Canadian Oil Recovery Faces New Threat From Possible Rail Strike

A potential strike by Canadian Pacific Railway Ltd. workers threatens to derail a recovery in Alberta’s beaten-down heavy oil prices.

Canadian Pacific said on Friday that a new labor agreement with thousands of train conductors and other workers remains elusive as an April 21 deadline neared for when a work stoppage could begin.

A strike would come at a critical time for Western Canadian oil producers. The heavy crude they pump is selling for $16.60 a barrel below the U.S. benchmark, from a discount of more than $30 in February. Oil flows out of Alberta to the U.S. have improved after pipeline and rail bottlenecks earlier in the year stymied exports.

“Any reduction in rail capacity would not be good,” Kevin Birn, a director at IHS Energy in Calgary, said by phone. “A rail strike would stretch or constrain CP, one of the major rail lines, at a time when its most needed.”

New heavy oil production from Suncor Energy Inc.’s Fort Hills mine, combined with reduced pressure on the TransCanada Corp.’s Keystone pipeline after a November spill filled remaining export lines to capacity this year, forcing producers to ship by rail as an alternative. But the rail companies were also constrained by heavy demand for grain shipments and cold winter weather that slowed trains.

Potential Logjam

While the maintenance shutdowns of oil-sands upgraders, including Syncrude Canada Ltd.’s plant near Fort McMurray, combined with rail lines moving “a little more” crude has helped alleviate the logjam, the discount could widen back out to between $17 and $19 a barrel once Syncrude resumes operation, Birn said. That assumes that a rail strike doesn’t happen.

CP is the second-biggest rail shipper in Canada after Canadian National Railway Inc. The carrier shipped 3,488 carloads of petroleum products the week ended April 14, up 28 percent from a year earlier, company data show.

The company said late Friday that “significant gaps” remain between the Teamsters Canada Rail Conference and the International Brotherhood of Electrical Workers. A work stoppage “will severely impact CP’s ability to continue to provide safe and efficient freight and passenger and commuter service,” Canadian Pacific said Friday. “All customers and commodities would be impacted at a time when demand is soaring.”

The potential strike comes as the oil-producing provinces of Alberta and Saskatchewan introduce legislation allowing them to cut oil shipments to British Columbia in retaliation for B.C.’s efforts to derail the Trans Mountain pipeline expansion project. A move to turn off the taps to B.C. could further worsen the current glut by removing an export route.

“The oil industry is concerned about any further impact on the availability of rail capacity given the tight pipeline situation and is monitoring these new market developments as they unfold,” Chelsie Klassen, spokeswoman for the Canadian Association of Petroleum Producers, said in an email.