A Keystone XL Assumption 900 Miles Long

The State Department’s new environmental impact statement on Keystone XL runs for nearly 2,000 pages, but one of its arguments is rightly seizing most of the public’s attention this week. Regardless of whether the $5.3 billion pipeline is built, the government’s reviewers say, oil sands development would not noticeably slow because producers could still make reasonable profits shipping fuel by rail.

Environmentalists who hope for a Keystone XL rejection that wallops the industry’s bottom line have cried foul. They see State enabling oil executives to have it both ways, claiming that heavy Canadian fuel will flow to market with or without KXL while also admitting that the pipeline’s fate will determine their future.

The industry’s position is not the transparent hypocrisy that climate activists contend. Pipelines like KXL are, as the president of oil-refiner Valero put it, “the cheapest way” to transport heavy crude, but not too cheap to rule out train or barge. Yet a close read of State’s new pipeline review — which I’ll refer to as the SEIS, for brevity’s sake — reveals that the government makes a notable, little-acknowledged logical leap.

Let’s call it the 900-mile assumption, because that’s the rough driving distance between Williston, N.D., the heart of the booming Bakken oil fields, and the center of Alberta’s oil sands region. 

In its analysis of how easily oil sands producers could scale up enough infrastructure to rail their fuel out of Alberta, State’s reviewers combine and conflate data showing oil-by-train traffic out of the Bakken with the same data for the oil sands. Anthony Swift of the Natural Resources Defense Council blasted the government for the move earlier this week, writing that

State’s new market analysis for rail does not explain why a rail boom has happened in North Dakota and has failed to do so in the Alberta tar sands.

To bolster his point, Swift notes that Canadian crude oil export by rail sat below 2,000 barrels in 2011. The State Department’s effective answer to that question comes in the chart below that lists oil-sands companies already planning to expand rail-shipping networks in 2013.

chartseis

At the higher end of the 2013 expansions, that progress would represent a 150,000-barrel-per-day uptick in oil sands transportation by rail. But not all of the Canadian crude run by those companies is the same kind of fuel that Keystone XL would send to the Gulf Coast.

For instance, Canadian reports indicate that Crescent Point’s oil-by-rail success has come courtesy of two rail facilities in Saskatchewan, where the Bakken extends and offers lighter oil than Alberta’s heavy deposits. In addition, Crescent Point’s two major rail terminals are far closer to North Dakota than to northern Alberta, meaning a shorter distance to ship.

In addition, Cenovus said it is using rail to ship “medium-light oil from conventional” fields to both the Gulf and an Eastern Canada refinery, the Calgary Herald reported. (In a story worth reading, because a Cenovus executive says “the big difference is only going to happen” in terms of higher prices for heavy fuel once Keystone XL is built.)

State projects in the SEIS that capacity for railing oil sands would have to grow by about 175,000 barrels per day each year “to keep up with (and prevent shut-in of)” production if no new pipelines are built. Based on an estimate of 200,000 barrels per day of Western Canadian oil riding the rails in 2013 — which comes courtesy of Calgary based oil-centric investment bank Peters & Co. — the government deemed that growth rate entirely possible if Keystone XL were denied.

In the fine print of that report, however, it’s noted that Western Canadian oil by rail was evenly split in 2012 between the lighter stuff of Saskatchewan and heavier oil-sands fuel. If we assume that 2013′s oil by rail will be evenly distributed as well, that amounts to a modest increase of 32,000 barrels per day in capacity (from 68,000 to 100,000). Compare that growth to the Bakken’s average annual oil-by-rail capacity rise of 255,000 barrels per day in recent years, as estimated by State, and you can see why Swift sees the assumption that Alberta will parallel the Bakken as fundamentally misguided.

All that said, Swift and Keystone XL critics are making their own huge assumption here — that oil sands producers will not be able to find an economical end-run around crowded pipelines, even with the gift of a product that’s sold for about 25 percent less than their nearest continental competitor.

There’s no test case: Either Keystone XL will get approved or it won’t. The tricky economics and politics of the issue were summed up well in an exchange yesterday between an investment analyst and the CEO of Baytex, one of Alberta’s key oil-by-rail shippers:

Baytex CEO: [T]he manufacturing industry has built the capacity to do that, it unlocked the Bakken. And it’s in the process of unlocking Western Canadian Select [a type of oil-sands fuel]. So there’s a lot of pie to be carved up between the various entities that participate in those efforts.

Analyst: I presume that when oil gets into the U.S. network, if you get it across the border via rail or something, it doesn’t necessarily have to be transported all the way down to the Gulf. I presume there’s lots of delivery points within that even the pipeline network, where it’s fairly fungible and you just have to get it to some place where it can be delivered and then moved by some other means …

Baytex CEO: Gord, that is a fair assessment.

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3 comments

  1. [...] Enbridge’s annual report discusses the controversial question of whether trains can pick up the slack of delayed pipeline projects when it comes to shipping [...]

  2. [...] so for lighter crude from the Bakken formation in North Dakota. But as energy reporter Elana Schor details here, a closer look at existing rail infrastructure suggests that the two aren’t strictly [...]

  3. […] but that price gap — which has propelled the oil-by-rail boom that the State Department controversially argues could take the place of pipe if KXL is not built — reached an eyebrow-raising low of $8 per […]

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