Canada's largest train operator says crude-by-rail on track to expand

TORONTO, April 22 Mon Apr 22, 2013 9:36pm EDT

TORONTO, April 22 (Reuters) - Oil companies are increasingly investing in transporting crude by railway, Canadian National Railway said on Monday, with growing demand expected to bolster earnings in coming years.

Canada's biggest railway operator, which saw its crude-by-rail revenue jump 300 percent in the first quarter, said that what had begun as smaller players building smaller terminals has turned into something bigger.

"We have a number of larger-scale refineries or integrated producers with which we are having dialog as we speak," Chief Executive Claude Mongeau said in a conference call on the firm's latest earnings, which took a big hit due to extreme winter weather.

Crude shipments are now the fastest-growing product for several big Canadian and U.S. Class 1 railroads after oil output expanded more quickly than pipeline capacity.

Railroads allow producers to take advantage of a temporary oil price differential by moving crude from inland oil fields to coastal refineries that pay higher prices linked to Brent crude. Pipelines are either full, or don't reach these refineries.

CN, which announced it would be opening new terminals in the U.S. Gulf and Western Canada in coming months, said that rail transportation would complement existing pipelines.

"A number of people in the U.S. Gulf on our CN line are investing into receiving facilities. More and more players are looking at going the way of unit trains," said CN's chief marketing officer, Jean-Jacques Ruest.

"So this is just still picking up momentum from one quarter to another."

Shipments of crude by rail in the United States have surged to an estimated 340,000 bpd in 2012 from around 11,000 barrels per day in 2007, according to data from the Association of American Railroads.

If rail shipments in Canada are added, the volume could top 400,000 bpd, more than 4 percent of North American crude production and equal to a new, large pipeline.

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