Cenovus Energy Inc. (NYSE: CVE) said Sept. 26 that it had signed three-year deals with Canada's two major railways to transport roughly 100,000 barrels per day (bbl/d) of crude from Northern Alberta to the U.S. Gulf Coast.
The major Canadian energy producer will start shipments on Canadian National Railway Co. (NYSE: CNI) from its Bruderheim Energy terminal in the fourth quarter of this year, and on Canadian Pacific Railway Ltd. (NYSE: CP) through USD Partner LP's (NYSE: USDP) Hardisty, Alberta terminal in the second quarter of 2019.
Reuters exclusively reported earlier this month that Cenovus had signed a deal to move more crude on CN Rail.
The deals come as the discount on Canadian heavy oil has spread to $42, its widest point on record, as rising production from Alberta's oil sands has run up against full pipelines, leading to swelling volumes in storage.
“Our rail strategy provides a means of mitigating the price impact of pipeline congestion," said Cenovus CEO Alex Pourbaix in a statement.
"While we remain confident new pipeline capacity will be constructed, these rail agreements will help get our oil to higher-price markets.”
There are three major Canadian oil pipeline projects in the works, though all have been hit with delays and the first likely to be in service is not expected online until late 2019 at the earliest. Pipelines are the cheapest mode to transport oil to market.
Cenovus said it expects all-in costs to transport the oil from Alberta to the Gulf Coast under the rail deals to be in the mid-to-high teens in U.S. dollars.
That pricing is in line with what the company has been guiding, said Phil Skolnick, an analyst with Eight Capital, in an email.
"This should start to help differentials and sentiment, in our view," Skolnick said, adding he expects further oil by rail deals to be announced.
Houston-based USD Partners separately said it had signed a four-year extension with Cenovus boosting the oil producer's contracted loading capacity at its Hardisty rail terminal.
Reuters reported earlier this month that USD Partners is moving ahead with an expansion at that terminal, which will boost capacity by 50%, or one more 120-car unit train per day.
Canada's crude by rail exports hit record levels above 200,000 bbl/d in June. They are expected to rise to more than 300,000 bbl/d by year end and continue climbing sharply through 2019.