The Long Road Back to Crude Trucking
It was late October, 2014 and I remember sitting in my office looking at the crude oil futures in free fall, week after week. By mid-November, I had come to the realization that the bulk trailer manufacturing company I was working for was not going to survive the consequences of this commodity disaster. The North American oil industry, and all those who served it, would be in for a very long and difficult winter. Hit hardest, would be companies like my own, who failed to recognize fundamental changes in the market and did not prepare or adequately diversify themselves for the leaner times ahead. What were these clues—besides the falling oil prices—that were being ignored?
I began to notice that sales of our Canadian crude equipment began to slow in 2013 as carriers began parking equipment and optimizing their fleets to handle the flattening crude and oilfield input volumes. Some carriers lamented that they were just moving crude barrels from one end of a pipeline to another to fill unused capacity. By March 2013, the pipelines were chockablock with oil and producers were finding it more and more difficult to move their products South to our sole export customer, the USA.
It had been a great crude equipment ride to 2013. With the exception of the three years after the U.S. housing meltdown, crude oil and crude oil equipment had been enjoying a very strong run since the early 2000’s, due in large part to the discovery of horizontal drilling and multi-stage fracturing. The U.S. loved our politically stable, reliable, and cheap Canadian crude. At first, producers pipelined the product to U.S. Midwest refiners, many of whom invested to reconfigure their refineries to handle our heavy Western Canadian Select. As Canadian production began to exceed Midwest capacity, plans were made in 2008 to expand pipeline capacity to the massive U.S. Gulf Coast refining complex via the Keystone XL. The end game? To feed the largest refining complex in the world – 50% of the U.S.’s total refining capacity – 8.5M barrels per day. At that time, we were exporting about 2.5M barrels to the U.S.
Gulf Coast refineries were already processing more expensive heavy crude from Venezuela and Mexico and, as those volumes began to decline, Canadian heavy crude was expected to be an ideal replacement. The U.S. Gulf Coast was the only location that could handle the amount of oil sands bitumen we planned to mine. Coincidentally, Gulf Coast refiners did not value the condensate which was being blended 30% into pipeline bitumen to allow it to flow. No problem! Canada was ‘net short’ of half the condensate it needed to blend into pipeline spec bitumen. So, working with American refiners to skim off the light ends and rail them back on a CBR backhaul made perfect sense! Send the condensate back to Fort Mac and we’ll just recycle it again.
However, as Canada continued to ramp up production, confident that new pipeline capacity would be available, a dramatic renaissance in U.S. domestic crude production, particularly in the North Dakota Bakken, was occurring. That surging production was all destined for the same Midwest refining market that Canadian crude was feeding – and using the same pipelines. By mid-2013, the whole Canadian crude pipeline system was log jammed and oilfield trucking equipment wasn’t selling. Despite this issue of not being able to market incremental crude barrels, many in the industry felt that the downturn would be short lived.
At the same time, the railroaders and crude by rail (CBR) transloaders were frantically trying to cobble together export capacity. But, progress was slow, impeded by legacy railcar issues, new railcar backlogs, and cost overruns. It was a rush to find commercially reasonable means to move large quantities of crude out of the country. Many transloads were built – few shipped any volumes of consequence, and most were abandoned after the October crash.
Besides, many believed that Keystone XL would soon add another 830,000 barrels (33%) of daily capacity. It had been originally proposed in 2008, recently green lighted by the US State Department and the EPA, and the whole thing just made perfect sense all around. Prime Minister Harper called Keystone XL a “no brainer,” and many were optimistic that we were simply just going through the calm before the storm. While there were not a lot of new crude hauls being developed by Southern Saskatchewan and Alberta truckers, crude carriers in the Peace Block were running around the clock trying to keep up with the demand for condensate (diluent), to feed the growing oil sands expansions.
In November 2014, President Obama finally announced that the Keystone XL pipeline would not be approved. This was going to be a huge problem for the industry until new evacuation capacity (CBR, East & West coast pipelines) could be built and commissioned. That would be years away and, of this writing, only two have been approved by the Federal Government. I knew my Company couldn’t survive such a market shock, and it was time for me to move on. I met with the CEO and we agreed that I would take early retirement at the end of 2014.
The business had been hemorrhaging cash for months, and it was quickly running out of runway. The company continued to burn though its credit facilities thinking (hoping) that it would all come back in 2015. But, it just got worse. By April, 2015 the Company’s private equity owners pulled out, and turned the keys over to the banks. When the Company filed under CCAA, it owed $115M. As secured creditors, the banks would be first in line with $31 million owing. Unfortunately, hundreds of large and small creditors and former employees owed money for expense re-imbursement, vacation pay, and salary continuance, got nothing. The company’s assets were eventually purchased for under $20M by a Toronto based private equity firm, and the company renamed and re-organized.
The Crude Road Ahead
The years 2015 and 2016 were very difficult for the industry, and crude / oilfield truckers in particular. Recent events such as the OPEC agreement to cap production has stimulated pricing somewhat and it looks to be holding. The U.S.’s new Secretary of State, Rex Tillerson, former Exxon CEO knows that 20% of Exxon’s worldwide crude reserves are in Western Canada. Given the state off U.S. politics, it seems that Keystone XL will again be seen as a “no brainer” and be approved shortly after Trump’s inauguration. I believe we saw the bottom of the cycle in 2016, and 2017 appears to have forward momentum. We can only wait, prepare, and be ready for when it comes back. Because, it has always comes back.