Looking for a way out, Canadian crude hits the rails

Clifford KraussThe New York Times
Scott Terrell

HOUSTON -- Over the past two years, environmentalists have chained themselves to the White House fence and otherwise coalesced around stopping the Keystone XL pipeline as their top priority in the fight against global warming.

But even if President Barack Obama rejects the pipeline, it might not matter much. Oil companies are already building rail terminals to deliver oil from western Canada to the United States, and even to Asia.

Since July, plans have been announced for three large loading terminals in western Canada with the combined capacity of 350,000 barrels a day -- equivalent to roughly 40 percent of the capacity of the proposed Keystone XL pipeline that is designed to bring oil from western Alberta to refineries along the Gulf Coast.

Overall, Canada is poised to quadruple its rail-loading capacity over the next few years to as much as 900,000 barrels a day, up from 180,000 today.

The acceleration has come despite a derailment in the lakeside Quebec town of Lac-Megantic in July, in which a runaway oil train bound for a refinery in eastern Canada exploded, killing dozens of people and bankrupting the railway company. That accident and others more recently have renewed concerns about the safety of transporting oil by rail and given an added argument to some who favor the Keystone XL pipeline.

"They don't give up," Jesse Prentice-Dunn, a Sierra Club policy analyst, said of the oil industry.

If all the new terminals are built, Canada will potentially increase its exports to the United States by more than 20 percent -- even if Keystone XL is never built.

Shipping by rail can cost an additional $5 or more per barrel, but oil companies have decided that they cannot afford to wait.

"The indecision on Keystone XL really spawned innovation and mobilized alternatives, and rail is a clear part of the options available to our industry," said Paul Reimer, senior vice president in charge of transport and marketing at Cenovus Energy, a Canadian oil company that is planning to increase rail shipments from 7,000 barrels a day to as many as 30,000 barrels a day by the end of 2014.

Opponents want to stop the pipeline project to keep the oil sands in the ground. They say that emissions from development - through mining or steam heating out of the ground followed by upgrading for shipment - are more harmful than those that come from extracting most conventional crude oil. Proponents say that Canadian heavy oil is no more environmentally harmful than some crude oils already used in the United States and that it would replace similar crudes from Venezuela and Mexico that are refined on the Gulf Coast.

But now it seems that even if environmentalists win their battle over Keystone, Canada is destined to become an even more important energy provider, one way or another.

The developing rail links for oil sands range across Canada and over the border from the Gulf Coast to Washington and California. Railways can potentially give Canadian producers a major outlet to oil-hungry China, including from refineries in Washington and California.

At least that is the hope of Canadian oil companies, which now depend almost solely on the United States for exports.

"We want to diversify our markets beyond just moving our product south," said Peter Symons, a spokesman for Statoil, a Norwegian oil giant that has signed contracts to lease two Canadian oil loading terminals. "We can get that product on a ship and get it to premium markets in Asia."

Several Washington and Oregon refiners and ports are planning or building rail projects for Canadian heavy crude as well as light oil from North Dakota. Texas refinery giant Tesoro and oil services company Savage have announced a joint venture to build a $100 million, 42-acre oil-handling plant in the Port of Vancouver on the Columbia River that could handle 380,000 barrels of oil each day if permits are granted.

At the beginning of the year, only a trickle of Canadian oil was transported by rail, no more than 60,000 barrels a day. There was limited rail off-loading capacity in U.S. refineries outside the Gulf Coast, and only a small number of rail cars suitable to transport bitumen, the raw substance in oil sands that can be refined into petroleum products.

But Canadian oil executives were making preparations for more rail traffic. Congested pipelines in the United States were producing localized gluts of Canadian crude, forcing producers to offer discounts that cut into profits.

In response, executives ramped up rail projects on both sides of the border to relieve the pipeline congestion, and now an estimated 175,000 barrels of Canadian crude are running by rail daily, according to a recent report by Peters & Co., a Canadian investment house.

The Canadians remain a few years behind producers in North Dakota, where the paucity of pipelines encouraged early oil explorers like EOG Resources to form a partnership with Burlington Northern Santa Fe to build terminals for the shipment of oil by rail to refineries across the country.

Today more than three-quarters of North Dakota's production, which also was to move on the Keystone XL pipeline, is transported by rail. The Canadian oil producers took notice.

"The market woke up when all of a sudden in 2012 they built 20 terminals in North Dakota, and now people are jumping on the bandwagon," said Sandy Fielden, director of energy analytics at RBN Energy, a consultancy. "Oil will find a way to market whether it has to come by truck or pipeline or rail."

With or without Keystone, transporting oil by rail has raised concerns over safety and increased air pollution from extra train traffic. The city of Benicia, Calif., last month delayed the granting of a permit for Valero Energy's planned rail terminal at its refinery by deciding to require an environmental impact report after residents expressed concerns that Valero would use the terminal to import Canadian oil sands crude.

Much of the concern centers on safety. This month, a train carrying crude oil and liquefied petroleum gas derailed west of Edmonton, causing an explosion and fire and forcing the evacuation of a town.

Last month, a Canadian National Railway Co. train carrying lubricating oil, ethanol and natural gas liquids between Winnipeg and Edmonton derailed in Saskatchewan, leading to a leak on farmland and well-publicized comments by Saskatchewan's premier, Brad Wall, that the accident underscored the need for more pipelines to safely move petroleum products.

Shipping oil by rail is generally more expensive than by pipeline, but the oil companies working in North Dakota made a critical innovation - leasing complete 100-car trains dedicated to oil rather than using traditional trains that ship a variety of products. By shipping directly from the oil fields to refinery depots, the companies sped deliveries and lowered costs.

Rail lines are also easier and faster to build than pipelines, particularly since permitting of pipelines can take years and the applications are sometimes rejected.

"We would like to bring that crude oil down by pipeline, specifically the Keystone XL pipeline, but we also want to have access from rail and ship," said Bill Day, a vice president at Valero, which is building a rail unloading facility to handle heavy oil from Canada at its St. Charles, La., refinery. "We want multiple means to deliver crude oil to our refineries."


By CLIFFORD KRAUSS
The New York Times