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Irving refinery increasingly using rail to transport crude

The Irving Oil refinery in Saint John. The refinery, Canada’s largest, has increased its ability to source crude by rail over the past 2 1/2 years to take advantage of cheaper North American supplies, a market shift that’s unlikely to reverse course amid fallout from Saturday’s Lac-Mégantic freight train disaster.

Roger Hallett/The Globe and Mail

Irving Oil Ltd.'s New Brunswick refinery, Canada's largest, has increased its ability to source crude by rail over the past 2-1/2 years to take advantage of cheaper North American supplies, a market shift that's unlikely to reverse course amid fallout from Saturday's Lac-Mégantic freight train disaster.

The North Dakota Bakken crude loaded on the train, which careened down an incline into the centre of Lac-Mégantic, was headed to Irving's 300,000-barrel-a-day facility in Saint John, sold by a subsidiary of Miami, Fla.-based distributor World Fuel Services Corp.

"They are acquiring crude from the Midwest because, even after all the cost considerations, logistical costs in particular, at least until recently, it's been less expensive than some of their traditional waterborne crude feedstocks," said Michael Ervin, vice-president and director of consulting at Kent Marketing Services Ltd., which provides research and consulting in the Canadian refining and marketing business.

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The disaster has focused attention on oil-by-rail shipments, which have grown in recent years as North American pipelines have become congested, and as refiners on the East Coast of the continent have been squeezed by imported crude prices that have run ahead of those from Western Canada and those delivered to the U.S. Midwest and Midcontinent.

Refineries throughout the Atlantic basin – eastern North America, Western Europe and the Caribbean – have been battered in recent years by overcapacity, forcing them to find cheaper options. Irving, which sells its petroleum products in Atlantic Canada and the U.S. Northeast, had purchased nearly all its crude from such foreign suppliers as Saudi Arabia, the North Sea and Newfoundland until the market began to shift in 2011 in favour of the cheaper domestic crudes.

Growth in rail volumes, which has eased some of the congestion on North American pipelines and paved the way for increased oil production, created a price gap that more than accommodated the added cost of rail transportation to facilities like Irving Oil's. At its widest last winter, the premium on international benchmark Brent oil was more than $23 a barrel to North American marker West Texas Intermediate as Canadian and U.S. supplies accumulated in the U.S. Midwest, particularly in Cushing, Okla., a storage hub.

Still, that spread has since narrowed considerably – on Tuesday it was $4.28 a barrel, meaning that any change in crude supply sourcing by Irving or any other East Coast refineries is more likely to be driven by prices than reactions to last week's catastrophic derailment.

In March, former Irving Oil president Mike Ashar told a conference in Texas that the refinery "had access to 200,000 barrels a day of rail-delivered crude," up from just 3,000 at the start of 2011. "As far as I know, it's the largest at a refinery in North America," Mr. Ashar said, according to the energy news service Argus Media.

In addition, family-owned Irving signed a multi-year deal with Houston-based Buckeye Partners LP late last year to use its crude oil storage and terminal facilities at Albany, N.Y. Buckeye modified its terminal to handle crude oil and ethanol trains with capacity of more than 135,000 barrels a day.

The recently squeezed price differential may give Irving pause before expanding its rail delivery capability much more, however, Mr. Ervin said.

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An Irving Oil spokesperson did not return calls seeking details on the refinery's crude supply.

With files from Reuters

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More

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