Notley giveth 120,000 b/d of new crude oil tanker shipping, but will Trudeau taketh?

Source: Railway Association of Canada

Ottawa accelrating phase-out of 21,367 unjacketed CPC 1232 tank cars by November 1, 2018 could eliminate estimated 196,000 b/d of heavy crude shipping capacity

Rachel Notley announced Wednesday that her government is already negotiating with suppliers to “invest” in 120,000 b/d of new oil tankers and locomotives that will begin operation in December, 2019. But Justin Trudeau may undermine that new crude oil takeaway capacity by continuing with a November 1 decision to significantly accelerate the mothballing of half or more of the current Canadian tanker fleet.

“We will not stand by while we’re forced to give our resources away for pennies on the dollar. This oil price differential is about real people with real bills to pay and real concerns about the future. There’s no excuse for Ottawa to not be at the table with us, but we cannot allow delays to continue,” the Alberta premier said in a release. She in is Ottawa for a luncheon address to the Canadian Club.

“Alberta will buy rail cars ourselves in our fight to get top dollar for the resources that belong to every Albertan.”

But while Notley is busy adding, the Prime Minister has been subtracting for months.

CPC 1232 tank cars are the workhorse of the crude oil transportation business. They’re also “unjacketed” – they lack a layer of thermal protection – and considered unsafe.

The horrific crash of tank cars carrying highly flammable Bakken crude oil killed 47 people in the small Quebec town of Lac Megantic in 2015 and there has been a movement to retire them ever since.

The federal government originally decided to phase out the CPC 1232 cars by April 1, 2020, then is September announced that date had been moved up to November 1, 2018.

Transport Canada confirmed to Energi News that it “has not been approached to delay the phase out of unjacketed CPC 1232 tank cars.”

How many CPC 1232 cars are we talking about? Well, according to the government, 21,367.

“We continue to be surprised that this issue isn’t at the forefront for Notley and for investors,” investment analyst Dan Tsubouchi wrote in the Stream Asset Financial Management’s blog.

Tsubouchi estimates that CPC 1232 cars carry 700 barrels of light crude oil (15 million barrels in total) and 55o barrels of heavy (11.75 million barrels). If we assume a train takes 60 days to make a round trip from Canada to US customers, the daily crude rail shipping capacity represented by these tankers is about 196,000 b/d.

It would appear that the federal government is removing far more crude by rail capacity that the Alberta government is added.

Tsubouchi is clearly worried this is the case: “Our fear is that this…will widen differentials and reduce crude by rail volumes.”

Dan Tsubouchi, chief market strategist, Stream Asset Financial Management.

His concern is offset to some extent because the railways have been adding the new, safer DOT-117J tankers to the national fleet for several years.

According to Rory Johnston, energy economist with Scotiabank, the latest data from the National Energy Board shows that as of September, 270,000 b/d of crude oil is being shipped by rail.

He told Energi News in an interview that volumes are expected to jump to 300,000 b/d or more by the end of the year and rise to 400,000 b/d by the end of 2019.

“The challenge here is that we expect that [Enbridge’s 375,000 b/d] Line 3 pipeline is going to come on at the end of 2019 and that will erode a good chunk of the demand for oil-by-rail,” he said.

“But it also probably would make it so that oil by rail is starting at a better starting point and I think they will be better able to keep up with the incremental demand at least for the next year after that.”

Calculating how much new crude by rail capacity will be available when Alberta’s spanky new “unit trains” (locomotives and tankers dedicated to moving only crude oil) arrive is made even more difficult by Cenovus Energy’s recent decision to contract with CN for 100,000 b/d over three years.

Bottom line?

If we were advising the Notley special envoys, we would be strongly recommending don’t wait, act now to focus on stopping the [federal government] from accelerating the phase out of jacketed CPC-1232 tank cars,” Tsubouchi wrote in his blog. 

He’s right. The unjacketed tankers could perhaps help in the transition from now until the new tankers are built.

Given the magnitude of the problem – Notley says the WCS/WTI differential costs the Canadian economy $80 million a day – there is a good argument to give Transport Minister Marc Garneau the “go slow” sign for six to 12 months while Alberta’s market access problem is sorted.

Alberta produces about 250,000 barrels a day more than can be shipped using existing pipeline and rail capacity, according to the government. The Alberta Petroleum Marketing Commission is already negotiating with suppliers and manufacturers.

About 15,000 b/d of capacity would be available at first, rising to the full 120,000 b/d by August, 2020. Notley thinks that will narrow the oil price gap by up to $4 per barrel, generate more than $1 million per day in new federal revenues, and provide smaller producers with a more affordable option to move their oil to market, according to the release.

Last week, the Premier said she had written to Ottawa asking the senior government to cost-share the project, but had not received a reply.

Perhaps it’s time to write another letter poking the Prime Minister for a response, also asking that he kindly stop taking oil tankers out of the system for a few months.

The Alberta producers shutting in over 100,000 b/d of output and those selling their crude for less than it costs to get it out of the ground would probably appreciate the gesture.

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