Exclusive: Cenovus inks deal to move more crude on Canadian National Railway - source

By Julie Gordon and Rod Nickel

VANCOUVER/WINNIPEG (Reuters) - Cenovus Energy Inc (Toronto:CVE.TO - News), a major Canadian oil producer, has signed a deal to move more crude with the Canadian National Railway Co (Toronto:CNR.TO - News), a source with direct knowledge of the matter told Reuters.

The deal is one of many being quietly signed that, along with the expedited deliveries of new locomotives, will help boost Canada's crude-by-rail shipments 50 percent by year end, a government consultant told Reuters separately.

The source said the Cenovus-CN deal was inked days before a Canadian court last week overturned the approval of the Trans Mountain oil pipeline expansion.

Shipper commitments put CN and smaller rival Canadian Pacific Railway Ltd (Toronto:CP.TO - News) in position to collectively move more than 300,000 barrels per day by December, said Greg Stringham, a consultant who mediated talks among oil producers and railways for the Alberta government this year.

Stringham did not directly address the Cenovus deal, but said new crude-by-rail "contracts are being signed. Not all of those been disclosed yet, but it is continuing."

The railways, burned a few years ago when booming demand for crude-by-rail vanished as oil prices fell and pipeline space opened, are now seeking rich multi-year, take-or-pay deals from producers. The 300,000 bpd would be 50 percent higher than June's record 200,000 bpd and double 150,000 bpd achieved in December 2017. It is expected to further increase in 2019 as locomotive orders start to catch up with demand.

The two railways and Cenovus declined to comment. The source declined to be identified as the deal is not public.

Cenovus CEO Alex Pourbaix said in July that he was considering a multi-year commitment to move 50,000 to 60,000 bpd by rail.

Cenovus shares rebounded to trade up as much as 0.86 percent soon after the news. Earlier in the day, they had fallen 6.4 percent after Goldman Sachs downgraded the stock to sell.

CN shares were down 0.5 percent.

SAFETY CONCERNS

Increased crude shipping by rail, while still far short of Western Canada's rail-loading capacity of nearly 1 million bpd, would represent progress in moving more Canadian oil to U.S. refineries. It remains a tiny fraction of the total 3.3 million bpd on average exported, mostly to the U.S., in 2017.

But as crude shipments increase, so do safety concerns. In 2013, a runaway train carrying crude exploded in the Quebec town of Lac Megantic killing 47 people. In June, some 230,000 gallons of crude spilled into an Iowa river after a train derailed.

The head of Canada's transportation regulator said last month that stronger tank cars for transporting flammable liquids should be required sooner than a 2025 deadline.

Enbridge Inc's (Toronto:ENB.TO - News) oversubscribed Mainline pipeline rations space each month as oil producers expand production, driving a bigger discount in Western Canada's heavy crude compared to the North American benchmark .

The increased crude by rail volumes could not happen without new locomotives that the railways are placing into service faster than before.

"Probably the biggest constraint that was identified was the lack of locomotives being available," said Stringham, adding that the railways went to their suppliers and were able to cut delivery times from 24 months down to nine to 12 months.

CN said on Wednesday that it had ordered an extra 60 locomotives from General Electric Co (NYSE:GE - News), adding to a previous deal for 200 locomotives over three years.

The original order will now be completed in two years, and the additional 60 are due in 2020, CN spokesman Patrick Waldron said. Those locomotives will be used for energy transport, along with intermodal, coal and agricultural products.

Western Canada's crude inventories reached 36.3 million barrels for the week ending Aug. 31, a record level since Genscape began monitoring in 2010 as oil production expands faster than transport capacity, analyst Dylan White said.

(Reporting by Julie Gordon in Vancouver, Rod Nickel in Winnipeg; additional reporting by Allison Lampert in Montreal; Editing by Denny Thomas and David Gregorio)