A Canadian Pacific tank train - 20 Feb 2012 Raymond S. Farand.

2 March 2012

As Pipelines Stall Railways Keep Oil Flowing

Calgary Alberta - On any given week, three to seven CP Rail trains laden with crude oil from the North Dakota Bakken field whisk across North America, bypassing the pipeline bottlenecks in mid-continent that are depressing oil prices and unaffected by the noise in Washington, D.C., that is holding back the Keystone XL pipeline.
 
It's a roaring business. In 2009, when Calgary-based Canadian Pacific Railway Ltd. started dabbling in crude oil transportation, it moved 500 of its black barrel-shaped cars out of the basin. Last year, its oil trains carried 13,000 cars and soon CP could be moving 70,000 cars or more a year out of the North Dakota Bakken tight-oil field alone.
 
With each tank car containing 650 barrels of oil, that's 126,000 barrels a day, a significant pipeline on rail.
 
"We think that's foreseeable in the not-too-distant future, and we think based on what we are doing now there is potential above that," Tracy Robinson, CP's energy and merchandise vice-president, said in an interview.
 
It's not the pipeline on rail that some were envisioning some years ago, when Canada's major railway companies, Montreal-based Canadian National Railway Co. and CP, started looking for ways to get a piece of the growing Alberta oil sands by offering alternative transportation.
 
The idea was greeted with skepticism. Pipeline and oil companies have been so interdependent for so long that large-scale rail transportation seemed like a costly, unsafe detour from a proven model.
 
Now, rail transportation is gaining traction for new reasons. For one, tight oil production is increasing rapidly and rail transportation can be scaled up quickly.
 
Then there are pipeline bottlenecks due to rising production out of Western Canada and the Bakken, that are depressing oil prices in the U.S. Midwest and justifying rail's higher costs, and the controversy surrounding the Keystone XL expansion is pushing producers to look at all options.
 
Meanwhile, the North Dakota Bakken experience has demonstrated that railways can do the job, Ms. Robinson said.
 
With production increasing rapidly to about 600,000 barrels a day in about six years, companies like CP, whose tracks traverse North Dakota, moved in aggressively to fill the void. During 2011, rail capacity in the region tripled to almost 300,000 barrels a day, according to the U.S. State Department.
 
"Our phone is ringing a lot more often," Ms. Robinson said. "We have always thought there was some potential here. What really gave us the opportunity was the technological enhancement that allowed the shale drilling on a more economic basis. It started first for us in the Bakken area, where there was suddenly a lot of oil that had no mode of transportation to get into the market place."
 
The process involves piping or trucking oil into a tank and loading it into a specially built, double-lined tank car. The car is assembled into a train dedicated to crude oil that takes it to refineries or tanks that feed other pipelines.
 
"The way we approached that market is to create a matrix of origins and destinations," Ms. Robinson said. "We have multiple-origin train loading points in North Dakota, and we are developing multiple-destination options for our customers, in Eastern Canada, Northeast U.S., the Gulf, and the Midwest, and we are playing around on a test basis to the West."
 
CP is building capacity in the Canadian side of the Bakken, located largely in Saskatchewan, where activity and production are ramping up, and looking for opportunities to carry more heavy oil. In the last year, it has opened oil trans-load facilities in Alberta and Saskatchewan.
 
When CN started marketing its ambitious pipeline on rail strategy about 2008, it was dreaming big. The railway was talking about moving millions of barrels a day from the oil sands, using existing tracks, to the U.S. Gulf Coast or to the West Coast for shipment to Asia.
 
Today, the company won't talk about its progress, other than to say its energy business is growing.
 
"CN, in response to customer demand, is moving crude (i.e., heavy crude, light crude, pure bitumen) from areas in Western Canada to various markets," it said in an emailed statement. "CN has also been providing truck-to-rail transportation solutions for crude oil, where CN is loading directly from truck to rail."
 
CP is also eager to step into the oil sands. Ms. Robinson said discussions are continuing but "nothing significant is happening yet".
 
"The oil sands, there is a lot of dialogue that continues to take place, and exactly how that oil can get to market," she said. "And as that develops and as decisions are made, I would expect that given the infrastructure that exists on rail, rail will play a role".
 
"It's very early on at this point. We have collectively as a market more work to do to see what the potential of the oil sands is."
 
John Heida, a consultant at Purvin & Gertz, said oil transportation by rail has increased, but it's hard to quantify by how much because rail information is not as readily available as pipeline data.
 
He expects rail to remain an option on a "case-by-case" basis rather than an industry-wide solution.
 
The main driver for the recent increase in rail use is the steep discount for mid-continent crudes caused by the pipeline bottleneck at Cushing, Oklahoma, he said. While carriers keep costs confidential, it's estimated that it costs $10 to $12 a barrel to transport it by rail, and about $5 for pipeline, making the option attractive when the discount is in the $30 or more range, as it has been recently.
 
Meanwhile, despite the targeting of pipeline expansions by environmental organizations, pipeline companies are continuing to come up with new options. Trans-Canada Corp. proposed this week to break up the Keystone XL pipeline to speed up construction of a southern leg and the portion from the U.S./Canada border in Montana to Steele City, Nebraska, that is not in dispute. It would collect North Dakota Bakken oil.
 
Enbridge Inc. launched an open season this week for an addition to its North Dakota Bakken oil pipeline system. And Kinder Morgan Energy Partners LP said last month it has received enough shipper support to decide this month whether to go ahead with an expansion of its Trans-Mountain pipeline to Canada's West Coast. The pipeline would compete with Enbridge's proposed Northern Gateway.
 
But the railways say they can offer flexibility to producers that pipelines can't. They can scale up or down quickly. Because their tracks are in place, they can provide transportation now, while pipeline permitting and construction takes years.
 
As for safety, Ms. Robinson says rail transportation has a top record relative to the amount moved and its exposure to spills is limited. If a rail car breaks open, the most it spills is 650 barrels.
 
"We have never suggested rail will replace pipelines," she said. "There is a role to play as a supplement."