Canexus Corp., says it will start Canada’s first pipeline-connected crude oil rail terminal before the end of August, but the Calgary-based chemical manufacturing company and terminal operator is already considering the sale of the Bruderheim, Alberta, facility.
Design issues, construction cost escalations and schedule delays related to expansion efforts at Bruderheim have depressed Canexus’ balance sheet and share price—even as demand for more Alberta crude shipping capacity is climbing.
In 2012 Canexus pegged Bruderheim's construction costs at $125 million, but recent estimates have been revised upward to near $360 million. Many wonder whether Canexus could sell at a profit if the facility is so over-budget. “It depends if a buyer finds the asset strategic enough and Canexus isn’t forced to sell it because of capital constraints,” says Brian Pow, analyst at Acumen Capital.
Other Canadian energy analysts have said that as a chemicals manufacturer, Canexus has struggled transitioning into crude oil shipping, where competition is stiff. Kinder Morgan announced in August it was building a rail terminal twice the size of Bruderheim for $150 million less. “We believe [Canexus] can hire the talent to help them but time will tell,” Pow says.
Labor and materials costs in Alberta are very high at present. However, “if the market doesn’t become saturated than costs can likely be passed on and remain competitive,” Pow says. “Given the life cycle of these facilities a 10 -15% cost overrun over a long period is less relevant.”
PNR Railworks, a primary contractor on the project, said “Phase II” required working through design issues and coordinating with the consulting project management firm through harsh weather constraints and a tight space where more than a dozen contractors were at work. Further, Canexus said “a design limitation with vapor incineration [flaring]...constrained volume.” Rangeland Engineering is providing design and engineering services for the $100-million third phase of the Bruderheim project.
On a quarterly earnings call with analysts in early August, Canexus Vice President Richard McLellan said the last stages of construction at Bruderheim “are still very much on track and we expect to be back up with the project at the end of August to start commissioning.”
McLellan said building the company’s first crude oil terminal has been a learning process. “Debottlenecking” issues at the terminal had to be resolved before the company could accommodate the 10 unit train-per-day capacity specified in the original design. Canexus added a fourth loop track as a staging or storage area for rail cars, a second incinerator to flare gas vapors and the installation of more pumping capability for “debottlenecking” efforts.
Some critics have questioned the inherent long term viability of dedicated crude oil rail terminals as more pipeline capacity comes on line. Pipe shipping prices are currently well below rail freight rates. Crude producers can ship dilbit (oil sands crude diluted with light oil) to Texas for about $9 per barrel and rail freight costs are near $16-$17. Since rail can accommodate a thicker, heavier product, it balances out some of the cost advantage of pipe.
“There are many refineries in the U.S. that don’t have pipeline connectivity, so for some, rail is the only way they can get Western Canadian crude,” Pow says. “Also for heavier oil, diluent is needed to ship by pipe and shippers typically don’t get full credit for the diluent when it is recovered at the other end.”
Canexus did not return ENR’s request for comment.
