social implications, there are capacity issues as well. Canadian railways have reported record amounts of grain in recent months and crude oil is dealing with grain and other commodities 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. These include Endbridge (NYSE: ENB) Pipeline 3, which runs from Canada to Wisconsin, Endbridge's pipeline on Line 5, which runs below r the Straits 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 the storage of crude oil, Benedict said. “It is not just a straightforward question of whether a pipeline that is decommissioned will be delivered 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 that they will deliver 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 bitumen mix from the DRU and ship it to the US Gulf Coast via CP and Kansas City Southern (NYSE: KSU). “These DRU volumes offer shippers 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 earnings statement. Keith Creel, President and CEO of CP, also said he sees benefits in US action on the Keystone pipeline for crude rail and DRU volume. The measures “represent more strength and more potential demand for crude oil. We believe this will create more support for the DRU to scale and expand. 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 on the railways as a ‘question mark' about what energy prospects the railroad sees for 2021. Ruest said that low oil prices, lower ones 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 insights straight to your inbox. Click here to read more FreightWaves articles by Joanna Marsh. Related Articles: Social Risk Exceeds Financial Risk For Canadian Crude Oil By Rail Transport Canada Issues New Speed Limits On Trains Carrying Dangerous Goods It Is Not Expected To Launch In April. Comment: Rail tank cars become successful. For more information from Benzinga, click here to learn 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.