The battle between pipeline and rail transport alternatives to get growing crude supplies out of Western Canada is heating up. On Thursday (August 1, 2013) TransCanada confirmed plans to proceed with repurposing their Mainline gas pipeline into the Energy East crude pipeline that will now carry up to 1.1 MMb/d from Alberta to Eastern Canadian refiners and the export market. A day earlier Kinder Morgan and Keyera announced plans to build a unit train loading terminal in Alberta to increase crude by rail capacity to the US. Today we review Canadian rail infrastructure investment plans.
If you are new to the topic of moving heavy Canadian crude (bitumen) by rail you can bring yourself up-to-speed by looking at previous posts on growing Canadian bitumen production (see Heat it! Bitumen Economics Part 1) and the options for moving heavy bitumen crude by rail – including various levels of dilution with light hydrocarbons known as “diluent” (see Heat it! Bitumen Economics Part 2).
In the first episode in this series we attempted to answer two key questions that determine the fate of Canadian heavy crude shipments by rail (see Go Your Own Way – The Rail vs. Pipeline Bitumen Challenge). First - is rail capacity needed to supplant a shortfall in available pipeline space now or in the future? The answer to that question is that although takeaway capacity is tight today, new pipeline construction coming online by early next year should free up enough space for incremental deliveries of Canadian crude to the US Gulf Coast. Further down the road a parade of new pipeline capacity is planned that (if built) will exceed Canadian production over at least the next five years. Second we asked if the cost of bitumen by rail transport can compete against pipeline delivery when both options are available to producers? The answer to that question appears to depend who you talk to. Investors in new rail capacity from Alberta are suggesting they can make the economics work. Today we begin a review of these rail terminal investment plans.
NuStar Asphalt & PBF Energy
Nustar Asphalt, a subsidiary of Nustar Energy Partners, own two Asphalt refineries on the US East Coast at Paulsboro, NJ (72 Mb/d) and Savannah, GA (32 Mb/d). The two asphalt refineries process heavy crude with a typical API gravity between 10 and 14 to produce a 70% asphalt yield. Asphalt is primarily used for road surfacing. The refineries currently process mostly Venezuelan heavy Boscan and Bachequero 13 crude but are looking to Canadian heavy crude for a lower priced alternative. To that end, NuStar has developed rail infrastructure in partnership with Canadian Pacific (CP) railroad and Torq Transload at Lloydminster, AB to currently load 9 Mb/d of heavy crude for rail shipment to their refineries. Nustar has purchased a fleet of 1200 dedicated coiled and heated tank cars to ship raw bitumen and has built unload facilities at both refineries with a combined capacity of 40 cars/day. The loading operation is currently only manifest but NuStar plans to expand to unit trains in 2014. NuStar data indicates that the all-in freight cost to the refineries is between $18/Bbl and $24/Bbl depending on destination. Another East Coast refiner, PBF Energy is also shipping heavy crude by rail from Western Canada – at least 35 Mb/d this quarter at an estimated shipping cost of $18/Bbl (3Q 2013) to their two Delaware River refineries according to their investor presentations (see Masterpiece Refining for more on PBF Energy). PBF had set a more aggressive target of 40 Mb/d of heavy crude this quarter but are experiencing some delays in the build out of loading infrastructure in Canada although they are not forthcoming about the origin load point. For both NuStar and PBF, shipping Canadian heavy crude by rail is the only alternative to the East Coast in the absence of existing or planned pipelines. By 2017 the TransCanada Energy East pipeline may offer an alternative route for waterborne crude to reach the East Coast (more about that project in a later episode).
Canexus Bruderheim Terminal
Canexus Corporation is a Canadian chemical manufacturing company based in Calgary, AB. The company produces sodium chlorate and chlor-alkali products but also provides fee-for-service transloading services to the oil and gas industry from their rail terminal at Bruderheim, AB, close to Edmonton. The existing Canexus terminal (see picture below) handles 35 Mb/d of diluted bitumen (dilbit) in manifest batches delivered to Bruderheim by pipeline from MEG Energy’s Stonefell Terminal. Facilities to load unit trains of up to 118 tank cars (70 MBbl) are currently under construction with start-up projected later this year (2013) initially loading Access Western Blend (AWB) – a dilbit crude. Canexus will connect Bruderheim by pipeline to dilbit production streams in 2014 including up to 100 Mb/d of Cold Lake blend (owned by Cenovus, ExxonMobil, Shell and Canadian National Resources). So far the Bruderheim terminal is shipping dilbit by rail rather than raw bitumen. That is because the incoming crude is already a diluent blend from the production sites. A future opportunity exists for Canexus to install a diluent recovery unit (DRU) at Bruderheim. This would allow customers to recover diluent at the terminal and ship ‘railbit” that has about 17% diluent or raw bitumen with no diluent – saving money and increasing the bitumen payload.
Source: Canexus AGM Presentation 2013
Gulfport – Grizzly Oil Sands
Grizzly Oil Sands ULC is a private oil sands company owned by Wexford Capital LP and Gulfport Energy Corporation. The company has a >800,000 net acre land position in the Athabasca and Peace River oil sands regions. They expect to produce 5.5 Mb/d of bitumen by the end of 2013 expanding to 11 Mb/d in 2015. Grizzly is currently investing in a rail-loading terminal at Windell – near to Conklin, AB adjacent to its May River production lease site. The rail facility will initially transport “railbit” bitumen (17 percent diluent) via Canadian National (CN) railroad to a rail-to-barge offload facility (Paulina Terminal) operated by Wolverine Terminals on the lower Mississippi River at St. James, LA (see pictures below). The Paulina crude oil offloading, storage, blending and marine dock terminal represents a $30 MM investment by Wolverine Terminals that will come online in Q2 2014. Grizzly expect transport costs - including terminal fees - to average $21-$22/Bbl. Grizzly will lease its own rail tank cars and ship crude under a contract with CN. The initial plan calls for shipping railbit to the Gulf Coast and backhauling condensate to Alberta. Once Grizzly achieves production levels above 10 Mb/d it will build DRUs at Windell to remove all the diluent prior to shipping – saving further cost. Grizzly does not have an alternative pipeline shipping plan for its crude production – believing rail economics to be better for smaller producers.
Source: Grizzly Oil Sands Investor Presentation July 2013
Statoil Canada Ltd – a subsidiary of Norwegian State oil company Statoil ASA owns and operates production leases in the Athabasca oil sands region through a 60:40 joint venture with Thai company PTT Exploration and Production. Current production is ~18 Mb/d of bitumen from the Leismer Demonstration Project and Statoil has future expansion plans at Leismer and the Corner project. The Leismer production is mixed with diluent and sent via a dedicated pipeline to Cheecham and existing pipeline connections to Edmonton, AB. To ship their bitumen to market, Statoil has recently entered into a long-term deal with midstream company Gibson Energy Inc. (for more on Gibson see Heat It! Part 2). Gibson will build storage, multiple pipeline access and a rail-loading capability at its Edmonton facility for Statoil’s bitumen. The Statoil facility, located on Gibson’s existing Edmonton storage terminal will include a 300 MBbl storage tank and will connect to the CN railroad. The in-service date for the rail terminal is expected to be 1H 2015.
In the next episode in this series we will cover Western Canadian rail load terminal development plans by Genesis Energy, Altex Energy and Kinder Morgan.