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John Zahary, president and CEO of Altex Energy, makes the case for moving Canadian crude by rail

John Zahary, President and Chief Executive Officer of Altex Energy, a company that owns and operates eight crude-by-rail terminals in Western Canada, made the case for transporting Canadian heavy crude oil by rail during an interview with BNN. During his interview, Mr. Zahary said that railways have been wrongly characterized as poor substitutes for pipelines, and that there are a handful of reasons transportation by railway is still a competitive and viable option.

Altex Energy AO

Mr. Zahary says that there are three main drivers behind the use of railroads to transport oil. Rail offers high takeaway capacity, flexibility for both producers and refiners, and removes the necessity of using condensate to make bitumen transportable by pipeline.

Canada’s oil export volumes are expected to continue growing, although at a slower rate than previously predicted. Mr. Zahary says that rails offer the takeaway capacity and flexibility necessary to meet that growing output. “A lot of refineries never ran Canadian oil because they could never get Canadian crude before railways started to ship it,” says Zahary. Railways offer producers who are not near a pipeline a route to transport their product, and it gives refineries that are not near a pipeline exit a way to access the crude.

The most important driver, according to Mr. Zahary, is that transporting by rail offers certain economic benefits. In order to transport bitumen through pipelines, producers have to blend it with condensates. Zahary calls blending condensate with bitumen a “classic loser argument” because condensate is a commodity that is worth more where it is produced than where it is consumed. “[Condensate] is more valuable as a diluent than as a refinery feedstock,” says the Altex president. Transporting the bitumen by rail means that it does not need to be blended, cutting out the cost of using condensates.

According to a Altex presentation from April 2014, the total cost of transporting a barrel of bitumen by pipeline costs $29.29 when the cost of the diluent is considered. The same slide says that pure bitumen transported by rail costs only $22.41 per barrel, a savings of $6.88, or 23% when compared to the cost of transporting diluted bitumen by pipeline.

Altex Price Comparision Rail and Pipeline

Zahary says that prices are putting a squeeze on margins, but that it’s a short-term issue understood by all producers and refiners. “Over the course of time, moving crude by rail has been a winning proposition for producers and refiners.”

According to the company’s operations page, Altex operate 425 railcars a day with a maximum cumulative capacity of 232 MBOPD.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.