Resource World Magazine

THE OIL PATCH REPORT J o e l Ch u r y Rail emerges as an option for shipping fuel L ike train hoppers in the 1930s, it seems that Alberta oil producers are seriously considering ���hitting the rails��� to ship their fuel to more lucrative markets. As controversial and protested pipelines such as the Northern Gateway and Keystone XL seem hung up in the courts, an alternative, available and viable option has emerged ��� shipping crude oil by rail. Highlighted by the recent acquisition of Elbow River Marketing by Parkland Fuel Corp. [PKI-TSX] from AvenEx Energy Corp. [AVF-TSX], more attention is being paid to what could be deemed the rail revolution in the oil patch. Through enhanced rail options, oil producers large and small are finding that, by shipping their products on trains, they are lowering market costs, and, as a result, increasing netbacks. Parkland���s acquisition was a monumental one; given that Elbow River was the first company to rail bitumen out of northern Alberta, in the fall of 2010. Since bitumen is heavy, and molasses like when crude, it requires the most processing of any petroleum source to create refined products. Unlike the lighter Bakken quality of oil coming out of North Dakota and southeast Saskatchewan, bitumen producers pay heavy refinery costs, and have the added headache of paying a premium at pipeline gathering systems for additives. These additives can include diluents used to breakdown the crude to a passable quality for shipment, as well as costs levied by the infrastructure operator in the form of pipeline tariffs and lower prices for the product. These costs bite into the bottom line. On average, diluent costs are around $6 per barrel, and tariffs are $1.15 per barrel. Over thousands of barrels, these costs can add up, limiting other operations a company would otherwise be able to afford. Some companies are looking to enhance their price received per barrel by explorMARCH 2013 ing options other than just tying in their wells to larger pipeline systems. For junior producer Aroway Energy [ARW-TSXV] the rail option can mean a big boost to the bottom line. ���When considering the factors of going the route of rail over pipeline, we decided on rail for our West Hazel heavy oil property,��� says Chris Cooper, CEO of Aroway Energy. ���We looked at the costs and distance to a rail loading station, and in this case rail was closer.��� Right now, the greatest limitation is the supply of railcars available in North America. In Aroway���s case, this decision alone can mean an increase in netbacks anywhere from $7 to $10 per barrel. The West Hazel property produces bunker fuel grade oil, so by rail shipping their product to the coast, they���re more open to international prices than when trying to pipe their product from inland. ���If it increases our netbacks with no additional risks, it only makes sense,��� says Cooper. ���Increased netbacks means more share value, and any time that happens, we���re happy with the decision.��� Transporting Aroway���s oil will be a private group called Altex Energy that has negotiated long-term rail rates with CN Rail. According to Altex this model provides transportation services to bitumen producers at rates less than the cost of their pipeline transportation alternatives. In addition to its facilities under construction in Peace River and Ft. Saskatchewan, Alberta, Altex intends to build a new port facility in New Orleans, Louisiana for international transport. Now the big question is ��� How much capacity can the rail providers handle at this stage? ���Given the fact that more companies are starting to use the rail option,��� says Cooper, ���People are already starting to get turned away.��� Right now, the greatest limitation is the supply of railcars available in North America. Shipping crude requires General Purpose 30k US gallon-type cars (known as GP30s), with coil insulation necessary to keep the bitumen in a liquid state. The costs are rising on the leases for these cars, which historically were in the $600-$700/ railcar/month range; now being fetched for $1,200/month for five-seven year leases, and up to $4,000/month for one-two year leases. The increased cost directly reflects increased demand, and the stronger desire to ship crude via rail. Excess supply coming out of the Bakken has changed the game completely. Now, when pipeline capacity is reached, companies are faced with two negative options: 1. Shut-in production, 2. Sign up for whatever option is available for a massive discount. With the latter option, some are getting hit with a discount as high as $37/ bbl. Companies such as Aroway and others with the foresight to secure a deal can make a profit. Setting up a rail agreement takes about two months before production hits the track. The increased traffic is benefitting the major rail carriers such as CN and CP , while it could also benefit the refineries on the coasts that traditionally have to pay Brent prices rather than WTI. Even billionaire Warren Buffett has seen the potential of the rail option. Five years ago he purchased BNSF Railway which crosses North Dakota. BNSF Railway is now a major shipper of crude. His foresight outpaced the newcomers by a few years, but the producers who seek this option now stand to benefit greatly from reduced costs, and higher netbacks. The future of oil production is literally on the rails. n www.resourceworld.com 49

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