Houston — **Sees production decreasing **CP Rail moved 134,000 b/d in Q2

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A shortage of pipeline takeaway capacity from the Permian Basin in West Texas is creating opportunities for Union Pacific to move crude oil in tank cars, a railroad official said Thursday.

"The [Permian] is an interesting place and we're definitely seeing some reduction in crude production due to the lack of pipelines," Chief Marketing Officer Beth Whited said on an earnings webcast. "We have some capacity in our network and expect to see some results in the third and fourth quarter."

UP officials did not respond to queries on their targeted volumes.

Loading terminals in Texas and New Mexico have a capacity of 300,000 b/d. But roughly 100,000 b/d of that capacity can be used to load crude as those facilities serve the needs for frac sands, Bernstein said in a report last month. Frac sands is used extensively by shale producers that utilize the hydraulic fracking process.

A fast pace of growth in the Permian -- currently projected to reach 3.690 million b/d by S&P Global Platts Analytics to be 3.5 million b/d -- has resulted in producers seeking alternate market access like railorads and trucks to move their barrels from that land-locked basin to the US Gulf Coast.

CANADA POTENTIAL

In the Western Canadian Sedimentary Basin -- another land-locked basin -- Canadian Pacific Railway sees the "potential" to double the volume of crude it hauls to refineries in the US Midwest and the US East Coast by 2019, as it hires more staff and adds additional locomotives, Chief Marketing Officer John Brooks said in an earnings call Wednesday.

The railroad moved 20,000 car loads, or roughly 134,000 b/d, by operating 60 units trains each month in the second quarter, Brooks said.

But CP now sees a potential to increase that run rate to some 266,000 b/d by late 2018 or early 2019, Brooks said, as no new pipelines get built out of the WCSB and oil sands producers still add new production.

A rail car can typically move about 600 barrels and in the first quarter CP moved 17,000 cars.

"As I look into Q3, I think we've got an opportunity to add to that," Brooks said. "It will incrementally come on as we sort of underpin that business with the resources to haul it through Q3. You can get a nice step function as we move through the balance of the year."

The increase in volume hauled in the second quarter came despite the railroad being "a little constrained from a locomotive and people stand point," CEO Keith Creel said on the same call.

As part of its efforts to gain a larger share of the crude by rail business out of the WCSB, CP is in talks with prospective new producers to move additional barrels while at the same time honoring its commitments with existing shippers, Kreel said.

"I've got to make sure that we have the capacity within the locomotive industry to be able to see our need and ability to remanufacture and overhaul locomotives," Creel said. "We've got capacity on the railway. The key is the locomotive piece."

CP plans to put on tracks 100 locomotives over the coming at least six months and is seeking three-year deals, Greg Stringham, president of consulting firm GS3 Strategies, said Thursday.

With the WCS (Western Canadian Select) and WTI price spreads still remaining wide and no new pipelines to be built before late 2020/early, crude-by-rail shipments from Alberta and Saskatchewan will rise further, Stringham said.

Western Canadian crude markets remained quiet Thursday, with trading not expected to pick up until the start of August. WCS at Hardisty did not trade, and the grade was assessed unchanged from Thursday at WTI CMA minus $25.50/b.

WCS at Hardisty weakened significantly earlier in the week on the roll from August to September barrels, with market participants citing the expected resumption of Syncrude production as one factor driving differentials for heavy crude lower. No bids or offers for September barrels of Syncrude Sweet Premium have been heard, and the grade was assessed 40 cents/b lower to a premium of $1/b Thursday, based on bids and offers heard for Mixed Sweet. --Ashok Dutta, ashok.dutta@spglobal.com

--Pat Harrington, patrick.harrington@spglobal.com

--Edited by Richard Rubin, newsdesk@spglobal.com