Regina, Northgate 鈥� When the Ceres Northgate Terminal, previously called the Ceres Northgate Commodity Hub, was first initiated, crude-by-rail was a big part of the plans. But just as the facility was coming online, the oil crash put the kybosh on building out the crude-by-rail portion.
However, with oil prices having recovered somewhat, Ceres Global Ag Corp. is seriously looking at reviving those crude-by-rail ideas, and several different options to expand their facility that could even mean reviving an old, abandoned rail line or building a pipeline to Stoughton.
Robert Day, Ceres鈥� president and CEO, sat down with Pipeline Newsin Regina on June 7 to discuss these plans in depth. He had just met with Trade and Export Development Minister Jeremy Harrison.
Oil and gas was a big part of the initial plans for Northgate, but that was before his time with the company. Day said, 鈥淎t the time, oil was 聽聽聽聽聽US$110 a barrel. There was less infrastructure than there is today. That was a big part of that initial plan. I believe Ceres had to go through a fund-raising phase to fully develop the site. At the time oil would have been an opportunity, they didn鈥檛 have all the funds needed to develop it for that. They were able to put a rights offering together pretty quickly and they raised capital needed to develop the site. By the time they raised that capital, oil had begun its plummet, and it no longer made sense to develop the infrastructure for that project. Instead they focused on the grain elevator and the other things that we鈥檝e done so far.鈥�
There was enough economics behind the project to go ahead without oil. The site has two loop tracks and several ladder tracks. It started with a grain transloading system, now has a large concrete and steel grain terminal, a 26,000-ton fertilizer warehouse, and liquified petroleum gas (propane) transloading facilities. They have handled chemicals in totes and magnesium chloride, as well as quite a bit of fertilizer.
They鈥檝e just started bringing in oil country tubular goods. Frac sand is a possibility for the future.
The 1,200-acre site has ample room from expansion, and Ceres is looking at a specialty grain facility in short order. They鈥檙e looking at a possible canola crushing facility on the east side with a partner, a project that would be around US$200 million.
On the west side, there鈥檚 an area that could be developed for crude-by-rail, including eventually substantial tankage and loading racks. 聽
Ceres operates three grain facilities in the Minneapolis rail switching district, including Savage, on the Mississippi river, with four bins each the size of a Panamax vessel. 鈥淥ne bin is about 70 per cent of the entire Northgate storage capacity,鈥� he said. It is also capable of loading barges onto the Minnesota (and therefore Mississippi) river system.
Malt One is in Minneapolis and Shakopee is south of the city.
At Duluth, they have a grain terminal at the very tip of Lake Superior, capable of loading ocean-going and Laker ships. Duluth is four times the size of Northgate, and a former Cargill facility.
They also have a grain facility in Port Colborne, Ont.
While they have these numerous facilities, the investment and business out of Northgate is equal to the rest combined.
鈥淎t our core, we鈥檙e a grain and oilseed merchandizing company that is focused on being a key ingredient supplier to quality-conscious customers. But some of our locations, and really Northgate, in particular, allow us to play a role as a supply chain service provider across a wide range of commodities and finished products,鈥� Day said.
Northgate advantage
Speaking about the logistics cost advantage at Northgate, Day said, 鈥淲e can originate Canadian products directly onto a U.S. railroad, the BNSF, that gives us direct access to U.S. destinations, BNSF destinations, and U.S. export gateways, at a lower cost than other Canadian companies that are trying to reach those destinations by rail. So that is the advantage. If it鈥檚 purely a cost play, and a Canadian product that鈥檚 going to go to a U.S. destination, and it鈥檚 a BNSF destination, we鈥檙e more competitive. Whatever the Canadian railroad charges, we don鈥檛 have that cost.鈥�
He noted the BNSF鈥檚 service performance and reliability, having recently invested over US$20 billion in its infrastructure over the past five years. This is of particular note as earlier in 2018 Canadian railways were struggling to meet demand, especially for grain and potash.
鈥淐anada hasn鈥檛 figured out how to create a system that allows the railroads to sufficiently reinvest into their infrastructure. It causes them to be less consistent than a company like the BNSF,鈥� Day said.
