The financials of opting for rail to move Alberta crude to tidewater markets
April 6, 2015
April 6, 2015
It happened again – Every February ends up being the shortest month of the year that seems to take two months to end! So I cashed in all of my Frequent Snow Shoveler points and bought a book called The Optics of Optimism, which I thought would encourage my cat in his as-yet futile attempts at mouse catching.
This tomb of intellect was helpful as it solved the mystery of how to get rid of weeds if we are so fortunate to have enough heat to encourage growth. This, impress-everyone-at-the-party term, is used as Feedback Inhibition, which means don’t do anything with the weeds just let them grow and when there’s no more room they’ll stop growing. I’m sure my neighbor, who trims his hedge with nail clippers, will understand.
We are rapidly reaching crude oil inhibition to the point that production will have to stop, or at least slow down dramatically. There is little, if any, more room to grow.
Evidence? The key delivery point for WTI futures contracted crude at Cushing, OK has now reached 92% of capacity – a 4% increase over last week. The Canadian equivalents of Cushing are Edmonton and Hardisty whose week-over-week levels increased by 13% and 17% respectively. Edmonton is now at 64% capacity while Hardisty is at 50% of capacity.
There are two solutions being worked on – first, Kinder Morgan is adding 4.8 million barrels of storage in Edmonton and a new Edmonton to Hardisty Enbridge pipeline will bring 527,000 bpd into available space in Hardisty.
But then what?
Pipeline capacity is full or non-existent to move the crude east or south for a variety of ‘Enviro-Politico’ reasons on both sides of the border. The handy but not so dandy option is rail, which at $20/bbl to ship crude to U.S. markets is double that of pipeline. Rail is also prone to disastrous consequences in terms of casualties, compensation, and environmental reclamation costs.
The financials of opting for rail to move Alberta crude to tidewater markets may be the toe-stubber that will hobble production for both Oil Sands and Shale oil. With storage at a virtual flood stage, the discount off of WTI for both crudes is widening. With WTI at $49/bbl the WCS price is discounted by $15/bbl to $34/bbl.
If you then include transportation by rail at $20/bbl then the end point is $14/bbl – well below the $30/bbl needed to cover operating costs, and the point that the smaller operators will have reached the inhibition point of no return on investments.
The Alberta oil industry has been frost hardened to these cyclical swings in profitability.
This time we hope for an earlier thaw than normal but production hibernation may be the best call.
Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada. All posts by Roger McKnight