An Alberta junior oil company is working on the railroad to get better prices for its Lloydminster area crude.
Since March, Calgary-based Rock Energy Ltd. has been shipping out an average of about 500 barrels a day -almost a quarter of its heavy crude production -using 30 railcars picked up on a oneyear lease.
The cars are being sent on a 3,600-kilometre journey to the Gulf of Mexico, where customers are willing to pay a significant premium over what the same oil sells for at the end of the pipeline at Cushing, Okla.
Moving oil by rail is common in new fields such as the Bakken light oil play in the northern United States where pipelines don't exist yet but moving heavy oil by rail when a pipeline is available is a new phenomenon prompted by a recent distortion in the North American oil marketplace.
Chief executive Allen Bey said Rock tested the idea last October, setting up a temporary rail loading facility in Lloydminster and shipping 15,000 barrels. The experiment succeeded.
"We ended up getting about a $6 premium over what it would have sold in the Lloydminster raw heavy oil market," he said. "That's net of all of our costs for transportation and rail cars and all of that."
He explained that Rock's heavy crude is priced based on a quality discount to the West Texas Intermediate crude price at the Cushing pipeline delivery point.
An oversupply at Cushing means the WTI price has not kept up with London-traded North Sea Brent -even though that grade of oil is heavier and contains more sulphur.
The differential widened to a record $22.80 per barrel as the July crude futures contract expired on Wednesday.
The amount of crude oil exported by truck or rail from Canada is so small that the National Energy Board doesn't track it, but estimates it has been less than one half of one per cent for several years.
Glen Perry, president of Altex Energy Ltd., which supplies Rock's cars and arranged the loading terminal with Canadian National Rail-way, said pipelines are the preferred method to move crude in Alberta but rail is an idea that's slowly catching on.
His Calgary company works with CN to help promote its "pipeline on rail" concept but he admits he has fewer than 10 clients and estimates only between 1,000 and 5,000 bpd is now moved out of Alberta.
The promotion is largely aimed at oilsands producers who are being told that rail shipments can compete on price because there is no need to mix diluent with the sticky bitumen to make it flow in a pipeline.
Diluent is expensive and there's a shortage of it in Alberta, which means it must be pipelined back from the United States at significant extra cost.
"We identified that there's actually an economic driver to rail heavy oil as opposed to light oil," said Perry.
Bey said Rock is finding a good market for its oil on the Gulf Coast.
"We're selling some of it as heavy fuel oil -people are actually burning raw crude in ships -it's equivalent to what they would burn as bunker fuel," said Bey.
The company is now looking at other markets, including Wyoming, California and the West Coast.
"We're trucking past the glut," said Bey, "because the refiners on the Gulf Coast can buy Brent crude or Cushing crude but they can't get enough Cushing crude down because of pipeline constraints."
The controversial $7-billion Keystone XL pipeline is being pursued to link growing Alberta heavy oil supplies with refinery capacity on the Gulf Coast.
Each railcar cost $450 a month, Bey said, and will hold about 550 barrels of crude.
Rock keeps its oil heated to 70 C so that it flows more easily -the railcars are insulated and can be warmed again for easy unloading.
CN Spokeswoman Kelli Svendsen said the railway has been picking up Bakken crude oil from trucks at Wilmar, Sask., since October and transporting it to the U.S. Gulf Coast, the Midwest, Eastern Canada and to the oilsands where it's used as diluent.
"CN has moved more than 1,900 cars of freight related to the Bakken formation in Saskatchewan since October 2010, including more than 600 single cars of petroleum crude in large blocks to match up with high throughput destination terminals," she said in an e-mail.
U.S. railroads such as Union Pacific and BNSF have recently announced they are adding crude oil terminals in North Dakota and Montana to ship Bakken oil and in the south to receive the oil.
U.S. Development Group told Reuters earlier this year it may build a southern rail terminal specifically designed to handle incoming shipments of heavy crude from Canada.
Several barge operators, meanwhile, have announced intensions to begin shipping crude oil down the coast from Oklahoma to Louisiana.
