Oilpatch leaders wait desperately to ship more crude by rail with pipelines maxed out

With no capacityto spare on pipelines out of Alberta, oilpatch leaders are desperately waiting for when they'll be able to ship more crude on rail lines.

Imperial Oil reducedoilsands operations in recent months as the company had no way of sending oil to market. In the first quarter of this year, production was pulled back by about 12,000 barrels per day.

"On any given day, we had capacity to produce, but no place to put the oil," said Imperial Oil CEO Rich Kruger to journalists at the company's annual general meeting in Calgary on April 27."We had to curtail it was not discretionary we had to because there was no place to put it."

Husky Energy temporarily scaled back production by 5,000 barrels a day and Cenovusdecided to fluctuate its production to produce less when limited pipeline space lowered prices in the province.

On any given day, we had capacity to produce, but no place to put the oil.- Rich Kruger, Imperial Oil

Pipelines are the preferredmethod of shipping oil because they are cheaper and faster in getting product to refineries. However, both rail and pipelinesare strained right now, leaving companies struggling to export oil.

Export woes

Existing pipeline space is full and new pipelines are delayed, such as Kinder Morgan's Trans Mountain expansion, Enbridge's Line 3 replacementand TransCanada'sKeystone XL.

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Meanwhile, Canada's largest railways aren't able to cash in on servicing the oilpatchsince they are grappling with too much existing freight after an above average grain harvest last fall andunusually tough winter weather.

The rail backlog is expected to clear in the latter half of this year, when oil companies can start loading up significantly more tank cars.

"Rail provides a bridge," said CenovusCEO Alex Pourbaix, until new export pipelines are constructed.

Pourbaixsaid Alberta currently needs between 100,000 and 300,000 barrels per day of new pipeline space, a figure that will only grow as new oilsands projects like Suncor's Fort Hills project reachfull production.

Alberta has oil rail terminal loading capacity of about 600,000 barrels per day and is currently shipping about 100,000 barrels per day, said Pourbaix.

The CenovusCEO said he's currently negotiating with CNand CPand expects to spend between $14 and $18 USper barrel, when all of the rail costs are considered.

The transportation constraints are the main reason why oil prices in Alberta are substantially lower compared with those for the rest of the continent.Alberta's Western Canada Select (WCS) was selling for around $30 US per barrelless than West Texas Intermediate (WTI), the North American benchmark,in February. The WCS-WTI differential has since narrowed to about $17, but is still far from the usual average of about $10.

Solid bitumen safer to carry

The longer the oilpatch waits for new pipelines to be constructed, the more the industry looksat new ways of exporting, such as shipping raw bitumen in solid form by rail.

"That's a very, very doable technology. It is not at all experimental, it is completely commercial," said Pourbaix."The only thing the industry would have to do is make an investment in processing units to take the diluent out of the product before we put it into railcars."

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This shipping method could be less dangerous in a spill compared withsending liquid crude oil.

"Because you are moving undiluted bitumen, you don't have any of the environmental issues," said Pourbaix. "The product solidifies in the tank cars and is actually inert."

The expected growth in shipping crude by rail doesn't mean the oilpatchis giving up on new pipeline projects. Company executives continue to say they are confident new pipes will be built. If not, growth plans may be shelved.

"For this industry to grow, we need expanded market access," said Imperial's Kruger."It will be a big part of our deliberations and considerations of any new expansions."

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