ANALYSIS: Rail supply of brent crude offers Canada a pipeline to the future

Updated 25 November 2018

ANALYSIS: Rail supply of brent crude offers Canada a pipeline to the future

Faisal Mrza RIYADH: Crude oil prices continued their downward fall last week, reaching their lowest level in more than a year, almost 30 percent lower than in last October. Brent crude ended the week at $58.80 per barrel and WTI fell to $50.42.
The steep slide started in early November from oversupply concerns that put bearish pressures on market sentiments. A worldwide glut is the major concern for futures, while the prompt physical market is balanced.
The real physical supply concern must be focused on the pipeline constraints that weigh on Canadian heavy crude. The Western Canadian Select (WCS) benchmark dipped to a record low last week, down to $11 per barrel, with pipeline demand far over capacity. This is the lowest since the financial crisis of 2008.
Although Canada has 10 percent of the world’s oil reserves, 95 percent of these reserves are heavy unconventional oil in the Canadian Oil Sands, located in the province of Alberta in the west.
Due to a geographical infrastructure imbalance, the capacity of the Canadian refineries, which reaches about 1.9 million barrels per day, is mostly located in the east.
In fact, the Canadians import oil to supply their eastern refineries. Therefore, Canada cannot take full benefit from its oil sands. It exports nearly all its oil production to the US at a steep discount. Due to the lack of appropriate infrastructure, the loss to the Canadian economy stands at $80 million per day.
Output from Canada’s oil sands is far beyond pipeline capacity to its US markets. Two pipeline projects that should have helped are still tied up in legal proceedings. The TransCanada Keystone XL pipeline is supposed to begin near Hardisty, Alberta, Canada and end in Steele City, Nebraska, US. It would have the capacity to deliver up to 830,000 barrels of oil per day. On Nov. 8, a US court issued an order blocking construction until an additional environmental review is conducted.
The existing Trans Mountain pipeline carries 300,000 barrels of crude and refined oil per day from Alberta to the west coast of British Columbia, Canada. Construction was supposed to begin this year on a 590,000-barrel expansion to the pipeline. However, in August 2018, on the same day that approval came for the pipeline to be sold to the Canadian government, an ongoing court battle blocked the permit for the pipeline expansion.
With pipelines over capacity, Canadian producers are moving their crude oil by rail. Crude-by-rail loadings at monitored terminals in Western Canada reached a record high monthly average of 274,000 barrels per day in October, according to Genscape Inc. data. This is more than double a year ago. The situation is dire. For the week ending Nov. 9, crude inventories at five monitored terminals in Western Canada reached 34.2 million barrels. The discount on Canadian crude is so high that some US refineries are reselling the oil outright rather than processing it.
The Canadian government is working on a deal to buy trains to move an additional 120,000 to 140,000 barrels of crude per day. Shipping crude by rail has its detractors, however. Opponents of the practice call the transportation method “bomb trains,” and claim that spills and deaths are inevitable when crude-by-rail shipments increase. As oil takes over the railways, overall shipping costs go up as capacity is strained. Pressure builds on the rail network, resulting in shipping delays for other goods. And Canadian production will continue to rise. Imperial Oil will move forward with construction of its $2 billion Aspen project in northern Alberta. The 75,000 barrel per day project is expected to begin producing in 2022.
The oil industry had hoped that well-maintained pipelines would last forever. A major spill from the Enbridge pipeline in 2010 showed that even with excellent maintenance and surveillance, it is difficult to keep pipelines running incident free. More than 40 percent of US oil pipelines were built in the 1950s and 1960s. In Alberta, at least 40 percent of the pipeline network was built before 1990.
Corrosion is a major issue. Pipeline companies fight rust corrosion through the use of coatings and cathodic protection. But with time, all coatings fail, and the level of expenditure increases for inspection and maintenance to keep pipelines intact. When downtime on the pipelines is required for maintenance, this disrupts crude oil flows.
For now, Canada will move forward with the expansion of crude oil rail shipments. A study from Carnegie Mellon University found that the environmental and health costs of transporting oil by rail are double the cost by pipeline. But with Alberta desperate to relieve the pressure on oil storage in the province, it is certain that for the foreseeable future rail shipments of Canadian crude are the only option.