Destinations
Asked where current product from Northgate goes, Day said, 鈥淲e have product going out to the U.S. Pacific Northwest that鈥檚 primarily going to Japan. We have product that鈥檚 going to Duluth, and that鈥檚 primarily going into Europe, Southern and Northern Europe, by ocean-going vessel. We鈥檙e also sending some volume out through the Texas gulf that is going to Africa, and we鈥檙e sending shuttle trains directly to Mexico, for processing in Mexico.鈥�
鈥淭here are a host of U.S. destinations products are going to.鈥�
The key petroleum product they are shipping is locally-produced propane from Saskatchewan gas plants for the last 2.5 years, primarily from Stoughton. It鈥檚 loaded at Northgate and heads south. 鈥淎 lot of it is going to Mexico,鈥� he said. 鈥淎nd a lot is going to the United States.鈥�
He noted they are having a lot of discussions with various companies about moving dry bulk and packaged commodities, product lines they expect to get started in six to 12 months.
Stewart Southern Rail
Ceres is a 25 per cent owner in the Stewart Southern Railway (SSR), a short line that runs from Stoughton to Richardson, just outside Regina. It had been quite busy shipping crude-by-rail from Crescent Point鈥檚 loading facility at Stoughton. That was initially done with trucks to rail transloading, but later upgraded to a loading manifold and a pipeline from Crescent Point鈥檚 Viewfield facility. The crude-by-rail is at a standstill on the SSR right now, but there is ongoing substantial development of agricultural users along the line.
There is no rail connection between Stoughton and Northgate, nor has there ever been. There once was a CN line that ran from Northgate to Frobisher, Steelman and Lampman, but no connection between Lampman and Stoughton. That rail has long since been abandoned and removed, all except for a very short piece CN has kept at the border 鈥� such that Ceres had to move their rail a bit to the east when they built. The point remains that that right-of-way, and most of the railbed, still exists.
Asked about this, Day said, 鈥淭he early thinking on this was it could potentially connect. I think the people that originally invested in that, wanted to own 100 per cent of it. For whatever reason, they arrived at 25 per cent ownership. It was viewed as a strategic investment to potentially connect to Northgate.鈥�
鈥淭he challenge is, it鈥檚 really expensive. In theory, it鈥檚 easy, because the railbed is there. But you have to acquire that.鈥�
鈥淭he thing that鈥檚 prevented us from seriously pursuing it is our high-level estimates on the cost to connect it are very expensive - US$150 million,鈥� Day said.
鈥淚f the cost was US$50 million, I think it鈥檚 probably a no brainer. Between $50 and $150 million, its still not out of the question. The big challenge is you need all the major volume opportunities to come together at once and be committed to this. If they all could, then I think it potentially works. But getting all those things to be happen at once is a challenge.
鈥淵ou need the oil volume, you need the potash volume, you need the grain volume. If you have all three of those things, you have in the neighbourhood of two million metric tonnes per year.鈥�
Crude-by-rail
Day spoke about BNSF 鈥渟huttle trains,鈥� also known as unit trains. They are one-origin, one destination, 100 or 120 cars long. There are incentives offered by the railroad for loading times under 10 hours or under 15 hours. The DET program allows you to break up 110 to 120 car trains with one origin, but 鈥測ou can explode the train into no less than 25-car units than go in other directions,鈥� he said.
鈥淭he DET program works really well for us at Northgate, because we handle so many different products. Most elevators in both Canada and the United States will focus on two or maybe three products. Shuttle freight works okay because you don鈥檛 have a mix of products. We鈥檙e handling four to five products consistently through the elevator. For us to handle four or five products through one train, and have a financial benefit for the volume we鈥檙e loading, is a real advantage.鈥�
The initial plan was the outer loop would be used for oil, principally unit trains. It鈥檚 currently being used for propane. 鈥淲e鈥檙e loading a lot of propane cars. The outer loop is very active,鈥� he said.
Crude-by-rail died off in a big way before they had the opportunity to implement it. But what is the price threshold for it to come back?
鈥淚 can tell you where those thresholds are today. Really, it鈥檚 more about spreads of different qualities than threshold, but at the same time, the higher the price, the wider the spreads typically are, so there is a correlation there. And then the opportunity with heavy is very different than the opportunity with lighter crude, and they鈥檙e influenced by different factors,鈥� Day said.
