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Cenovus ramps up WCS crude-by-rail program as market conditions improve

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Platts Global Alert - Oil

Cenovus ramps up WCS crude-by-rail program as market conditions improve

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WCS crude-by-rail volumes rise to 150,000 b/d-175,000 b/d

Western Canadian inventories grow as turnarounds end

New York — Cenovus Energy resumed crude-by-rail shipments in the fourth quarter of 2020 as market conditions improved for moving Western Canadian Select crude from Alberta to refineries in the US and Canada, the company said Feb. 9 in its fourth quarter results statement.

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Rail is crucial in moving the heavy crude to markets to be refined given the dearth of pipeline capacity. But it is only economic if the price of Western Canadian Select is low enough to support the more expensive rail transportation mode.

As Western Canadian producers have started to increase out following provincially-mandated production cuts, the price spread between WCS in Canada and WCS in refining centers in the US Midwest and US Gulf Coast widened enough to allow more barrels to flow.

So far in first quarter, barrels of WCS in Hardisty, Alberta are holding an $11.34/b discount to WCS at Nederland, Texas, compared with the fourth quarter 2020 discount of $9.41, according to Platts assessments.

"With resumption of the rail program, Cenovus exited December with average loading of nearly 28,000 b/d of its own crude oil for transport by rail for the month plus nearly 10,000 b/d for third parties. For the full year, the company loaded an average of more than 30,000 b/d of which more than 29,000 b/d were Cenovus volumes," the statement said.

Canadian crude-by-rail exports plunged from an all-time high of 411,991 b/d in February 2020 to an eight-year low of 38,867 b/d in July as the pandemic took hold. Exports have since rebounded to 173,095 b/d in November, according to latest data from the Canada Energy Regulator.

However, on its Jan. 28 guidance call with investors, Cenovus CEO Alexander Pourbaix said while the company was working with its freight partners to manage costs and '"some elements of rail movement make sense" he saw it only playing a "modest" role in its business unless differentials widened out "significantly north of $15."

Pipeline woes help rail

Another integrated Canadian oil company, Imperial Oil, is also starting to ramp up crude-by-rail volumes, to the 30,000 b/d to 40,000 b/d range, CEO Bradley Corson said on the company's Feb. 2 results call.

"Obviously we will continue to assess the economics of that going forward," he said.

Corson said that crude inventories in the region have fallen from 37 million barrels at its peak last year to "just shy" of 30 million barrels. He noted recently inventories have been building again as turnarounds on oil sands facilities have been completed and production restored.

However, he says stocks are still at a "very manageable" level and estimates that total crude-by-rail volumes out of Western Canada are averaging in the range of 150,000 b/d to 175,000 b/d.

Refining economics for WCS are becoming more competitive, particularly on the US Gulf Coast. Quarter-to-date USGC coking margins for WCS ex-Nederland are averaging $7.41/b so far in the first quarter of 2021, according to S&P Global Platts Analytics. This compares with $3.21/b in the fourth quarter of 2020.

The cancellation of the Keystone XL Pipeline by President Biden could help spur on the crude-by-rail recovery, according to Bernstein analyst David Vernon. The contentious pipeline was originally envisioned to carry heavy Western Canadian crude to US Gulf Coast refineries.

In a Feb. 9 research note Vernon said that volumes out of Canada will get a "lift with the cancellation of the Keystone." While assigning it a lower probability, he also said "Bakken volumes may also get a lift" if the Dakota Access Pipeline is shut down.

In January, a federal appeals court in Washington, DC, ruled the government should have conducted an Environmental Impact Statement before building the pipeline, which carries crude from North Dakota to Patoka, Illinois. An earlier lower court decision sided with tribes, saying the line should be down.

On Monday, the Biden Administration asked for an extension of a conference about the status of pipeline from Feb. 10 until April to study the litigation.