Insight: Facing shipping constraints, Canada moving oil one truckload at a time

Gear Energy

23/04/2018 06:00

By Rod Nickel and Julie Gordon
    WINNIPEG, Manitoba/VANCOUVER, April 23 (Reuters) - At an
Alberta oil loading terminal, a convoy of big rigs are gearing
up to haul Canadian crude oil hundreds of miles through bone dry
fields across the U.S. border into Montana, where the oil will
be transferred to pipelines and rail cars headed south and west.
    Trucks loaded with crude are an increasingly common sight at
the border. Production has risen in the world's fifth largest
producer but full pipelines and a rail car shortage have made it
difficult for drillers to ship oil out of Canada.
    Some oil producers are feeling the pressure from customers.
Alberta-based Gear Energy Ltd  GXE.TO  pumps about 7,500 barrels
of oil equivalent per day, and recently had an Asian customer
walk away from an agreement to buy crude after failing to secure
a way to ship oil to the West Coast. 
    "We've never had more inbound calls looking for heavy oil,"
said Gear Chief Executive Officer Ingram Gillmore. "And we have
never had more challenges actually getting it to them. It is
very frustrating."
    Production in Canada rose 8 percent in the last year to a
record 4.2 million barrels per day (bpd) and is forecast to keep
rising. Over the next five years, OPEC production is expected to
only grow modestly, leaving the bulk of forecasted global supply
increases to the United States and Canada. 
    But Canada’s oil industry faces significant challenges, not
the least of which are high production costs, remote oil fields
and, perhaps most pressing, the shipping bottlenecks. So
significant are the problems that a number of oil majors have
withdrawn from Canada.  
    No easy solution is on the horizon. Plans for new export
pipelines are running into opposition from environmentalists,
Aboriginal groups and rival provinces. Most recently, Kinder
Morgan Canada  KML.TO  hit the brakes on its Trans Mountain
expansion, and TransCanada Corp  TRP.TO  has not yet fully
committed to its Keystone XL project.
    Frustrated and fearful of missing out on the rebound in
prices, drillers are increasingly relying on trucks to move oil
to the market. Crude exports from Canada by road nearly tripled
from 2015 to 2017, and continued to rise in the first two months
of 2018, according to StatsCan data provided to Reuters. (For
graphic, see https://tmsnrt.rs/2qDogMD)
    However, a truck can only carry 200 barrels of oil, compared
with 60,000 barrels in one unit train, or nearly 600,000 per day
on the Keystone Pipeline - the equivalent of 3,000 trucks. Each
one of those trucks needs a driver and enough fuel to carry
crude over long distances. Moving crude by truck is at least 10
times more expensive on a mile-for-mile basis compared with rail
or pipeline.
    "We have demand for 50,000 bpd and we can move about a fifth
of that," said Jarrett Zielinski, chief executive of Torq Energy
Logistics, an Alberta company that owns rail loading facilities
and 275 trucks. 
        
    TRUCKIN'
    Rising opposition to pipelines is hitting Alberta, the
landlocked province where most Canadian oil is produced.
    The fight over the Trans Mountain expansion, which would
nearly triple the capacity of the 1,150-kilometre (715 mile)
line from Alberta to a British Columbia port, has engulfed two
provinces and the government of Prime Minister Justin Trudeau. 
    British Columbia is opposed to the project, which prompted
Kinder Morgan to suspend work on the line. Alberta's premier
threatened to cut fuel deliveries to its neighbouring province
in retaliation.  urn:newsml:reuters.com:*:nL1N1RV1YU
    As for trains, during certain months, rail operators face
political pressure to prioritize movement of agricultural
products. Rail operators want long-term deals from shippers, but
oil companies prefer to have the flexibility to shift to
pipelines if space becomes available.
    Exports by road rose from just over 17,000 barrels per month
in 2015 to more than 51,000 in 2017, according to data
Statistics Canada provided to Reuters. In the first two months
of 2018, road exports surged to an average of 180,000 a month.
    By contrast, rail exports averaged 4 million barrels a month
in 2017. 
    Using trucks allows producers to reach northern U.S. rail
loading sites, where there is more capacity and rates are
cheaper, Zielinski said.
    Monthly demand fluctuates based on the discount for western
Canadian crude versus the U.S. benchmark. When the discount is
above $20, oil producers will pay to haul crude up to five
hours, more than twice as far as usually makes economic sense,
Zielinski said.
    However, the trucking industry's capacity to move more crude
is limited by a severe driver shortage in Western Canada, said
Andrew Barnes, director of compliance and regulatory affairs at
Alberta Motor Transportation Association.
    This is not unique to Canada. Booming production in west
Texas has strained pipeline capacity, increasing reliance on
trucks to deliver to injection points. But ongoing pipeline
construction in Texas should alleviate the glut in the next
year, while Canada's future in less clear.
    The uptick in truck transport also raises safety questions.
There were 205 road accidents involving crude tanker trucks in
Canada from 2010 through 2016, which killed 10 people, according
to Transport Canada data. There were nine accidents involving
crude trains, though one was the Lac Megantic, Quebec disaster
in 2013, where a train hauling 72-crude cars derailed and
exploded, killing 47.
        
    RAIL SLOW TO RETURN
    When the Canadian oil discount hit a four-year high at $31
in January, Alberta oil companies started calling Ceres Global
Ag Corp  CRP.TO , a grain and fertilizer handling facility on
the Canada-U.S. border at Northgate, Saskatchewan.
    Desperate for access, companies were pushing Ceres to
accelerate long-term plans to add crude hauling, starting with a
C$1 million ($795 million) facility to transfer crude from
trucks to rail and onto the BNSF system.
    "Every day they have fewer options of where to take it,"
said Ceres CEO Robert Day, who said his company is working to
get to the point where they can load oil. "We're going to work
real hard to make that happen in 2018."
    The bottlenecks are frustrating for Canadian oil producers
because heavy crude is in great demand from U.S. Gulf of Mexico
refineries, which are designed to process it, and have faced
shortages of Venezuelan and Mexican heavy crude. 
    Large producers tend to store oil until they have enough
volume to fill a train, but for smaller producers who cannot
shut production and lack storage capacity, trucks may be the
only option, said a Calgary trader. 
    "At the end of the day, you cannot put it back in the ground
- it has to go somewhere," he said. "If your alternative is a
camel or a donkey, then that's the alternative you have to go
with."

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Kinder Morgan says investment in oil pipeline expansion may be
untenable     ID:nL1N1RV1YU 
GRAPHIC: Trucking Oil Across the Border    https://tmsnrt.rs/2qDogMD
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 (Reporting by Rod Nickel in Winnipeg and Julie Gordon in
Vancouver; Editing by David Gaffen and Paul Thomasch)
 ((julie.gordon@thomsonreuters.com; 778-374-3856; 604-396-7906;
Reuters Messaging: julie.gordon.thomsonreuters.com@reuters.net))