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(Drops paragraph 7 of March 27 story to remove incorrectreference to government subsidies)
By Anirban Paul and Ahmed Farhatha
March 27 (Reuters) - Canadian railway operators see alucrative opportunity to transport more crude oil to
However, their need for long-term contracts and the pressureto move a surplus of grains in the country is making it hard tocash-in on the prospect.
Analysts expect railway operator Canadian Pacific Railwayto see a more than 60 percent rise in the volumes ofcrude it ships this year, but the company and its rival CanadianNational Railway (CN) are being cautious about goingall-in.
With oil prices volatile and three pipeline expansions dueto come on line at the end of decade, railways worry that anyinvestment will be at risk in two or three years and couldundercut their money-making base - moving grains.
"Rails don't view crude by rail as a sustainable business,but rather, one that is driven by short-term dislocations incrude prices," said Stifel analyst Michael Baudendistel.
In 2017, 23 percent of Canadian Pacific's revenue came fromgrains and only 3 percent from crude, according to data byDesjardins analyst Benoit Poirier. Canadian National saw 13percent of its revenue from grains and 2 percent from crude, inthe same period.
"We understand crude is only going to be here for a certainperiod of time," Canadian Pacific's Chief Executive OfficerKeith Creel said in a fourth-quarter results call with analysts.
"We're looking for strategic partners with long-termobjectives that align with ours. We're not going to allowourselves to be commoditized."
Still, RBC analyst Walter Spracklin says Canadian Nationaland Canadian Pacific could see, respectively, 5 and 11 percentupside in earnings this year helped by crude shipments, if oilsands production increases by 315,000 barrels per day. Otheranalysts expect even more of an impact to their bottom lines.
LONG-TERM PACTS NEEDED
Rail companies are reluctant when it comes to monthly,spot deliveries and the inherent volatility of the oil marketsmake it hard for them to get long-term commitments https://www.reuters.com/article/us-canada-crude-railway/canada-oil-producers-exhaust-options-as-pipelines-railroads-fill-idUSKBN1EC0GWfrom vendors.
Cenovus Energy, which expects to double its dailyoutput to 350,000 barrels during the first quarter over lastyear, recently complained that transport bottlenecks had made itimpossible to haul oil. The company said it was having "ongoingdiscussions" with rail operators to resolve the shortage of railhauling capacity.
Railway operators cannot think of one to three-yearinvestments when they invest in tank cars that are intended fora more than 30-year life span, said Genscape analyst Mike Walls.
Producers on the other hand are wary of the long-termcommitments railways are asking for, which is costlier thanpipelines.
To make a rough estimate, pipelines cost about
Major pipelines are expected to complete capacity expansionsby 2020. Enbridge Inc is expected to double thecapacity of an existing line to 760,000 barrels per day, whileKinder Morgan Canada plans to triple its capacity withthe expansion of its Trans Mountain pipeline beginning 2020.
TransCanada Corp said last month it expects tostart construction on its
The International Energy Agency says crude shipments by railwill ease to 170,000 barrels per day (bbl/d) in 2020 from about250,000 bbl/d in 2018, when Enbridge's Mainline pipeline isexpected to complete a capacity expansion.
But until that happens, railways could move more than400,000 barrels of oil per day and movements could even behigher if pipelines face further delays, said IHS Markit analystKevin Birn.
"They want longer term commitments from oil producers and wethink those commitments will be made... (but) the long term roledepends on pipes," he said.
(Editing by Bernard Orr)
