ANALYSIS: Canada oil-train boom may thwart winter crude price slump

CALGARY, Alberta, Sept 15 (Reuters) - Each winter for the past four years, Canadian oil sands producers have watched in dismay as local crude prices slumped.

CALGARY, Alberta, Sept 15 (Reuters) - Each winter for the past four years, Canadian oil sands producers have watched in dismay as local crude prices slumped.

Limited export pipeline capacity coupled with the end of the U.S. summer driving season led to oil gluts in Alberta, sending prices tumbling and depriving producers of billions in potential revenues.

Not this year, predict industry players.

Revamped U.S. refineries are absorbing heavy Canadian crude and new oil-rail terminals built by companies like Gibson Energy Inc and Canexus Corp are loading trains to deliver crude to markets across North America, and potentially abroad, limiting the downturn and keeping prices buoyant compared to the past seasons.

Thanks to the emergence of these "train pipes", the market is "unlikely to get that deep of a squeeze on the deliverability side," said Bart Melek, head of commodity strategy at TD Securities.


Shipping crude by rail can be up to twice as expensive as by pipeline, roughly $14-$21 per barrel to the Gulf Coast. But just a small volume of such shipments could help avoid the short-term supply overhangs that have burdened the market for years.

In recent winters, the price of Western Canada Select (WCS) heavy blend crude has fallen to fetch between $33 and $42 per barrel less than the U.S. benchmark WTI crude, far cheaper than the typical discount of around $20 per barrel during the rest of the year.

With oil sands production at just under 2 million barrels per day, each $1 increase in the discount equates to some $2 million a day in lost revenues for producers like Cenovus Energy and Suncor Energy, and wipes billions of dollars a year off Alberta government revenues.

After U.S. oil tumbled to its lowest prices in nearly two years this month, a sudden slump in prices this winter would be particularly unwelcome. At around $79 per barrel, the absolute price in Canada is getting nearer the break-even cost for major new developments.

Thus far, Canadian crude is holding up well around $13.50 per barrel under WTI, which fetched about $93 a barrel on Monday. That was the narrowest differential since July 2013.

Some traders say WTI minus $20 per barrel is now a realistic floor for discounts - with the dark days of minus $40 a thing of the past.

A $20 discount would improve the economics of crude-by-rail. In Calgary they say a rule of thumb is WCS should trade around $15-$20 per barrel below WTI to be worth railing to the U.S. Gulf Coast, where it competes with Maya, a Mexican blend of similar quality.

"There may be periods of lower differentials in which rail is less profitable than pipeline, but there are still benefits to transportation by rail including new market development," said Cenovus spokeswoman Jessica Wilkinson.


Some of the factors behind the winter slump in Canadian crude prices remain: North American refiners still shut down for maintenance in the autumn, diminishing demand for crude. Road construction also tends to ebb, limiting the need for asphalt, a significant by-product of refining heavier oil sands crude.

Seasonal discounts are exacerbated by congestion on Canadian export pipelines that can leave crude bottlenecked in Alberta, sparking wild price swings. TransCanada's Keystone XL pipeline, which was proposed more than five years ago to help relieve congestion, has been repeatedly delayed by the Obama Administration amid fierce environmental opposition.

Congestion can be worse during cold weather, which makes oil sands bitumen even more viscous than usual and forces producers to blend in a higher proportion per barrel of ultra-light oil known as condensate so the bitumen can be shipped through pipelines, according to traders. This means there are higher volumes of diluted "dilbit" crude squeezing through an export network already pumping flat out.

But several important factors have changed, including the expansion of key North American refiners that have invested billions of dollars in consuming more Canadian heavy crude.

This will be the first full winter for BP Plc's revamped 405,000 bpd Whiting, Indiana, refinery, which has been upgraded to process 80 percent Canadian heavy grades.

The larger factor is the emergence of the oil-by-rail industry, with a host of operators building new terminals to help mop up barrels that would otherwise be stranded in Alberta.

National Energy Board data shows Canada exported 163,000 bpd of crude by rail in the second quarter of 2014, a 22 percent rise on the same period a year earlier. That figure does not include shipments to major refineries in eastern Canada.

The Canadian Association of Petroleum Producers estimates current rail loading capacity is much higher at around 800,000 bpd and could hit 1.4 million bpd in 2016.


Certainly, there is a risk that current firm prices will pull back. Supply outages as a result of planned maintenance currently taking place in the oil sands will come to an end, and demand from linefills on Enbridge Inc's new Flanagan South and reversed Line 9 pipeline is finite.

Jackie Forrest, analyst at ARC Financial, said if there are no big outages on pipelines, WCS differentials should widen to reflect the cost of rail transportation from Alberta to the Gulf Coast. Right now they reflect the cost of moving a barrel by pipeline.

Forrest said if differentials widen to reflect rail economics WCS would trade around $15 per barrel below Maya, or $20 per barrel below WTI.

"With more market options via new pipe connections and rail, we expect large discounts to be less in number and duration than compared to the past," she added.


By Nia Williams.

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