| WASHINGTON, April 18
WASHINGTON, April 18 The prospects for bringing
large amounts of Canadian heavy crude oil into the United States
by train is a contentious issue as the U.S. government weighs
whether to allow the controversial Keystone XL pipeline to go
An assumption that oil would move by rail without Keystone
was a key part of a U.S. State Department report in March that
found development of Canada's oil sands region will proceed at
roughly the same rate, with or without the pipeline.
That finding undercut warnings from environmentalists that
the pipeline would lead to a spike in greenhouse gas emissions.
Proponents for the roughly 1,200 mile (1,900 km) pipeline,
delivering the oil in Canada's Alberta province to refineries on
the U.S. Gulf Coast, say moving huge volumes of crude by rail
would be dirtier and more prone to mishap than a pipeline and
the market would adopt rail if the project were halted. The
State Department report endorses that view.
But some industry officials, energy analysts and recent data
raise questions about whether the industry is really eager to
adopt crude-by-rail should the U.S. government rule against the
TransCanada Corp pipeline.
They say train transport is so expensive that Canadian heavy
crude, produced by processing bituminous sand, isn't likely to
reach Texas and Louisiana in Keystone-like quantities by rail.
These experts also point to plentiful supplies of lighter
crude oil from the Bakken shale formation in North Dakota, which
is roughly 900 miles closer to the Gulf than the hub of Canadian
oil sands production, and plenty of heavy crude from traditional
sources such as Saudi Arabia, Mexico and Venezuela, as signs
that Gulf Coast refiners can get along without Keystone.
The U.S. government is expected to make a final decision
before the end of the year on the Keystone XL pipeline, which is
designed to carry as much as 830,000 barrels per day, most of it
Comments on the State Department's environmental assessment
are due by April 22, and will be made publicly available, an
official said on Wednesday.
The State Department report cites two industry studies to
predict that 200,000 barrels a day or more of Canadian heavy
crude oil will reach Gulf Coast refiners by train by the end of
Officials used that figure to bolster their argument that
the oil industry has already decided rail is a good option for
moving oil sands crude. "Limitations on pipeline transport would
force more crude oil to be transported via other modes of
transportation, such as rail, which would probably (but not
certainly) be more expensive," the State Department said.
But one of the sources for the 200,000 barrels per day
estimate, Calgary investment bank Peters & Co, says its forecast
was misunderstood as being for just Gulf Coast-bound oil when it
included shipments to Eastern Canada and other refiners.
"We haven't tracked exactly where those barrels are going,"
said Tyler Reardon, a spokesman for Peters & Co.
The other source for the number, Hart Energy, did predict in
a report last year that 250,000 barrels per day of heavy crude
from Western Canada would be reaching the Gulf Coast before the
end of this year but its analysts are reviewing that forecast.
"Hart Energy continues to carefully monitor flows from
Western Canada," said Susan Emfinger, a spokeswoman for the
Houston energy consultant.
The latest figures from the U.S. Energy Information
Administration show heavy crude shipments to the Gulf Coast from
Canada by rail have a long way to go to meet the 200,000 figure.
They have not exceeded 30,000 barrels per day in any of the past
12 months, though they did rise by two thirds to 25,000 barrels
per day in January, the last month for which there are figures,
from 15,000 in January 2012.
In fact, EIA data shows that little heavy crude from Canada
is reaching the Gulf Coast via any route, with about 75 percent
of 33 million barrels of heavy Canadian crude being processed in
the Midwest in January and only 7 percent of it being processed
further south. Other destinations account for the remainder.
"We just are not seeing those kinds of big deliveries to the
Gulf Coast," said Michael Wojciechowski, head of downstream
Americas research at Wood Mackenzie, an energy research and
A State Department official said crude-by-rail is
fast-evolving and is one viable alternative to pipelines.
"The industry sees rail as a one possible solution to moving
crude oil, particularly in the absence of a pipeline," said the
official who was not authorized to speak publicly about the
"We will continue to evaluate its potential and expect
substantial public input on the issue."
FEASIBLE VERSUS ECONOMIC
Trains can be effective in moving oil. The railroad company
Burlington Northern Santa Fe, owned by Warren Buffett's
Berkshire Hathaway, has 228 so-called unit trains on
the tracks carrying hundreds of thousands of barrels of Bakken
crude at any given time.
The use of unit trains - about 100 tank cars linked together
on a dedicated route - is what pushed BNSF's North Dakota
crude-by-rail volumes to about 500,000 barrels per day at the
end of 2012 from about 70,000 barrels per day 18 months earlier.
There are not currently any unit trains running from Western
Canada to the Gulf Coast, industry sources said.
"Rail is not a replacement for pipelines. It is going to be
a niche business," said Gary Kubera, the president of Canadian
chemicals manufacturer Canexus, which runs a rail terminal just
north of Edmonton that it is expanding so it can transport more
heavy oil to the U.S. East Coast, principally for the production
And the expense of getting the Canadian crude to the Gulf
would be greater given the additional 900 miles distance and the
heavier nature of the oil.
A standard tank car can carry about 700 barrels of light
oil, but the fuel wrung from oil sands is so dense that it must
either be diluted by about 20 percent or move in a specialty car
that can hold only about 550 barrels, according to Jarrett
Zielinski, an executive with Torq Transloading, a Canadian
company that advises oil sand producers on such shipments.
The logistical challenges to moving heavy crude by rail can
be overcome, industry officials and analysts say, but the
economics are not so clear-cut.
While the State Department says in the report that moving a
barrel of heavy crude through a Keystone pipeline would cost no
more than $10 a barrel, oil sand producers say they are facing
costs closer to $30 a barrel by train.
Those economics are tenuous, said Sandy Fielden, director of
energy analytics with RBN Energy LLC in Houston, who has studied
crude-by-rail. "If rail were such a terrific option now out of
Western Canada, why haven't more producers switched from
pipeline to rail?"
Gulf Coast refiners are specialists at turning heavy,
sulfurous crude from Mexico and Venezuela that arrives by tanker
into clean-burning gasoline for cars, so they are already
equipped to process Canadian oil sands.
The problem, analysts say, is that the Canadian crude will
have to be priced to compete against those shipments, as well as
crude arriving at the Gulf refineries from Saudi Arabia.
Mayan crude, the Mexico benchmark akin to oil sands crude,
was trading at about $106 a barrel in March, while the Canadian
product was valued at about $83 in markets north of the border.
Oil sand producers therefore had incentives to move a barrel of
their product to the Gulf Coast if they could do so under the
roughly $23 spread, said Fielden.
Midwest refiners and existing pipelines are able to absorb
oil sands production for now, the Canadian Association of
Petroleum Producers has said, but producers will face a critical
shortage of pipelines by the end of next year.
"The cheapest way to get from point A to point B is a
pipeline," said Raymond James analyst Steve Hansen. "That is why
Keystone has got to go ahead."
(Reporting by Patrick Rucker; Additional reporting by Jeffrey
Jones in Calgary; Editing by Tim Dobbyn)