(Reuters) — Canadian railway operators see a lucrative opportunity to transport more crude oil to the United States as a rise in output force producers to find new routes to its southern neighbour.

However, their need for long-term contracts and the pressure to move a surplus of grains in the country is making it hard to cash-in on the prospect.

Canada moves about 95 per cent of its oil by pipelines, which are currently full. A 20 per cent rise in crude production in the past five years has increased pressure to find new ways to haul the commodity, with rail being the second cheapest alternative.

Analysts expect railway operator Canadian Pacific Railway Limited to see a more than 60 per cent rise in the volumes of crude it ships this year, but the company and its rival Canadian National Railway Company are being cautious about going all-in.

With oil prices volatile and three pipeline expansions due to come online at the end of decade, railways worry that any investment will be at risk in two or three years and could undercut their money-making base: moving grains.

"Rails don't view crude-by-rail as a sustainable business, but rather, one that is driven by short-term dislocations in crude prices," said Stifel analyst Michael Baudendistel.

In 2017, 23 per cent of Canadian Pacific's revenue came from grains and only three per cent from crude, according to data by Desjardins analyst Benoit Poirier. Canadian National saw 13 per cent of its revenue from grains and two per cent from crude, in the same period.

"We understand crude is only going to be here for a certain period of time," Canadian Pacific's Chief executive officer Keith Creel said in a fourth-quarter results call with analysts.

"We're looking for strategic partners with long-term objectives that align with ours. We're not going to allow ourselves to be commoditized."

Still, RBC analyst Walter Spracklin says Canadian National and Canadian Pacific could see, respectively, five and 11 per cent upside in earnings this year helped by crude shipments, if oilsands production increases by 315,000 bbls/d. Other analysts expect even more of an impact to their bottom lines.

Long-term pacts needed

Rail companies are reluctant when it comes to monthly, spot deliveries and the inherent volatility of the oil markets making it hard for them to get long-term commitments from vendors.

Cenovus Energy Inc.recently complained that transport bottlenecks had made it impossible to haul oil. The company said it was having "ongoing discussions" with rail operators to resolve the shortage of rail hauling capacity.

Railway operators cannot think of one to three-year investments when they invest in tank cars that are intended for a more than 30-year life span, said Genscape analyst Mike Walls.

Producers on the other hand are wary of the long-term commitments railways are asking for, which is costlier than pipelines.

To make a rough estimate, pipelines cost about $6-$12/bbl to move crude from Hardisty in Alberta to the Gulf Coast, while it costs about $16-$18/bbl when using rail.

Major pipelines are expected to complete capacity expansions by 2020. Enbridge Inc. is expected to double the capacity of an existing line to 760,000 bbls/d, while Kinder Morgan Canada Limited plans to triple its capacity with the expansion of its Trans Mountain pipeline beginning 2020.

TransCanada Corporation said last month it expects to start construction on its Keystone XL expansion in 2019 and it will take about two years to complete.