鈥淲CS, Western Canada Select, versus WTI, that spread is very important. WCS is an approximation of where heavy crude in Alberta and Western Saskatchewan is trading, but it doesn鈥檛 represent everyone there. That spread is important, because the wider it is, the more you can pay for logistics costs to get that product to a U.S. destination. The opportunity there is likely in the centre Gulf, in the United States.鈥�
鈥淭he WCS spread is important, but in order for that to get where it needs to be, it鈥檚 really about where WTI is, and that threshold. So our analysis has told us that heavy crude production could soon hit a point where it just doesn鈥檛 have anywhere else to go. And if so, they would be capped at what the price can be. If WTI can get above US$75 and stay there, there鈥檚 a very good chance there鈥檚 going to be a wide enough spread between the price in the Gulf they鈥檒l pay for heavy crude, and the price they鈥檒l accept at the wellhead in Canada where we can get it moved by truck down to Northgate and transload it there.
Hauling heavy oil out of Northgate?
鈥淭hat鈥檚 a possibility, absolutely,鈥� he said.
鈥淚t鈥檚 probably only a three year opportunity. As infrastructure gets built, it wouldn鈥檛 be an opportunity going forward,鈥� Day said.
That infrastructure he鈥檚 referring to is the long-delayed Keystone XL pipeline. If that鈥檚 in place, there鈥檚 no point in moving heavy oil by truck to Northgate.
Long term sweet crude opportunity
鈥淭he more long-term opportunity is the southern Saskatchewan sweeter crude and that鈥檚 more dependent on the spread versus North Dakota crude, and maintaining a level of a US$6.50 to $7 per barrel discount to North Dakota product. Unless we had a pipe connection to Northgate. Then the spread could be narrower,鈥� Day said.
Right now there鈥檚 about a US$7 discount for Saskatchewan oil versus North Dakota oil. A publication by the North Dakota Pipeline Authority on June 15 shows nearly 100,000 barrels per day of Canadian oil is being trucked into North Dakota, so clearly this spread has been noticed.
鈥淚n order for that opportunity to work, we need to be able to load shuttle trains. And in order to load shuttle trains, we need to have infrastructure in Northgate that would cost US$12 to US$15 million 鈥� tanks and rack loading, the ability to load a train in 24 hours.鈥�
It would be an enclosed loading rack, similar to what is seen in North Dakota.
鈥淚f we could get a commitment from one of the refineries in the Pacific Northwest 鈥� that鈥檚 the opportunity. The heavy stuff would go to the Gulf, but the lighter stuff would go to the Northwest,鈥� Day said.
鈥淲e鈥檝e been in touch with a couple refineries, it鈥檚 more than just one location.
鈥淚f we had the infrastructure, and the spreads are there and they made sense, we could do 15 to 20 trains a month. You have to have the supply, so you have to get your producer and refiner to come to terms on price.
That would be 100 cars at 700 barrels per car, or 70,000 barrels.
鈥淩ight now it鈥檚 an opportunity for anyone. We鈥檙e exploring all alternatives. Our goal is to maximize the value of what Northgate can offer, and we see crude oil as a long-term opportunity we want to develop. We haven鈥檛 signed any exclusivity agreements yet.鈥�
Pipeline
With reference to a pipeline, instead of rebuilding the abandoned rail line connecting to Stoughton, pipelining oil to Northgate is an option, actually two. One could see a pipeline from Stoughton, another could be to the TEML terminal at Steelman, about half the distance. Day said, 鈥淲e see both of those as attractive, put it that way. I would say we鈥檇 be willing to pursue either one.鈥�
Doing so would also allow a propane pipe in the same ditch.
If oil companies did choose to ship their oil by rail out of Northgate, on the BNSF Railway, Day said it gives them access to Pacific Northwest refineries they don鈥檛 have access to today. 鈥淭hat鈥檚 the big connection,鈥� he said.
The proposed Trans Mountain pipeline expansion is different product, bitumen, which he doesn鈥檛 see as a competitor to light sweet crude.
If they went ahead
Their link in the supply chain for crude-by-rail is only, US$1.50 to US$2 per barrel. Ceres would to act as facilitator, bringing together the producer and buyer. Indeed, any investment is predicated on being able to bring them together.
If the client wants Ceres to invest the money, backed by long term commitments, they鈥檙e willing to do it. Alternatively, the oil company can choose to do it themselves. 鈥淲e are willing to look at partnering in a way that satisfies our customers鈥� requirements,鈥� Day said. 鈥淥ur goal is to maximize the value of what we have at Northgate, and we鈥檙e willing to be flexible about how we do it.鈥�
At US$65 per barrel, the economics don鈥檛 work so well for Canadian producers, but they are much better at US$75. For heavy oil, they don鈥檛 need shuttle trains, so they can do transloading to manifest trains. 鈥淲e can have ourselves set up in two weeks鈥� he said.
