Weekend Edition: Bypassing Heavy Oil Differentials by Rail

According to First Energy, North American rail shipments of oil are estimated to reach 465,000 bpd this year. That’s the equivalent of a major pipeline such as Enbridge’s Seaway which is expected to ship 400,000 bpd by the end of the year.

Recently Southern Pacific Resources (STP) committed to ship its entire output by rail totally bypassing pipelines. That’s 12,000 bopd trucked to a rail terminal where it will head south 4,500 km by rail. The oil will then be hauled on barges to Gulf refineries.

Transportation cost for moving oil by truck, rail and barge adds up pretty quickly to a whopping $31 per barrel. But the end result is selling the oil at Brent pricing.

STP’s bitumen typically fetches WCS pricing – about $8 per barrel in diluents.  WCS trades at a steep discount to WTI which in turn trades at a discount to Brent. So even with the $31 transportation cost, STP will realize at least an addition $18 in netbacks.

rail vs pipeline

It looks like the transportation cost is worth it! – click to enlarge

Not surprising, last Friday WCS closed at a $35 discount to Brent.

The unfolding scenario of increased rail shipping and pipeline constraints is a gold mine for rail companies. CN expect its revenue to triple in the next 3 years.

But marketing companies like Avenex Energy’s Elbow River division also stand to profit handsomely from differentials in oil price and rail shipping. Elbow River took ownership of a physical loading facility with a 2,000 bopd capacity with the potential to ramp it up to 10,000 bopd.

I have to reiterate that in my opinion Elbow River is what will support Avenex’s distribution in 2013 and beyond. A pretty nice yield which has tremendous upside when, not if, the market for natural gas returns.

News Roundup

Outcome of $15.1-billion Nexen-CNOOC merger is murky

World oil supply tightens in last 2 months: EIA

No US-style shale gas boom for Europe, says energy investor

Shell plans at least $1 billion a year China shale gas investment

Romney’s energy independence proposal a move to heal Canada-U.S. rift

Have a Great Weekend!