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Oil Companies Climb Aboard Potential Alternative To Pipelines

Moving crude oil by rail is nothing new; indeed, it's how the commodity was transported until the late-1800s before John D.

Moving crude oil by rail is nothing new; indeed, it's how the commodity was transported until the late-1800s before John D. Rockefeller came up with the idea of pipelines as an alternative, and today is still carried this way in parts of the world where pipelines don't exist.

Now several Canadian companies have started using rail as an alternative to pipelines and proponents say it's catching on.

"It's kind of going crazy," said Glen Perry, president of Altex Energy Ltd., which has partnered with Canadian National Railway Co. (CN) to promote the concept of moving bitumen by rail to create new markets for the hydrocarbon.

Canadian Pacific Railway (CP) is also getting a piece of the oil transportation pie.

The market has opened up "a fair bit" and interest in receiving bitumen where Canadian pipeline access currently doesn't exist has been expressed "from all over the place, really," said Perry. Buyers such as refiners and asphalt plants in places such as California, Texas, Louisiana and the East Coast have made proposals, he said.

Interest has grown in the past six months, he said. It's gone from producers saying they'll review the proposal to asking "Can you do it tomorrow?" he said. Perry estimated seven or eight companies are now moving their heavy oil by rail, five of them moving bitumen, but he would not disclose their names due to confidentiality agreements.

He guessed about 5,000 bbls per day of Western Canadian production is currently being shipped by rail.

"You keep bringing on supply and you don't build takeaway, it's inevitable what happens," said Perry. "It's just happened a lot quicker than we thought it was going to happen, maybe as a result of all the pipeline problems. We can't even take away as much oil as we thought we could."

CN's three terminals are not built for heavy oil so custom loading and unloading facilities are needed in Peace River, Fort McMurray and the Cold Lake/Lloydminster area, but their construction is proceeding slowly, he told the DOB. No shovels have hit the ground yet, he said.

Connacher Oil and Gas Limited has been transporting diluted bitumen (dilbit) by rail since the first quarter of this year to expand its markets and raise the price of its production, Pete Sametz, Connacher's president and chief operating officer, told the DOB.

Sametz said rail companies have been responsive to the company's needs. "It's another option, it's developing and it's something to watch."

He declined to say how much Connacher dilbit is being sent by rail, by which railway or where it is going, for competitive purposes.

"Dilbit by rail is still in its early stages but we are trying to develop markets for essentially moving raw bitumen to parts of North America and/or the coast that can take advantage of it," said Sametz. "We'd rather have our dilbit priced not on WCS [Western Canadian Select] but more related to the world oil price. Given that the pipelines have had apportionment and it's caused differentials to widen or be landlocked so we can't get the stuff out as easily as we could, then we would like to get our pricing as close to the refinery gate as possible based on some other marker than just the WCS."

He said Connacher has not yet sold any production offshore.

Possible markets for Canadian heavy crude oil and bitumen are the U.S. Gulf Coast (USGC), the California coast and the U.S. Midwest. Moving heavy crude and bitumen to the USGC makes a lot of sense now because that area's refineries could use it to replace its current, dwindling sources from Venezuela and Mexico, said Sametz.

Connacher had been using rail to transport asphalt to markets from its refinery in Montana.

"Rail can get you just about anywhere," Sametz told the DOB. "It's like the Harry Potter stairway. You get on the stairs at one end and they move to wherever you need to go. That's the beauty of the railway. You get on at one end here, with your bitumen or dilbit, and then you can end up in different places depending on what are the best markets."

Currently producing around 15,000 bbls of oil equivalent per day, mostly from near Fort McMurray, Connacher's volumes are not yet such that a pipeline makes economic sense so production has been trucked. Its long-term strategy is to use truck, rail and eventually pipeline, said Sametz.

"The issues Trans Mountain and Enbridge [Inc.] have had have forced smaller companies like ourselves to be nimble and develop other markets using rail," said Sametz.

Connacher is building a diluent recovery system at its Great Divide site to remove the diluent added as part of the treatment system, to make the bitumen ready for rail and more attractive to refiners, he said.

Rock Energy Inc. chief executive Allen Bey told a recent industry conference his company is sending 500 bbls a day of oil directly to USGC refiners from its rail-loading facilities in Lloydminster (DOB, June 16, 2011).

The company leased 30 rail cars to gain access to a wider range of markets for its Lloydminster heavy oil and is adding as much as $6 to $7 a bbl to the netbacks, Bey said.

CN has the rail while Altex is handling everything else: the terminals, loading and unloading, and putting producers and refiners together, explained Perry.

Altex looks after all the rail cars, Randy Meyer, CN's senior manager of business development, told The Canadian Institute's North American Pipeline Symposium in June. "You pay a toll for that, that's it, that's all and you deliver your oil to a terminal."

