Growing Canadian heavy production, coupled with a shortage of pipeline capacity, offers a window of opportunity for crude by rail from Western Canada to the Gulf of Mexico from now until about 2021, a Canadian crude oil conference heard Tuesday.
Youll see a big surge and then by the end of the surge there will still be some crude by rail into niche markets similar to what is happening today, Terry Doherty, director of rail strategy and commercial development for Genesis Energy, told the Argus Canadian crude summit.
Depending upon pipeline capacity out of Canada until new pipelines come onstream, crude-by-rail could increase to probably eight, or perhaps 12, unit trains from two to three trains today, he said. We believe that Keystone [XL] will get built but we dont think that Keystone and Energy East will get built.
Genesis estimates that another 835,000 bbls a day of production will be coming onto the market over the next five years. Pipelines will get built but we definitely will have delays so dont count on a lot of pipelines by 2019, said Doherty.
He also believes there currently is enough rail terminal capacity in Canada to accommodate the growth in unit trains and that any future expansions will be developed by companies already in the business.
The Gulf Coast has 18 rail unloading terminals, mainly in the eastern Gulf, with the ability on paper to unload 1.7 million bbls a day of crude oil, Sandy Fielden, director, oil and products research, for Morningstar Commodities and Energy Ltd., told the conference. Most were built since 2012 in response to the need to get stranded and discounted Bakken light crude to market.
Fielden said there has been a 50 per cent increase in crude oil storage in the Gulf to 291 million bbls from 192 million bbls because much of the new shale production needs to be blended ” it is too light to run through a refinery on its own.
Canadian crude imports into the Gulf increased to 352,000 bbls a day in 2016 from 144,000 bbls per day in 2010 with the increased pipeline capacity to the Gulf ” most of those bbls were heavy crudes.
According to Fielden, the constraint is all in Canada right now because if there was more rail and pipeline capacity, more crude would be getting down to the Gulf Coast. Evidence of that is that the Seaway pipeline and the Cushing Marketlink are running half empty, he said. Canadian crude could potentially replace the 1.4 million bbls a day of declining heavy crude production from Venezuela, Mexico and Colombia, said Fielden.
Dakota Access pipeline
It could take awhile but the new Dakota Access pipeline could potentially offer another outlet for Canadian heavy crude from Patoka, Illinois if there is increased capacity out of Canada, said Stephanie Sheldon, an independent analyst.
The pipeline, she said, is likely to accept other grades of crude than Bakken on its southern segment from Patoka to Nederland, Texas, she said.
The northern part of the new-built pipeline runs from North Dakota to Patoka, Illinois and Sheldon expects about 200,000 to 250,000 bbls per day to travel only as far as Patoka, leaving a lot of empty space on the line between Patoka and the Gulf Coast. Why would you run a pipeline at half capacity when you can accept other grades at Patoka?
Enbridge Inc. has already said it is willing to introduce joint tolls from its system onto the Dakota Access pipeline, she said. Customers also would be able to request new grades currently not in the tariff.
If you get enough demand from customers, the pipeline company is going to make that happen; they are going to want more volumes. However, its going to take a long time because at present there isnt enough tankage at Patoka to accept a lot of different grades of crude for the southern half of the pipeline, said Sheldon.
At present, the DAPL tariff is approved for only light, sweet Bakken crude (39 degrees API to 48 API) although Sheldon said she expects that eventually other grades will be shipped.
The tariff for committed shippers from North Dakota to Patoka is between US$4.25 a bbl and $5.25 a bbl, depending on volumes and the length of the commitment with a spot tariff of $6 per bbl. The tariff from North Dakota to Texas is between $5.50 and $6.50 per bbl.
With the growing volumes of light sweet crude flowing into the Gulf, exports from Texas are expected to rise as growing volumes of light crude are going to have to go somewhere, she said. People have been already offering Bakken bbls for export out of Nederland and Beaumont and I would expect that to continue, she said.