UPDATE 2-TransCanada eyes shipping oil by rail amid Keystone XL delays-CEO

Thu May 22, 2014 2:36am IST

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By Catherine Ngai

May 21 (Reuters) - TransCanada Corp is in talks with customers about shipping Canadian crude to the United States by rail as an alternative to its Keystone XL pipeline project that has been mired in political delays, Chief Executive Russ Girling said on Wednesday.

"We are absolutely considering a rail option," Girling told Reuters on the sidelines of a conference in New York. "Our customers have needed to wait for several years, so we're in discussions now with them over the rail option."

The comments are the first to confirm growing speculation that TransCanada might use more costly and controversial railway shipments as a stopgap alternative to the Keystone XL pipeline, whose approval has been delayed by the U.S. government.

Girling said the firm was exploring shipping crude by rail from Hardisty in Canada, the main storage and pipeline hub, to Steele City, Nebraska, where it would flow into an existing pipeline to the Gulf refining hub.

TransCanada has waited more than five years for the Obama administration to make a decision on the $5.4 billion project, which would carry up to 830,000 barrels per day of crude from the oil sands of northern Alberta to the U.S. Gulf Coast.

While the project has received a mostly favorable environmental report, the State Department last month delayed a decision beyond the mid-term elections in November while a legal dispute over the line's route in Nebraska is settled.

The pipeline has drawn sharp criticism from environmental groups who say it will fuel more production of Canada's energy-intensive oil sands. But the oil-by-rail movement has also come under scrutiny after a series of explosive derailments, including the one in Lac-Megantic, Quebec, last summer that killed 47.

"It's an irony that the adamant opposition of environmental organizations and others against oil sands-derived crude have actually created a phenomenal opportunity for rail to pick up the slack," said David McColl, an analyst at Morningstar, Inc.

The line has the backing of the Canadian government and conservative Prime Minister Stephen Harper called the project "a no-brainer." Canada is counting on new export lines to boost discounted oil prices in the country and accommodate rising production from the oil sands.

Demand to ship crude by rail has gathered pace in Canada as producers scramble for alternatives to congested export pipelines.

Canadian crude-by-rail exports jumped to 146,047 bpd in the last quarter of 2013, an 83-percent year-on-year surge, according to the National Energy Board.

With Keystone XL and a number of other new pipelines projects mired in regulatory delay and environmental opposition, the crude-by-rail boom shows little sign of slowing.

Jarrett Zielinski, chief executive officer of TORQ Transloading, which is building Canada's largest unit train terminal in Kerrobert, Saskatchewan, said TransCanada would need to load at least roughly nine unit trains per day to rival the takeaway capacity of Keystone XL, if they were to load raw bitumen.

Zielinski said that much extra crude traveling on Canada's rails, in addition to the new rail loading projects already underway, could strain the system.

"The rail network would need more infrastructure and people," he said. "It's my fear that the current rail infrastructure would be insufficient, although it could be scaled up quickly." (Additional reporting by Scott Haggett and Nia Williams in Calgary and Timothy Gardner in Washington; Editing by Jessica Resnick-Ault and Marguerita Choy)

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