According to CN, it has been moving diluent, pipe, aggregate, steel, cement, sulphur and petroleum coke into and out of the oil producing regions of Western Canada and now it is prepared to transport from 1,000 to 200,000 bbls of bitumen per day from Alberta's oilsands to the USGC, the U.S. Midwest or Eastern and Western Canada.

Warren Chandler, regional manager of Western Canada public and government affairs, said CN has been testing concepts to move crude (i.e. heavy crude, light crude, pure bitumen) from Western Canada to various markets in the U.S. Since October 2010, it has been providing truck-to-rail transportation for Bakken crude oil, used as diluent for bitumen, at Wilmar, Saskatchewan.

Chandler would not disclose CN's customers, saying it was against company policy to discuss negotiations.

From October 2010 to June 2011, CN has moved more than 1,900 cars of freight from the Bakken formation -- more than 60 single cars of petroleum crude in large blocks loaded directly from truck to rail, said Chandler. Rail cars can carry between 550 and 680 bbls depending on the product and rail type. Pure bitumen in an insulated coal car, for example, has capacity for 550 bbls.

CN has direct access to the Louisiana Gulf Coast, and, through the company's rail interline partners or barge, can access the Texas Gulf coast.

Oilsands projects are all within about a 100-kilometre radius of the end of CN's network just east of Fort McMurray's Linton yard at the end of Highway 69. The yard is currently being used to truck in commodities such as sulphur, petroleum coke, and truck out products like heavy components for construction.

Trains have capacity for about 60,000 bbls of bitumen and do not need to run full. Shippers pay only for what they use, when they use it. According to CN, five trains can take the equivalent of a 400,000 bbls-per-day pipeline.

Meyer promoted rail as a complementary option to pipelines and part of a portfolio approach to market access. "When the type of oil that needs to go to a market changes, pipelines are dedicated to a certain type of oil and you're kind of committed, but rail is segregated each way so you don't have to worry about whichever oil you want to deliver," Meyer told the conference.

The network provides connections from Fort McMurray-area oilsands to upgraders in Alberta's Industrial Heartland near Edmonton and to the port in Prince Rupert where production can be shipped to Asian destinations such as Hong Kong, Shanghai and Tokyo.

Rail can get bitumen from Fort McMurray to the USGC in 10 days versus 50 or 60 days via pipeline, he said.

Shipped by rail, bitumen does not have to be diluted, he added. "In fact it's better if you don't because there's no point. Not having to dilute bitumen with diluent makes transport safer because in the case of a break or crack it won't escape into the environment. At ambient temperature it doesn't flow," said Meyer.

Rail shipments of bitumen use existing infrastructure, avoiding the necessity of getting permits and approvals that proposed pipelines such as Northern Gateway and Keystone XL are going through, he said.

Rail also offers less risk, as much of the capital has already been spent, and it does not require 20-year take-or-pay commitments or $10-billion investments. Infrastructure commitments would likely consist of $5-million or $10-million terminals, he said.

A scalable transportation option, rail lowers the risk of project development, he said. Steam-assisted gravity drainage producers run the risk of having fields that don't perform to expectations while having already built pipelines. That risk does not exist with the rail system. "You scale into what you need."

Rail also offers security, he said: If something goes wrong with a pipeline and there is an interruption, producers have no alternative mode of shipment. Meyer suggested they use rail as part of their portfolio by having some component of their production moved on rail so that they can "dial it up or dial it down depending on market demand."

CN is moving more than one million tonnes of petroleum coke from upgraders and about 250,000 tonnes of sulphur out of its Alberta terminal to the Port of Prince Rupert in British Columbia and as far south as Florida.

Meyer indicated a slide depicting CN's coal terminal at Prince Rupert, which receives coal trains carrying the volumetric equivalent of 750,000 bbls per day of coal, and the nearby road/rail corridor. Also near the terminal is the site of a future potash terminal.

"This is going to accommodate up to nine high-speed, high-throughput tracks and you can actually put tanks right in here," said Meyer. "We can connect. We're already in Prince Rupert; we're already at the West Coast."

Enbridge has said its pipeline to the West Coast will cost $5.5 billion, he said. "Of that ... $5 billion is for the pipeline alone and the half-billion is for the terminal. If you think that nominally the tanks and connections to vessels and such are the same for rail versus pipe, you'd have to say then we're about one-tenth the cost to establish a West Coast terminal. Today we are looking at that."

He said CN is moving intermodal containers from Prince Rupert into Chicago in 100 hours. "We can move product very fast if it's in that type of unit train service."

Enron Oil and Gas is moving about 70,000 bbls per day by way of about three or four trains per week through Saskatchewan, said Meyer, adding North Dakota Bakken producers are trucking north up to CN's facility.

