A potential Canadian railed crude revival?

Stagnant railed crude shipments from Canada could see a revival in 2026-2027 as growing oil sands output once again outstrips available pipeline capacity, according to a recent study.

New upstream projects are expected to boost Canadian crude output to about 6mn b/d by 2033, up from about 5mn b/d in 2023, according to Enkon Energy Advisors, a Houston-based consultancy.

Potential available crude exports could increase to 5mn b/d by 2027, Enkon said, surpassing the capacity of existing long-haul export lines including Enbridge's giant 3.1mn b/d Mainline system and the recently expanded 590,000 b/d Trans Mountain Expansion (TMX) to Canada's west coast.

Demand for spot railed crude volumes will likely remain low until 2026-2027 amid plentiful pipeline capacity, which is the most efficient way to move heavy crude over long distances. But with no new pipeline capacity additions on the horizon after TMX, "spot rail volumes are expected to become significant post-2027," Enkon said.

Canadian crude-by-rail exports have averaged about 94,000 b/d this year through June, down from 119,000 b/d in 2023 and 143,000 b/d in 2022, according to Canada Energy Regulator (CER) data. Flows are well south of the all-time high yearly average 280,000 b/d set in 2019, and the 412,000 b/d monthly record set in February 2020.

Railed crude exports are linked to differentials between crude prices at the rail and pipeline hub in Hardisty, Alberta, and their corresponding prices in Houston, Texas.

Those differentials widened to near $25/bl in late 2018 amid a supply glut and persistent pipeline congestion, spurring Alberta's government to enact mandatory output cuts and negotiate billions of dollars worth of railed crude contracts that were subsequently dropped.

That pricing spread has recently held at about $8/bl, less than half of the $15-20/bl spread that typically makes crude-by-rail movements viable for shippers without rail commitments.

However, Enkon said that as Canadian pipeline capacity refills, that differential is expected to return to levels seen in 2018.

"This situation underscores the urgency for producers transporting crude via rail to find strategies that mitigate negative impacts on their netbacks," Enkon said.

By Chris Baltimore