The gaping difference between North American and international crude prices is spurring a boom for Canada's railways as energy companies look to shuttle more of their output to the continent's coasts, where they have been able to fetch substantial premiums.
A year ago, almost no Alberta or Saskatchewan crude travelled by rail, moving instead through the network of pipelines that has built up over many decades. Now, rail volumes are rising so quickly that shippers can't find enough rail cars to pour it into as oil companies look to sell crude in parts of the country that are difficult to reach by pipeline. Companies are converting other types of rail cars to transport oil, as industry rethinks a long-standing reluctance to deliver crude by train.
It's all in the name of extra profit.
A glut of oil in the mid-continent has depressed North American prices, which are set at Cushing, Okla. But prices on the coasts, which compete in international markets, have been far higher – nearly $30 (U.S.) a barrel in recent weeks; just under $20 yesterday – reflecting the value of crude priced in the North Sea. That has created an incentive to get oil to the coasts.
Pipelines have long been favoured by energy companies because they are generally cheaper and safer. The argument for trains comes down to simple math. Moving a barrel by rail can cost $15, compared with $3 to $6 by pipe, depending on destination. But that price difference pales next to a $20 to $30 premium for reaching the right destinations. That creates an advantage for rail carriers, which can adapt to changing markets in days, compared with the years – if not decades – it takes to build new pipe.
The growth in rail service comes amid a broader industry embrace of a pipeline alternative that has, in many cases, been forced upon it. In the United States, for example, oil production in the Montana and South Dakota Bakken play has increased so quickly that pipelines simply can't be built fast enough to keep up. The result: Of 425,000 barrels of daily Bakken production, roughly a quarter is now moving on tracks, according to BNSF Railway Co., which moves most of it.
"We've about doubled it every two years in the last several years," BNSF spokeswoman Krista York-Woolley said. "It's one of our largest growing segments."
In Canada, companies were similarly persuaded to experiment with rail when a series of leaks created pipeline outages on vital connections, both on Enbridge Inc.'s backbone Mainline system into the United States, and on Plains All American Pipeline LP's Rainbow pipeline that connects northern Alberta oil wells to market.
In some cases, those experiments are now switching over to more regular service, as companies leverage rapid movements of oil by train to seek out additional profits.
"We have seen customers shift business to CN in response to the increased demand as we have the ability to respond quickly to the market," said James Cairn, vice-president of petroleum and chemicals for Canadian National Railway Co. "Cars formerly in asphalt, condensate, ethanol and biodiesel service are being used in crude service."
Oil is now "going to every market where rail goes," said Glen Perry, president of Altex Energy Inc., which is working to boost oil shipments by train. "California, Texas, Louisiana. I'm not involved in all the trades, but there's probably some going to the East Coast, too."
He cautions that rail may prove to be a temporary solution, given that pipes continue to be viewed as the best long-term solution to any oil movement – and a series of new pipelines have been proposed to solve the current price disparity.
And compared with the rivers of Canadian oil that flow through pipelines, the amount travelling by train remains modest. It is somewhere between 10,000 and 20,000 barrels a day; industry officials are reluctant to provide precise numbers. That's compared with the two million barrels Canada exports to the United States each day, mostly by pipe.
But as oil companies grow more comfortable with rail, it may prepare the way for access to new markets, such as Asia, which could be served by trains that already travel to the British Columbia coast.
CN, for example, has promoted a "pipeline on rails" that would deliver crude along much the same Alberta-to-B.C. route as Enbridge's controversial proposed Northern Gateway pipeline project.
But shifting transportation methods is not simple. In the Bakken, where the need is most acute, companies have built up some 30 rail-loading facilities, with another 40 planned in the coming decade. In Canada, however, building those facilities has been a tougher sell, given that oil prices are expected to rebalance in coming years. That has reduced the corporate incentive to build loading facilities that may soon not be needed.
What rail "really needs" to succeed, Mr. Perry said, is "a major investment of capital."
And, he says, its rail shipments will have a harder sell once the issues that have contributed to the massive inland-versus-coast pricing disparity are sorted out. The current oil price disparity is "very, very ephemeral," he said. "And nobody is going to spend money [on a facility that only runs]tomorrow. They want to see it running for two, three, five years."