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Cenovus Energy Inc. is pressing ahead with aggressive plans to transport more crude by rail – contrasting itself with peers that have hit the brakes – as the Canadian oil producer bets that pipeline bottlenecks are likely to return.

Pipeline capacity constraints depressed Canadian oil prices last year, prompting Cenovus and other producers to increase their reliance on railways to move crude to U.S. refineries. Alberta’s government imposed mandatory production cuts in January, an unusual step that succeeded in narrowing the gap – called a differential – between Canadian and U.S. prices.

That tightening has inadvertently made rail transport less profitable, and producers such as Imperial Oil Ltd. and Suncor Energy Inc. pulled back.

But Calgary-based Cenovus, which committed to three-year railway deals last September, is boosting rail shipments five-fold to 100,000 barrels a day (b/d) this year. The company said it expects the plan will prove shrewd once Alberta lifts curtailment orders and Canada finds ways to satisfy growing U.S. heavy crude demand because of sanctions against rival supplier Venezuela.

“The way you get to a conclusion that rail doesn’t make sense is if you believe differentials are going to remain at US$10 forever,” Cenovus CEO Alex Pourbaix said in an interview. “I certainly wouldn’t make that bet.”

Shipping crude by rail costs more than by pipeline, so a minimum discount of US$15 to US$20 a barrel for Canadian oil is generally required to cover the extra expense for buyers. Rail shipments were robust late last year after the discount on Canadian heavy oil topped a record US$52 per barrel, but chugged along more slowly this month as the discount shrank to US$10.

Rail shipments are a critical relief valve for Alberta’s oil production, which has grown in recent years while pipeline expansions stalled. The resulting glut of Alberta crude in storage depressed prices, hurting corporate profits and accelerating investors’ flight from Canada’s oil patch.

The discount on Canadian heavy crude hovered on Thursday around US$13, according to Net Energy Exchange. The Alberta government said on Tuesday that it will launch its own crude-by-rail program, a move that it forecasts will shrink the discount by US$4 per barrel and weaken railway economics.

“The incentive to move crude by rail has been erased,”Imperial chief executive Rich Kruger said on Feb. 1.

Over all, rail loadings from Canada plummeted to 156,000 b/d for the week ending Feb. 1 from a weekly record-high average of 356,000 b/d set last month, data from Genscape showed.

The conditions are different for Cenovus than for integrated producers.

Cenovus’s business depends more on spot crude prices, as it mainly produces and sells to other refiners. Imperial and Suncor feed their own refineries with the crude they produce, allowing them to benefit even when prices are low.

For Cenovus, shipping part of its production by rail makes strategic sense because spot prices for the bulk of its output are supported when Canadian oil is flowing smoothly, said Matt Murphy, analyst at Tudor Pickering Holt & Co.

U.S. sanctions against Venezuela have resulted in American refiners paying higher prices for Canadian crude in the Gulf than for U.S. benchmark West Texas Intermediate, Mr. Pourbaix said.

“I am highly, highly confident that rail is going to be in the money, certainly by the latter half of this year,” he said, adding that Cenovus’s costs are also lower because it owns a loading facility.

The Alberta government has also said it expects Canadian oil price differentials to widen enough to support rail shipments this year.

Those higher prices in the Gulf absorb some of the hit to Canadian shippers from a narrow differential, resulting in them limiting losses to an estimated US$2 to US$6 for each barrel moved there by rail, said Jackie Forrest, senior director of Calgary-based ARC Energy Research Institute.

By contrast, some shippers with long-term rail contracts lose as much as US$10 by not shipping because of sunk costs and penalties, she said.

But for many, the economics no longer work.

“As a refiner, I’m not shipping by rail. I don’t need to tighten the market further,” one U.S-based trader of Canadian crude said.

“We’ve gone from an unsustainable wide discount for Canadian heavy to an unsustainably narrow discount,” said Greg Garland,chief executive of refiner Phillips 66, on a quarterly call.

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