Oil Sands Truth: Shut Down the Tar Sands

Oil-by-rail shift squeezing plans for new pipelines — including Keystone

Oil-by-rail shift squeezing plans for new pipelines — including Keystone

Jeff Lewis | 13/08/30
Financial Post

CALGARY • The tug-of-war between railroads and pipelines in North American oilfields is only just getting started.

In recent months, the popularity of moving crude on tracks has sapped commercial support for new pipelines from oil fields in West Texas to North Dakota’s Bakken. Now it’s raising questions about the importance of Keystone XL, TransCanada Corp.’s controversial project designed to connect Alberta’s booming oil sands to refineries on the U.S. Gulf Coast.

Calgary investment bank Peters & Co. Ltd. this week said the pipeline, although still a “very important” link to the world’s largest refining complex, is becoming less critical over time, amid an expected boom in rail export capacity and as other pipeline projects materialize.

The assessment reflects moves by companies such as Gibson Energy Inc., Keyera Corp. and others, which have committed a combined $1-billion this year and next to build rail terminal infrastructure in Western Canada. Another $4-billion to $5-billion is earmarked for new railcars that are on back order, Peters said in the report.

For producers, rail is now “a viable, real option,” said Skip York, vice-president, downstream consulting at Wood Mackenzie in Houston. “Five years ago the alternative was pipe or leave it in the ground.”

Five large-scale loading terminals capable of exporting 550,000 barrels of oil a day by 2015 are either planned or under construction in Western Canada, according to RBN Energy LLC.

The pattern is playing out across North America, as investments in rail infrastructure give rise to a formidable transportation alternative and a potential foil for new pipeline projects.

Kinder Morgan Energy Partners LP this year shelved a $2-billion pipeline proposed to link West Texas’s oil fields with California refineries after the project failed to pique shippers’ interest.

Enbridge Inc.’s $2.5-billion Sandpiper project to move Bakken crude to Minnesota has also met with difficulties. One prospective shipper told the U.S. Federal Energy Regulatory Commission this year Sandpiper’s capacity “was not necessary in view of rail and pipeline alternatives.”

A joint venture between Enbridge and Texas-based Energy Transfer Partners LP to transport Canadian and Bakken crude to the eastern Gulf Coast refining market may likewise struggle to get shipper support amid competition from dedicated unit trains, traders say.

Enbridge says negotiations with would-be shippers for the Sandpiper scheme are ongoing and it expects to begin soliciting commercial interest for the pipeline by the end of September.

Energy Transfer has extended the open season on its Eastern Gulf Crude Access Project to the end of September and is “very optimistic that we will fill up that pipeline,” president and chief operating officer Marshall McCrea said on a second-quarter earnings call.

Still, the combination of volatile crude pricing and the dramatic growth in rail capacity has made oil companies reluctant to sign long-term commitments on pipelines, Mr. York said in an interview.

The shift has complicated Keystone XL’s importance to North Dakota’s Bakken, where the lion’s share of production moves on tracks.

“I think Keystone XL does become less critical for the guys in the Bakken, because there’s other pipeline capacity being added and the rail option is growing,” Mr. York said, adding the project was still important as a heavy oil conduit between Alberta and Texas.

“That actually is kind of good news for Alberta shippers because if the Bakken guys don’t take their part of the Keystone XL, it frees up space in the line for even more barrels to move out of Canada,” he said.

TransCanada spokesman Shawn Howard said Bakken producers have turned to rail because of delays with projects such as Keystone XL.

“The fact is that moving product by rail is much more expensive, but we have also indicated that it is part of the equation for many producers,” he said in an emailed statement. The popularity of moving crude on tracks has sapped commercial support for new pipelines from oil fields in West Texas to North Dakota’s Bakken.

Tightening crude differentials saw U.S. crude-by-rail shipments fall from a peak of roughly 900,000 barrels a day in May to about 700,000 barrels today, analysts at AltaCorp Capital Inc. said in a note this week, citing data from the Association of American Railroads.

Rail shipments also face added scrutiny from regulators in the wake of July’s derailment in Quebec that killed 47 people.

Officials from the U.S. Pipeline and Hazardous Materials Safety Administration and the Federal Railroad Commission have started investigating oil-loading terminals in North Dakota.

In Canada, meanwhile, a recent Senate report called for phasing out tank cars deemed unsafe, raising the spectre of higher costs or decreased crude shipments.

Some observers doubt rail could entirely replace Keystone XL, which is conceived to move primarily heavy oil.

The Sierra Club published a report this week arguing the pipeline remains critical to expanding oil sands production, refuting a claim by the U.S. State Department that growth will happen with or without the TransCanada project.

“Out of desperation the oil industry is looking to move tar sands by rail,” the report said. “However, the economics alone are leading many analysts to conclude that rail will not allow the industry to reach their expansion goals.”


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