Keystone zeal cools for producers with more shipping options

Heavy Crude

“Going out the next decade, I think the industry needs every pipeline proposal that’s out there,” Lanny Pendill, an analyst at Edward Jones & Co. in St. Louis, said in an interview.

Keystone XL’s outcome will influence the price of Canada’s heavy crude. A lack of transportation has created a glut that led to a discount of as much as $42.50 a barrel on Canadian heavy crude against the U.S. benchmark, West Texas Intermediate.

If Keystone gets built, Western Canadian Select is forecast to rise, narrowing the gap with the U.S. oil price to $12 a barrel, according to an October research report by CIBC World Markets Inc. Without the line, the price of Canadian heavy crude is set to fall to $63 a barrel, compared with $85 for WTI -- a gap of $22.

Oil-sands producers are poised to spend C$25 billion to C$30 billion a year to expand production regardless of the Keystone XL decision, RBC Capital Markets analysts led by Mark Friesen said in a September report.

Rail Shipments

Much of that new output will travel by rail, said John Stephenson, a portfolio manager who helps oversee about C$2.8 billion at First Asset Investment Management Inc. in Toronto.

“Crude-by-rail has grown enormously over the last 20 months or so,” said Stephenson.

The capacity of rail terminals to load crude oil in Western Canada will quadruple by the end of next year to 905,000 barrels a day, according to an August report by Calgary investment bank Peters & Co. Keystone XL’s planned capacity is as much as 830,000 barrels a day.

“This is now bigger than KXL,” Stephenson said.

Rail companies including Canadian Pacific Railway Ltd. and Canadian National Railway Co. have benefited from the pipeline delays. Canadian National in October reported a 17% increase in petroleum and chemicals sales in the third quarter, and Canadian Pacific posted the same gain in industrials and consumer products revenue, which includes crude shipments.

Rail fills the gap while TransCanada and its Canadian pipeline rival Enbridge Inc., as well as Houston-based Kinder Morgan Energy Partners LP, work on other pipelines that would provide access to coasts and expand exports.

“The market has figured out that Keystone is not the be- all, end-all,” Cormark’s Kepler said.

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