Cenovus Energy Inc. believes rail will become part of its long-term transportation strategy so it is adding rail capacity with "multi-year" leases on 800 rail cars: 300 general purpose and 500 coiled and insulated cars for heavy oil, to arrive starting in late 2014.
"I believe that it will be important to have the optionality to move up to 10 per cent of our production by rail," Brian Ferguson, president and chief executive officer, told attendees at the company's investor day on Tuesday. "Rail provides a lot of flexibility for us."
Now railing 6,000 bbls per day of light and medium crude oil to the United States Gulf Coast and Canada's East Coast, the company expects to be shipping 10,000 bbls per day by rail to market hubs by the end of this year and 30,000 bbls per day by the end of next year.
Hauling bitumen in heated, insulated cars offers the company the ability to use less diluent, thereby reducing the $10-to-$15-per-bbl cost of rail.
He declined to say how long the rail car leases were for.
In addition, the company is considering participating in rail terminals, the meeting heard.
Currently Cenovus is using manifest trains, which carry all kinds of different freight, and while this method works well there are some logistical challenges the company is working to solve.
Cenovus has also made firm commitments on multiple pipeline projects so that it is not dependent on any one project in future.
In the long term, the company plans to move up to 50 per cent of its marketable blended volumes on firm service transportation.
"Pipelines remain the safest and most economical mode of transportation and we remain positive that takeaway capacity out of the Western Canadian Sedimentary Basin will improve over the coming years with new projects," said Ferguson.
Meanwhile, "we're certainly not sitting and waiting for pipeline [and] regulatory approvals," he told the meeting.
Don Swystun, executive vice-president, refining, marketing, transportation and development, said railing of 30,000 bbls per day is a short-term goal and he believes all producers will be looking to expand opportunities on rail.
"It's just a natural progression," he said.
Cenovus' production currently has access to the West Coast via the Trans Mountain pipeline (11,500 bbls per day) and the United States Gulf Coast via the Pegasus pipeline, rail and barge (30,000 bbls per day).
The company's shipments have not been significantly affected by the Pegasus upset, the meeting heard. On April 30, the pipeline leaked a small amount of crude into a residential yard in Missouri, a month after the same pipe spewed thousands of bbls of crude in Arkansas (DOB, May 2, 2013).
Cenovus is adding pipeline commitments to the West Coast via Trans Mountain and Northern Gateway pipelines (up to 175,000 bbls per day) and the U.S. Gulf Coast via Keystone XL and Enbridge Inc.'s U.S. Gulf Coast Access pipelines (150,000 bbls per day) and the East Coast via participation in TransCanada Corporation's Energy East pipeline's open season.
According to Cenovus, firm transportation supports infrastructure expansion for greater market access, provides secure access to new markets, defines costs for an agreed-upon period, and offers the opportunity for preferred terms and tolling as an anchor shipper.
"Our strategy has been to participate in multiple pipeline opportunities, and in rail, to manage some of the risk in the pipelines being delayed," said Swystun.
Rail is a great option during periods of pipeline congestion, he said. It also opens markets not accessible to western crudes by pipeline and provides the flexibility to move bitumen with less diluent, he added.
Since mid-2012, markets and pipeline capacity have been tight and rail has helped to fill the gap, said Ivor Ruste, executive vice-president and chief financial officer.
Rail will be particularly valuable to Cenovus if planned new pipelines or expansions are delayed or cancelled, he said.
"We continue to expand pipeline and rail options to expand our market opportunities," said Ruste. "By selling bitumen blend at multiple market hubs including Alberta, the West Coast, Midwest and U.S. Gulf Coast, we can optimize realized prices."