With pipeline in limbo, Canadian crude finds new path to US: rail


If President Barack Obama rejects the Keystone XL pipeline, large quantities of the Canadian oil it’s designed to carry will still roll into the United States — on railroads.

The proposed pipeline across Montana, South Dakota and Nebraska has provoked opposition from environmental activists who say extraction of crude oil from tar sands increases greenhouse gases that cause global warming.

As anti-pipeline groups have pressed the White House to kill the project, the oil and railroad industries have been building oil-loading terminals and buying tank cars to ship Canadian crude oil by rail.

“There is no permitting required — you can put oil on rail and nobody can complain,” said Sandy Fielden of RBN Energy, a Houston-based consulting firm that has tracked the oil-by-rail boom.

In the campaign against Keystone XL, the National Wildlife Federation and other groups have issued two reports since 2011 critical of pipeline safety, singling out Canada’s heavy oil called bitumen as especially hazardous. Neither report mentioned the risks of shipping it by rail.

“This is not something we had been working on,” Beth Wallace of the federation’s Great Lakes Regional Center in Ann Arbor, Mich., said of the crude-by-rail trend. Neither pipelines nor rail, she said, are “options for what should be our future.”

Yet the dramatic growth of the crude-by-rail business in North America illustrates how quickly shippers can adapt to a new option. North Dakota, the nation’s No. 2 oil-producing state behind Texas, ships the majority of its oil by rail from loading terminals built mostly in the past three years.

The two major carriers, Canadian National (CN) and Canadian Pacific (CP), say 32 Canadian oil-loading terminals now operate on their rail networks, and more are being built, including some to load crude from the oil sands region near Fort McMurray, Alberta. That’s the same heavy bitumen that the Keystone XL pipeline would carry.

Trains won’t replace pipelines

Tank cars won’t completely replace pipelines, officials in the oil and rail industries say. Yet even if the $5 billion Keystone XL is approved — and a decision could come soon on the presidential permit to cross the U.S. border — industry officials expect crude to keep moving by rail partly because it takes years to build pipelines.

Industry officials say tank cars offer one important advantage for shipping bitumen: It is so thick it must be diluted with other petroleum products to flow through pipelines. Bitumen can be shipped in special tank cars without dilution.

“We believe this business is going to be around for a long time,” said Wayne Bobye, CEO of Altex Energy of Calgary, Alberta, which has four Canadian oil-loading terminals and is building a fifth.

Canadian National, whose rail network stretches from western Canada’s oil region to the U.S. Gulf Coast, says it hauled 30,000 tank car loads of crude last year, a sixfold increase over 2011. It expects that to double this year.

On the Canadian Pacific, crude oil shipments also jumped last year, partly because of the boom in North Dakota, where the railroad has major operations. CP does not break out its Canadian and North Dakota oil shipments.

The Gulf Coast is a target destination for Canada’s heavy crude because many refineries there have technology to process such oil.

On the East Coast, PBF Energy last year built a rail terminal at its Delaware refinery to accept heavy crude. The company also ordered enough rail cars to carry 80,000 barrels of Canadian crude per day.

“We are confident, very long term, on the movement of heavy Canadian crudes to the U.S. East Coast,” Tom O’Malley, the company’s chairman, told analysts last month. “The people who are selling these crudes … seem to have that same view, since a number of them have made very, very large orders of rail cars.”

NuStar Energy Corp. of San Antonio, which owns refineries in New Jersey and Georgia, also is shipping Canadian bitumen by rail to the East Coast. The company plans to develop a terminal to load Canadian bitumen onto “unit trains” of 80 to 120 tank cars, vastly expanding oil-by-rail capacity to U.S. markets, said NuStar Vice President Gregory Kaneb.

“At the moment, you have pipeline constraints and that is why rail is working,” said Kaneb, who estimated that about 150,000 barrels of Canadian crude of all types now move daily by rail.

In January, Southern Pacific Resource Corp., a Calgary-based oil producer, reported that its first rail shipment of oil sands crude arrived in Natchez, Miss. It said bitumen shipments eventually will reach 12,000 tank cars a year.

One obstacle in the crude-by-rail business is that shippers can’t purchase tank cars fast enough. The five North American tank car makers have back orders for 48,000 new tank cars through 2014, according to Rail Theory Forecasts, which tracks rail car production.

When all the new tank cars enter service, North American railroads will have the capacity to ship 2 million barrels of crude oil per day, said Toby Kolstad, president of the Portland, Ore., forecasting firm.

The Keystone XL pipeline, proposed by TransCanada, based in Calgary, Alberta, would initially move 700,000 barrels. Keeping that oil out of the United States would slow tar sands development, environmental groups contend.

Anthony Swift, an attorney for the Natural Resources Defense Council and co-author of one of the critical pipeline safety reports, said railroads don’t offer a feasible alternative to pipelines from Canada. He said tar sands producers aim to triple oil output by 2030, which would outstrip railroads’ capacity.

But the U.S. State Department, in a report on Keystone XL issued March 1, said “the proven ability of rail to transport substantial quantities of crude oil profitably” means that denial of the project “is unlikely to have a substantial impact on the rate of development in the oil sands, or on the amount of heavy crude oil refined in the Gulf Coast area.”

Keystone XL wouldn’t be the only pipeline to the U.S. market for Canada’s crude oil. Enbridge Energy, another pipeline company, is expanding its capacity to transport Canadian heavy oil via a pipeline through Minnesota. The owner of the Superior, Wis., refinery is considering transporting crude oil by ship on Lake Superior.

Ex-NTSB chair says pipelines safer

“Essentially the safest way to transport the product is in pipelines,” said Jim Hall, a former chairman of the National Transportation Safety Board and now a safety consultant. “I would be concerned in populated areas where I saw an increase in hazardous materials placed in tank cars and on the rails.”

Ed Greenberg, a spokesman for CP, said railroads have made substantial investments to improve safety. When comparing pipeline and rail, he added, “our view is that both are safe options.”