Pipeline protests spur companies to consider shipping oilsands crude by rail

By Jason Fekete, Postmedia News August 10, 2012

OTTAWA — As battles rage over the Northern Gateway and Keystone XL pipelines, governments and energy companies are eyeing other options for transporting oilsands crude to foreign markets, including by rail, a pipeline through the Northwest Territories and shipping more oil to Eastern Canada instead.

The political, economic and environmental stakes are enormous. Billions of dollars of investment are on the line but, as the Northern Gateway saga has shown, there are also plenty of potential pitfalls for governments and project proponents.

British Columbia’s demands for supporting the Enbridge Northern Gateway and Kinder Morgan Trans Mountain pipeline proposals — including receiving its “fair share” of the economic benefits from Alberta and Ottawa — are sparking uncertainty over the future of the projects, which would ship oilsands crude from northern Alberta to the West Coast.

In the U.S., the Keystone XL pipeline, which would carry oilsands crude from northern Alberta to the U.S. Gulf Coast, has also turned into a political football.

President Barack Obama rejected TransCanada’s original Keystone XL permit application in January due to concerns about what pipeline construction and potential for spills could do to ecologically sensitive areas in Nebraska. The company has since reapplied for a presidential permit to reroute the controversial pipeline around some of the environmentally sensitive areas in Nebraska, with a decision expected by early 2013.

The prolonged pipeline disputes in B.C. and south of the border have governments and petroleum producers considering other options for getting oilsands crude to foreign markets like Asia, including alternative pipeline routes, moving more oil east (and then onto the U.S.) and shipping bitumen on the rails.

Ken Chapman, executive director of the Oil Sands Developers Group, an industry lobby organization, said the ongoing battles over the Northern Gateway and planned expansion to the Trans Mountain pipeline mean “every option” must be looked at from an economic, environmental and First Nations perspective.

“None of these are easy but all of them are worth investigation,” Chapman said. “They (oilsands developers) are always looking at options. Rail is becoming more and more of an attractive option.”

However, producers can’t move nearly as much product by train, he said, which means rail probably must be considered a supplement — not a complete alternative — to shipping oilsands crude by pipelines.

A recent report from Standard & Poor’s found a barrel of diluted bitumen is transported at a cost of $7 by pipeline, compared to $6 to $8 by rail.

The report also said rail has the potential to move crude to the U.S. Gulf Coast from Alberta in about one-fifth the time of pipelines, with the capital cost to expand rail infrastructure about one-tenth that of the cost of adding incremental pipeline capacity.

Amid the pipeline problems, Canadian National Railway, in response to customer demand, is moving crude oil (including pure bitumen) from Western Canada to markets across the country and the United States, including the U.S. Gulf Coast, and California. There are currently no shipments going to Canada’s West Coast ports for export partly due to a lack of infrastructure to unload crude oil from rail cars onto ships, the company said.

In 2011, CN moved approximately 5,000 cars of crude oil (there are between 550 and 680 barrels of oil per rail car, depending on type of product and car) and the company expects to transport more than 30,000 carloads of crude oil in 2012 to various North American markets, said company spokesman Mark Hallman.

Canadian Pacific Railway’s crude oil volumes are also rapidly increasing.

The company expected to grow its crude-by-rail market from 13,000 carloads in 2011 to 70,000 carloads by 2014 but, based on growing demand, now expects to reach that level a year earlier in 2013, including with shipments to northeastern U.S. and the Gulf Coast.

The company currently isn’t shipping any oilsands crude to the West Coast but it’s being explored, said CP spokesman Ed Greenberg.

“Movements of crude oil to the West Coast for export is something that continues to be developed. We have the infrastructure in place to respond to energy producers, but this is something the producers are driving so they will ultimately decide,” Greenberg said.

Northwest Territories Premier Bob McLeod mused last week the Alberta government should — given the problems with pipeline proposals in B.C. — consider a northern pipeline route that would transport landlocked oilsands crude up through the N.W.T. and to the Beaufort Sea, where it could be transported to Asia.

However, the prospect of an oilsands pipeline running through the N.W.T. to the Arctic is already rankling aboriginal groups who battled for years to get a seat at the table and fair stake in the proposed Mackenzie Valley natural gas pipeline project that would run from the Beaufort Sea, through the Northwest Territories, and into Alberta.

Fred Carmichael, chairman of the Aboriginal Pipeline Group, said a northern oil route would face huge backlash from environmentalists and aboriginal groups.

“They think there’s a battle with the Gateway pipe?” Carmichael told Postmedia News recently. “I tell you, there’d be one big battle here.”

Jack Mintz, director of the School of Public Policy at the University of Calgary, said the Northern Gateway and Trans Mountain lines could lead to “significant sales to Asia” because the transportation costs of shipping the crude would be much more competitive.

“But if those get blocked, then it’s hard to see what other options right now there would be in terms of market diversification, like getting oil to Asia,” Mintz said.

Piping oilsands crude north through the N.W.T. is “a nice idea” but likely isn’t a viable option because winter would also pose a number of problems, including tankers getting through northern shipping lanes, he argued.

Transporting the product through an eastern pipeline to Central Canada and the Atlantic Provinces wouldn’t lead to true market diversification, he said, because most of the product would likely end up in the U.S.

Shipping bitumen by rail to B.C. won’t resolve a number of the lingering environmental concerns because there will still be worries about tankers spilling oil off the West Coast, he added.

“It won’t deal with the political disagreement,” he said.

The Harper government continues to trumpet the importance of diversifying Canada’s energy export markets beyond the United States and says new pipeline projects such as the Northern Gateway are critical for getting Canadian petroleum to Asia.

But Mintz said the federal government will likely be hesitant to push pipeline projects on British Columbians — who, polls show, are opposed to the Northern Gateway and Trans Mountain lines — because the Conservatives will need the province’s support come the next federal election.

“You can have a number of seats in B.C. that could be affected, so what happens in terms of the actual politics in the end will be interesting,” he added.

David Collyer, president of the Canadian Association of Petroleum Producers, said his group is focused on trying to get West Coast market access through the proposed Northern Gateway project and Trans Mountain expansion.

However, he said rail shipments of crude to the Gulf Coast, proposals to ship bitumen by rail to the West Coast and the possibility of an eastern pipeline system to get more Western Canadian crude to Central and Eastern Canada are all options either being pursued or examined.

“What we’re seeing is that the market can be quite creative in terms of looking at other potential opportunities,” Collyer said.

Pipelines to the West Coast remain the safest and most economical way to transport large amounts of crude, he said.

“Rail will certainly potentially play a role but it’s difficult to see it at the scale comparable to what pipelines can provide,” he said.

Petroleum producers also “have to be realistic” about getting oilsands product to Asia via a northern pipeline through the Northwest Territories, he said, noting the Gateway and Trans Mountain lines are well advanced in design and commercial support compared to running a pipeline through the N.W.T.

Environmental groups say no new pipelines or alternatives for shipping oilsands crude should even be considered until the environmental consequences of developing the resource — including greenhouse gas emissions and cumulative impacts on land — are more effectively addressed.

“We’re seeing a lot of opposition to these various transportation options for oilsands crude,” said Jennifer Grant, director of the oilsands program at the Pembina Institute, an Alberta-based environmental think-tank.

“It’s not just about making pipelines safer or looking at the various pros and cons of each option, it’s about addressing the upstream issues that have been receiving actually less attention as the spotlight has shifted to pipelines.”

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