PADD III (USGC), the largest refining location in the U.S., contains between one million and 1.5 million bbls a day of coking capacity within a 50-mile radius of CN's facilities where the company's trains interchange with connecting carriers, said Meyer.

"It's kind of amusing when I read in the paper that there's this angst and gnashing of teeth about Keystone and I'm going, 'My goodness, we're already there.' We can go there and we are. We are shipping product there," he told the conference.

CN is also serving PADD V. "No surprise, right? Because that's where the money is, that's where the value is. That's where the differentials support us. And we're even now talking about going into as far as PADD I -- the U.S. East Coast -- so it's quite something," said Meyer.

CN is continuing to test the re-loading of condensate, he said. "That's the nice thing about rail, is you can re-load your condensate in the same car. ...So you can bring it back, and when you bring it back, not even Southern Lights [pipeline] can compete with our tolls."

Even if rail cars return empty, rail is still less expensive than pipelines, he said. "We did a study where we took the American Association of Railway's published rates, which averaged out all the traffic that moves and all its products. That average ... is about 16 per cent less than pipeline costs."

According to CN, rail emits six times less greenhouse gases than heavy trucks. Meyer said that's due to its fuel efficiency. CN can move one tonne of freight 197 kilometres on just one litre of fuel. "On a grams per bbl-kilometre basis it's about 2.7 times less, which means if you were to take the nominal starting capacity of Keystone, 400,000 bbls per day, and put it onto rail, you would mitigate almost the entire output of Syncrude's greenhouse gas emissions," he said.

Furthermore, regulatory requirements are simplified by using rail, he said. "If we're only looking at adding rail cars there is nothing [needed for regulatory approval]. We just put them on and away you go. If you're looking at significant new terminals then of course you'd go through the same permitting process as anyone else would. If your track is going beyond 100 metres of our existing right of way then we have to go through the Canadian Transportation Agency for permitting and that process is similar to the [National Energy Board]-type process although somewhat easier."

Asked about public opposition to transporting oil by rail, Meyer said, "We started moving condensate through Kitimat and there wasn't a peep. Now, if you're going to move crude and you're going to advertise that I'm not naïve enough to say that you're not going to have opposition but the opposition then comes to that port and that tankage area that you're going to have to build and in the case of Prince Rupert, that's a federal port which has a whole different regulatory regime than anywhere else, but you narrow your scope. You're not going through a bunch of bands and such to get there. We can get there and increase our traffic with no problem."

He said each train can carry about 10,000 tonnes, or about 55,000 bbls a train. "If you're looking at 10 trains a day, which is one every two hours, that's about 550,000 bbls a day. That's a lot. You can put a lot of traffic on there. And don't forget, a barrel on rail is not a barrel on pipeline because a barrel nominally is a 30-70 blend [of oil and diluent], right? ...We run about 135 trains a day in Western Canada. CN runs 90 trains a day just of coal so these things are easily possible."

As another benefit, rail is very safe, he said. Rail cars are double hulled. "If you were to punch one car of pure bitumen open and shake it out you'd get 540 barrels out, that's it. Even if you do have an incident it's limited. It's compartmentalized. Pipelines use pumps and it comes out pretty quick."

CP has been transporting energy products like diesel, propane, ethanol and fuel oil to various North American markets for many years and has been moving crude oil for about a year. It intends to grow that side of its business, said a spokesperson.

"Our company has conducted internal research and analysis that shows energy remains a growth area for our company, including with the moving of crude oil," said Ed Greenberg, CP spokesman.

Oilsands upgrading is a significant rail market for products that are not traditionally shipped by pipelines, including petroleum coke, sulphur, asphaltenes and various hydrocarbon liquids and gases, said Greenberg. "Our Scotford transfer facility and our South Edmonton transfer facility can accommodate aggregates, pipe, dimensional loads and some liquids. As well, our company has secured land for future expansion so we are in position to respond to growth in the oilsands."

He said CP has more than 100 transload facilities at yards across Canada and the U.S. and is the only North American railway to serve the Alberta Industrial Heartland, the Bakken formation and the Marcellus shale.

CP's shipments of oil from North Dakota on its Soo Line mainline from Canada to Chicago jumped to about 8,000 cars a year, up from 500 the year before, and the company foresees that growing to between 30,000 and 35,000 cars per year (DOB, June 20, 2011).

Alaska may be an option in future. A Vancouver-based management consulting firm, G Seven Generations Ltd. (G7G) is proposing a new railway to carry oil from the Alberta oilsands to an existing marine oil terminal at Valdez, Alaska (DOB, June 29, 2011).

"It's an alternative -- a viable alternative," G7G director Matt Vickers told the DOB.

G7G has not yet received any reaction to its proposal from oilsands companies.