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A CP petrochemical train heads west through the Rocky Mountains

The Canadian Press

Canada's two major railroad companies have begun making regular shipments of oil, in a move that changes how Canadian crude moves to market - and opens the door to new destinations for energy exports, including Asia.

Although pipelines continue to carry the overwhelming majority of Canada's oil production, both Canadian National Railway Co. and Canadian Pacific Railway Ltd. have begun using their rail networks to deliver crude, moving past technological tests into actual commercial service.

The idea of a "pipeline on rails" has been quietly pursued by both CN and CP in recent years. The railways believe their tracks can divert oil to the best possible markets at any given time, freeing energy producers from the constraints of pipelines, which are built to last for decades and as a result cannot quickly be changed to accommodate market shifts.

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The idea has gained speed in the past year, as oil prices soaring toward $100 (U.S.) a barrel prompt a spike in crude output, creating new volumes that railroads, which don't have to wait years to build new capacity, can spike. And the ability to transport oil by rail is now building a competitive threat to Canada's pipeline companies, which have long been the dominant carriers of crude but are working to expand into markets - such as Asia and the Gulf Coast - that are already well-served by rail lines. Rail could, analysts say, prove a viable alternative to major new projects such as Enbridge Inc.'s $5.5-billion Northern Gateway, which would deliver Alberta crude to the B.C. West Coast.

Though rail deliveries remain modest for now, the ability to deliver crude by track promises to transform the way oil moves inside this continent, and how it reaches untapped customers.

"Our unparalleled market reach and flexibility, we feel, gives shippers, buyers … and refineries new options to explore and new ways to reach different markets," James Cairns, vice-president of petroleum and chemicals with CN, told an Insight Information conference in Calgary last week.

The company has begun sending oil sands bitumen to California; heavy oil from Cold Lake, Alta., to Chicago and Detroit; and crude from the Bakken, a fast-growing play in southern Saskatchewan, to the U.S. Gulf Coast. Though rail does not have the same reach into production fields as pipe - indeed, rail cars are typically loaded and unloaded by truck, which is costly - CN boasts that its tracks lie within 80 kilometres of five million barrels a day of refining capacity, which is more than double Canada's entire U.S. exports.

For CN, the Bakken trade alone is now filling 250 to 300 rail cars a month; altogether, the company is moving roughly a unit train worth of crude per week. A unit train typically consists of 80 to 150 cars; each car can hold 550 barrels. That means CN is carrying, at most, just over 10,000 barrels per day, far less than the two-million barrels that pipeline company Enbridge Inc. hauls every day.

And both Enbridge and rival TransCanada Corp. are aggressively pursuing those areas that rail is now tapping. TransCanada, for example, recently signed commitments for 65,000 barrels per day of crude shipments out of the U.S. Bakken play. Enbridge is also spending heavily to build into the Bakken, whose lack of pipeline capacity has opened a window for the railroads. If the pipeline companies are successful, the Bakken rail exports could be temporary.

But CN and CP believe their Bakken trade is just the beginning. CP, for example, now runs 80-car unit trains every week out of the U.S. Bakken, a trade that is "ramping up," according to Stephen Whitney, the railway's vice-president of marketing and sales in agri-business and merchandise.

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"It will certainly grow to be a multiple-train" weekly business, he said.

CP has also assembled a right-of-way that allows it to lay track to new oil sands processing facilities, called upgraders, northeast of Edmonton. If it builds there, it will have direct access to a major supply source.

"We think that oil moving within North America is a key opportunity," Mr. Whitney said.

"The key thing for rail in our mind is you already have a network and the infrastructure in place," he said.

And rail offers several advantages. Because tracks go where pipes don't, oil producers can use rail to send product to refineries in, for example, California. They can also better react to pricing conditions. If crude is selling for more on the West Coast than the Midwest, for example, rail offers the ability to "dispatch" loads to different destinations.

Rail cars can also ship pure bitumen, the very heavy crude produced in the oil sands. Bitumen is so thick that it needs to be mixed at about a 70-to-30 ratio with a thinner hydrocarbon - called diluent - to flow in a pipeline. Diluent then needs to be returned to the oil sands, creating substantial additional pipe costs. Rail cars, which are already used to transport asphalt, can take undiluted bitumen.

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"That creates a real economic advantage when comparing rail," Mr. Cairns said. If you factor in the cost of piping diluent, he added, "I can tell you that I haven't come across a pipeline public toll that rail wasn't cheaper than - if not significantly cheaper than."

What rail doesn't have is good systems for handling large volumes of oil, although both companies are spending to develop that. CN is preparing to deploy "rapid deployment units" that cut in half the 45 minutes it currently takes to load a single tanker with crude. It has also begun looking at ways to load oil directly from rail cars onto ships, a step that could make it far cheaper, for instance, to open a crude trade between the oil sands and Asia through ports like Prince Rupert, B.C. Chinese companies have already expressed interest in such movements.

As for cost, railroads have typically been viewed as more expensive than pipe - and both CN and CP acknowledge they can't compete with pipe that has already been built.

"There's a lot of talk about is it pipe? Is it rail?" Mr. Cairns said. "Our view is pretty simple. It's a big pie. … It's not either or. It's maybe both."

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