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Five reasons why rail won't be replacing pipelines for moving tar sands oil

Anthony Swift

Posted November 6, 2013 in Moving Beyond Oil, Solving Global Warming, U.S. Law and Policy

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The issue of whether tar sands will move by rail if projects such as the Keystone XL tar sands pipeline are not built has become a major part of the debate about tar sands expansion. Tar sands proponents continue to search for ways to show that tar sands development is inevitable. First, they tried to argue that if not Keystone XL, then pipelines would be built to the Canadian coasts. They argued this until it became clear that Canadian communities and First Nations don’t want the risk of tar sands oil spills in their lands and waters any more than Americans do. So, now we are hearing a lot about rail as an alternative to major project such as the Keystone XL pipeline. This line of argument is important for tar sands proponents because any claim that Keystone XL passes the President’s climate test rests on the weak argument that tar sands will be developed at the same rate with or without the massive pipeline. This is the reasoning that the US State Department has used so far in its draft environmental reviews of the project to avoid taking the climate impacts of Keystone XL into account.

This is mistaken and irresponsible reasoning. As the following five points show, rail is not a substitute for major pipeline projects such as Keystone XL. Expansion of tar sands depends very much on the proposed Keystone XL pipeline and any responsible and accurate assessment of the climate impacts of Keystone XL needs to take the full emissions from the expansion that will be driven by this project into account.

To get a better understanding of why the current claims that tar sands by rail could replace Keystone XL are wrong, here are five key things to understand:

1. Rail is actually a story of light crude, not tar sands: The U.S. has seen a boom in crude by rail, but it has been of light crude, not of Canadian tar sands. For example, even major tar sands producers such as Cenovus are using rail for light and medium crude instead of for their tar sands.[1]

2. Tar sands is expensive and technically difficult to transport: Goldman Sachs analyzed some of the tar sands difficulties and found that tar sands rail cars have to be specially made, including heating capacity of the tarry substance.[2] The heavy tar sands also come up against weight restrictions meaning less can be transported at a go. Specially made rail cars, time intensive loading processes, and fewer barrels per tank cars all increase the cost of shipping tar sands a given distance relative to light conventional crude.

 3. Rail is a niche market: Reuters recently contacted the companies behind the major heavy crude by rail terminal proposals, who reiterated the fact that rail was a niche market for a pipeline constraint tar sands sector:

 “Crude-by-rail is the safety net,” David Smith, President of Canadian logistics company Keyera, which is proposing two rail terminals in Alberta.

“We remain very, very confident that rail is here to stay as not a replacement for pipelines, but as a supplement to pipelines,” Stew Hanlon, president of Gibson Energy Inc., a company proposing a rail terminal in Alberta.  

“We can move large volumes, but it will always be a niche service,” said Gary Kubera, whose company, Canexus, is moving small volumes of tar sand by rail and has proposed an expansion of its terminal.

4. Rail is a stop gap: The tar sands industry doesn’t have sufficient pipeline capacity to transport the 3.1 million bpd of current tar sands production and tar sands projects which are in construction and will come online in the next couple of year – much less the 6.5 million bpd of proposed tar sands expansion which is on the sidelines. Current tar sands producers are turning to rail as an emergency option to prevent their product from being shut in as production exceeds cross-border capacity in 2014.

5. Wall Street continues believe that pipelines – not rail – is essential to enable the tar sands industry’s long term expansion plans. Both Goldman Sachs and RBC Capital have recently reiterated that despite marginal crude by rail volumes in Alberta, new pipelines would be critical to the expansion of tar sands production.[3] 

 


[1] Cenovus Energy, Cenovus Energy 2012 Annual Report, 2pg. 6; pg. 35, http://cenovus.com/invest/docs/2012-annual-report/cenovus-AR-2012.pdf.

[2] Goldman Sachs, Getting oil out of Canada: Heavy oil diffs expected to stay wide and volatile, June 2, 2013, pg. 15.   

[3] RBC Capital Markets; Energy Insights, September 25, 2013; Goldman Sachs, Getting oil out of Canada v1.2: heavy oil diffs widening, rail growing, October 8, 2013. 

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Comments

Mike PriaroNov 7 2013 10:36 AM

Comment #1:

What underlies 54,132 square miles of land in northern Alberta, map below, is neither "oil sands" as used by proponents or "tar sands" as used by opponents but bitumen-saturated sandstone (partially-consolidated) or carbonate reservoirs. Bitumen sands, bituminous sandstones, or bituminous carbonates, if you will.

Bitumen can produce tar-like asphalt once processed but neither bitumen or asphalt are tar. Tar is a black, thermoplastic material produced by the destructive distillation of coal. Neither is bitumen oil until upgraded to a suitable refinery feedstock like syncrude which requires further refining into useable oil products. Get it? Raw bitumen, then dilbit or syncrude, then commercial oil products. Asphalt, used as a binder for aggregate in paving roads, is produced only in relatively small quantities at upgraders and refineries.

Mike PriaroNov 7 2013 10:50 AM

Comment #2

The cost of shipping undiluted raw bitumen, or partially-diluted bitumen - railbit, by rail actually compares very favourably with the cost of shipping dilbit - raw bitumen diluted with 30% diluent, by pipeline.

Factor in pipeline tariffs for an extra 30% volume, the cost of dluent which is priced at a premium to WTI -let alone heavy, sour crude, the revenue for the diluent in dilbit which is at the price of dilbit, the cost to ship diluent to the bitumen sands from the Gulf Coast, the capital cost for extra dilbit and diluent pipelines and you will see what I mean.
(See the business analysis by Altex Energy Ltd.)

There is a shortage of rail cars and rail terminals for handling raw bitumen, railbit and even dilbit but that could be overcome in a few years.

Mike PriaroNov 7 2013 11:08 AM

Comment #3:

TransCanada's proposed Energy East pipeline will take up to 1.1 million bbls/d of Western Canada crude to Eastern Canada and the U.S Eastern Seaboard where it is most needed to displace imports of foreign crude.

A potential Energy East Line 2 (you heard it here first!) could add another 1.1 million bbls/d to that.

Along with expansions by Enbridge of their Mainline from the Alberta bitumen sands to the U.S. Midwest and an expansion by Kinder Morgan of their TransMountain pipeline to Canada's West Coast and you can see that neither Keystone XL or Enbridge's Northern Gateway pipeline to Canada's West Coast are needed to allow unrestricted development of Canada's bitumen sands.

The biggest knock on Keystone XL, and I say this as a TransCanada shareholder, is that it ships dilbit to a Gulf Coast that will be (is already) awash in light crude from shale oil plays (Eagle Ford, Bakken, etc.).

Any Canadian heavy crude that reaches the Gulf will be refined to diesel and then exported at huge margins to Latin America and elsewhere from tax- and duty-free refineries in Free-Trade Zones. So no energy security for the U.S. either from Keystone XL.

The main beneficiaries of Keystone XL are not Canada or the U,.S but companies like ExxonMobil who will refine the cheap raw bitumen in dilbit and export the refined products like diesel at a huge margin to Latin America and elsewhere.

Jan Cox GolovichNov 9 2013 10:19 AM

Sorry, but Tar Sands by rail is already in the works in the San Francisco Bay Area. The Valero refinery in my town, Benicia, CA is gearing up as is the Chevron refinery in Richmond. The NRDC is diligently working with community organizations to stop it, but frankly the outlook is grim. #6 needs to happen soon!

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Switchboard is the staff blog of the Natural Resources Defense Council, the nation’s most effective environmental group. For more about our work, including in-depth policy documents, action alerts and ways you can contribute, visit NRDC.org.

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