North American pipelines for carrying oil and natural gas used to be environmentally friendly and biodegradable. That's because the first ones in the 19th century were made from hollowed-out pine logs. After chiselling out the inner diameter, carpenters made male and female connectors at the ends to fit the log segments together. Fitted joints were tightened with metal bands to prevent leakage and breaks.
Although some wooden pipelines in the United States were up to 40 kilometres long, there were many problems, not the least of which was rotting logs. So pipelines didn't gain favour until welding metal tubes was perfected in the early 20th century. Up to then, stranded natural gas was mostly blown into the atmosphere and oil was transported by a combination of horse-drawn carriages and railway cars.
Back to the future: Canadian pipeline applications are gathering moss and greater quantities of oil are finding their way to refineries on wheels. The list of new projects to build rail car loading facilities is growing by the week – about 300,000 barrels a day of new capacity has been proposed just in the past few months. Table 1 (see rail terminal infographic sidebar) shows our updated list of publicly announced projects that have been ticketed to proceed.
If all the facilities in Table 1 are built, the cumulative capacity addition by 2015 is expected to be over 700,000 b/d. That's pretty close to the proposed volume of the Keystone XL pipeline.
In their competitive spirit, rail transport salespeople are offering oil companies more than just a straight alternative to pipelines. Their brochures and websites claim two important selling features: faster time to market and greater access to refineries.
Oil flows down a main pipeline at between six and eight kilometres an hour, while a unit train barrelling down the track averages around 28 km/h. For a producer, getting oil to a refinery four times faster means getting paid sooner. This is not a trivial point in today's capital intense oil field environment where cash flow is paramount.
Leaving the contentious safety debate aside, pipelines are more cost efficient, silent and direct, but those benefits also mean they typically lead to a constrained customer base; in other words, a producer's oil gets channelled to a limited number of refineries. A small set of customers can limit competition and lead to suboptimal pricing when demand from one suddenly falls off. For example, Canadian producers suffer steep price discounts – and millions of dollars of losses – when key refineries go offline for maintenance or accidental shutdown. U.S. railway companies such as Burlington Northern Santa Fe are offering Canadian producers access to "more than 50 destinations that serve inland and coastal refineries and ports."
Although slow to get approvals, we believe more pipelines to take away Canadian oil will get built over the course of the decade (the uncertainty lies in knowing which ones will get the green light). In the meantime, railways are filling in capacity gaps and also serving customers an important set of new benefits. Within five years, there will be greater optionality, a much more efficient market for all grades of crude oil, and far less chance of intra- and intercontinental price discounts. The biggest beneficiaries of the evolving North American oil transport systems will not be the rail or pipeline companies, but the producers.
In a world where unintended consequences are commonplace, it's paradoxical that anti-pipeline efforts for derailing Canadian pipelines are only serving to make the oil producers stronger.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
Peter Tertzakian