Transportation of Oil by Rail
LOCATION: National
Issue/Source: With significant increases in crude oil prices following Russia’s invasion of Ukraine, and the resulting import bans, there is interest in understanding the capacity of the rail system to carry additional crude oil to export markets, like the United States, should the demand arise
Date: March 17, 2022
Suggested Responses
- Canada’s key trading partners may begin looking to our shores to address their needs. While oil may be a significant part of that discussion, fertilizer, grain and coal, are other key commodities that may see an increase in demand, and place additional strain on the railways.
- Less than five percent of Canada’s oil exports are moved by rail. To date, we have not seen an increase in demand for movement of crude oil by rail, but we are closely monitoring the performance of the rail transportation system, and its ability to respond to the impacts of the conflict in Ukraine.
- Transport Canada continues to work with all stakeholders, including railways and shippers, to find solutions and ensure that the transportation system is able to meet the needs of the Canadian economy.
IF PRESSED ON CHALLENGES / CP STRIKE
- The freight rail sector saw many challenges over the past year, including wildfires and floods, and shippers from a number of industries have experienced a challenging winter for rail service. A work stoppage at Canadian Pacific Railway would also impact the ability of the railways to meet any increase in international demand for Canadian commodities.
- Shippers and railways are encouraged to work together to discuss shippers’ transportation needs and find the solutions that work best for them.
BACKGROUND INFORMATION
- The vast majority of Canada’s oil exports are moved by pipeline. Less than 5 percent are moved by rail.
- The total volume of crude oil moving by rail depends on a number of factors, such as:
- the current and forecasted oil production levels;
- international prices and global demand for crude;
- capacity and timing of both the rail and pipeline network expansions; and,
- how oil shippers and railways handle demand before pipeline expansion projects are completed.
- Since transporting crude by rail is more expensive relative to pipelines, the differential between the prices of Western Canada Select (WCS) oil and West Texas Intermediate (WTI) oil must be wider to justify the use of rail and cover its higher cost.
- Crude by rail is generally considered economical when differentials are higher than $15 to $20 USD. Differentials this calendar year have not yet reached the level that would make crude by rail more economical, hovering between $13 and $14 USD. At midday on March 17, the differential was between $14 and $15 USD, with WCS approaching $88 USD and WTI approaching $103 USD.
- Rail network capacity available for oil movements also depends on demand for the movement of other commodities by rail, which are subject to seasonal changes, along with the size of the tanker fleet and overall network fluidity.
- October 2021 marked the completion of the Line 3 pipeline project, which has boosted Canadian oil sands pipeline export capacity by 370,000 barrels a day.
- In turn, this has reduced the need for oil exports by rail. Crude by rail exports were 131,224 barrels a day in December 2021.