By GRAHAM HICKS
Today I am going to figure out, with the help of energy analyst Tim Pickering of Calgary-based Auspice Capital, one of the weirdest aspects of Alberta’s oil business.
Despite good prices for our heavy oil, why has shipping oil-by-rail fallen off the map?
Alberta oil producers are currently sitting pretty.
Our Western Canadian Select (WCS) heavy oil – basically the oil from the oil sands — has moved from a rock-bottom $12 US a barrel last fall to around $40 today. (All prices are in American dollars. P.S. this column is not about the dreaded “differential” – it is concerned only with the actual price of heavy oil.)
We all know the pipelines carrying our oil are full. Our oil storage capacity – those great big tank farms we see around the Strathcona County refineries and elsewhere along our oil pipelines – is once again filling up.
If the pipelines are full, the storage tanks are full, and the price is good … why has shipping oil by rail died?
In January, when heavy oil prices were in the dumpster, rail tankers were moving out 300,000 barrels a day, mostly to the USA. That’s only about 10% of our total daily oil production – but 10% is still significant.
Today, the amount of heavy oil being shipped out of Alberta by rail has dropped to almost nothing – about 100,000 barrels a day, or a little over one 100-tanker train a day.
So I ask once again.
The current price for our heavy oil is really good.
Our pipelines and our storage tanks are full.
Why isn’t more oil being moved by rail? The oil-by-rail system in Alberta is easily capable of moving 300,000 barrels per day.
“Remember,” says Pickering, “shipping oil by rail is very, very expensive. Rail costs $15 per barrel, pipelines $7 a barrel, ocean oil-tanker ships $3 a barrel.”
Alberta’s heavy oil is shipped and sold to big refineries in the American Midwest and on the Gulf of Mexico, refineries designed to handle massive quantities of heavy oil.
“Look at the financial equation from the buyer’s point of view,” says Pickering.
“Before Christmas (before the provincial government curtailed oil production by 10%) the price for our heavy oil was below $20. Even with rail shipping charges of $15 – our oil-by-rail was still bargain-priced.
“Today, at $40 a barrel plus $15 for rail shipping, the price isn’t so attractive. The American buyers can purchase heavy oil from elsewhere – shipped by ocean tanker or by pipeline -for less.”
But what about the laws of supply and demand?
If railways wanted to keep their Canadian oil-shipping business busy, why wouldn’t they drop their shipping rates by a few bucks, to make the price competitive?
“A stand-off is happening between the railways and the oil producers,” says Pickering. “The railways know the oil folks only use oil-by-rail when the pipelines are full. Why should they invest in moving oil by rail, when new pipelines would immediately suck away all that business?”
Unanswered is the following: At current prices, why wouldn’t an oil producer eat the extra cost of shipping by rail – in order to sell as much oil in the USA as possible? Even at a discount, the producer is still making money.
Meanwhile, says Pickering, the Alberta heavy-oil cycle is repeating itself.
Even with the 10% government-imposed oil production cutback, storage capacity is again full, pipelines are full. The “differential” – the difference between the price of our heavy oil and the WTI price (Western Texas Intermediate oil – North America’s benchmark oil price), is again widening.
New Alberta Energy Minister Sonya Savage is walking into a complex situation. Fortunately she is a pipeline expert highly regarded within the energy industry.
But at the same time, it’s simple.
Alberta needs at another million barrels a day of oil-moving capacity to get world-market value for our heavy oil.
Moving oil by rail is a stop-gap measure. Because it’s too damned expensive!