Faisal Mrza is an energy and oil marketing consultant. He was formerly with OPEC and Saudi Aramco. He is the president of #Faisal_Mrza Consulting. Twitter: @faisalmrza


Food for thought as Aramco’s Amin Nasser hosts Davos

Updated 50 min 37 sec ago

Food for thought as Aramco’s Amin Nasser hosts Davos

  • The theme of the reception was “the art of the possible,” aiming to highlight Aramco’s huge investment in energy technology
  • Among the foreseen events were the release of audited reserves estimates showing Aramco — officially — as the world’s biggest oil company

DAVOS: Rapidly becoming a highlight of the hectic Davos calendar is the Saudi Aramco reception and dinner, held for the past two years now at the InterContinental Hotel on the outskirts of the Alpine resort.

The egg-shaped InterConti is one of the bigger and newer establishments here, very different in style from most of the other traditional Swiss hotels. It exudes corporate power and influence and is a fitting venue for the most valuable company in history to host friends, clients and would-be partners for a few informal hours.

On Wednesday, the hotel was virtually an extension of Riyadh. In addition to the Aramco event, there was also a big presence by the Saudi Arabian General Investment Authority (SAGIA), with its slogan “Saudi Arabia: Now Live” in prominent view in the bustling lobby.

The Aramco event — hosted of course by chief executive officer Amin Nasser — was a gathering of some of the most powerful people in the Kingdom, as well as a number of the great-and-good of the energy world and representatives of the global elite.

The Saudi Energy Minister Prince Abdul Aziz bin Salman chatted amiably with guests, none the worse for wear from the door-stepping he had got from the Western press earlier in the day, which had caused a storm of disapproval on Saudi domestic media. He had a few words for everyone.

Yasir Al-Rumayyan, governor of the Saudi Public Investment Fund and chairman of Armco, was in attendance too, enjoying the refreshments and canapes of the gathering.

The theme of the reception — held in the InterConti’s cavernous basement function hall — was “the art of the possible,” aiming to highlight Aramco’s huge investment in energy technology, its big global research and development commitment, and its awareness of climate-change issues. “We are more than just a petrol pump,” was the message.

One neat synergy between traditional Saudi life and modern technology was the story of Mohamed Amanullah, leader of Aramco’s Advanced Research Center, who devised a way of using discarded date seeds — suitably processed — as a filter in the oil-drilling process. “It shows heritage and sustainability in one place,” an Aramco aide explained.

The highlight of the soiree was an address from Nasser, who took the stage to thank guests for making the trek to the InterConti. He noted that Davos 2020 had the highest number ever of Saudi delegates.

“Last year was an exceptional year for Aramco, in a variety of areas; some of them planned, some not predicted,” he told the audience.

Among the foreseen events were the release of audited reserves estimates showing Aramco — officially — as the world’s biggest oil company; the record-breaking bond issue in spring; the finding by scientific experts that the Kingdom had the cleanest crude of any of the oil majors; and, of course, the biggest initial public offering in history last month and market recognition of the fact Aramco is the biggest listed company in the world.

Some unplanned events were also mentioned, notably the attacks on Aramco facilities last September that briefly halted most of the Kingdom’s oil industry, but which was overcome with rapid efficiency. The oil price spike was short lived.

“Our job is to fulfill the global need for affordable energy,” Nasser said, highlighting Aramco’s “responsibility and moral obligation” to help alleviate energy poverty in poorer countries, especially in sub-Saharan Africa.

Nasser finished with a pledge that Aramco’s hi-tech capabilities will be enhanced and expanded for the benefit of the world. “I am confident that we can use technology to remove carbon dioxide emissions and methane from the atmosphere,” he said.

That is a mission worthy of the biggest energy company on the planet and provided food for thought for the rest of the Davos evening.