California Refineries Prepare For Canadian Crude

Many railroads have profited from the surge in just the past few years of transporting oil, none more so than BNSF Railway due to its access to the Bakken shale formation in N.D.. Hoping to increase their oil shipments, known as crude-by-rail or CBR, Union Pacific and Canadian Pacific railroads have teamed up to transport Canadian crude to California.

Bruce Kelly, contributing editor of Railway Age, writes that Valero Energy's Benicia refinery in the Bay Area and Wilmington refinery in South Los Angeles "are now making preparations to receive 100-car unit trains of Canadian crude from CP and UP, pending approval and construction of expanded offloading facilities."

In fact, the latter already “now processes a small amount of Canadian crude.” Track expansions and other rail improvements will accommodate "up to 60,000 additional barrels per day at Wilmington, and 70,000 barrels per day at Benicia".

While California may be one of the largest oil markets in the U.S. and the fourth largest oil-producing state, it functions as an 'oil island' as there are no oil pipelines transporting cheaper domestic oil from other states. California "produces only about 37.2 percent of the petroleum it uses." [CA.gov] The rest is shipped from Alaska and imported from overseas at higher prices. Canadian crude could be purchased at lower prices, notwithstanding higher transportation costs.

Another route for the Canada-to-California CBR is to Northwest ports, where it would then be barged to Calif., but Kelly notes that those ports are encountering difficulty in exporting coal now.

Is this Canadian crude oil the same as "tar sands" oil?  Kelly writes:

To further allay public concerns about Canadian “tar sands” oil being processed at Benicia, Bill Day, Valero’s Vice President-Media and Community Relations, says, “I can confirm that neither the Valero Benicia Refinery nor the proposed crude by rail offloading facility there are set up to handle heavy Canadian crude.

In a related Railway Age article on August 20, William C. Vantuono, Editor-in-Chief, explores how higher rail transportation costs don't deter producers or refineries from opting for CBR. Key to modal selection is the price differential between imported and domestically produced oil.

The result is that many shippers now appear convinced that rail should continue to be an important transportation option regardless of the arbitrage ["the practice of taking advantage of a price difference between two or more markets" (Wikipedia)]) or the lack thereof.

More information on "how the price differentials between the two oil markets for trading oil, the U.S. benchmark West Texas Intermediate (WTI) and the global crude-market benchmark, North Sea Brent" was posted here last month under the title, "Increased Oil Supply = Increased Oil Prices?"