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Keystone indecision spurs TransCanada to study rail alternative

The Keystone oil pipeline is pictured under construction in North Dakota.

Reuters

TransCanada Corp. is taking steps to use rail to ship Alberta oil sands crude across the U.S. border to reach the completed southern section of Keystone XL, a move that amounts to an end-run around the Obama administration's continuing delays on the controversial pipeline.

While presidential approval is required for a pipeline crossing an international boundary, shipping Canadian oil to U.S. markets by rail requires no green light from U.S. President Barack Obama.

TransCanada CEO Russ Girling, who was in Washington, D.C., on Thursday to meet with business leaders and media, said customers have asked the company to consider moving the oil south by rail.

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"Our customers asked whether we would explore with them potentially building rail-car loading facilities at a place called Hardisty, [Alta.,] which is the initiation point of the current Keystone XL project, and we've said we will do that, and we'll do it expeditiously," Mr. Girling told The Hill, a U.S. political website in Washington. He made similar comments on the sidelines of a conference in New York a day earlier.

The latest delay in deciding whether Keystone XL can proceed likely pushes the decision until next year, after November's mid-term elections and the ruling in a court case on whether TransCanada has a legal route through Nebraska.

Shawn Howard, a spokesman for TransCanada, confirmed to The Globe and Mail that the company is "looking at how to modify existing contracts with our customers to allow for rail shipments as we wait for U.S. permits approving the construction of Keystone XL."

TransCanada and oil producers maintain that North American oil production will continue to increase no matter what, and without Keystone, more oil will be shipped by rail and other means. Major Canadian oil sands players such as Cenovus Energy Inc. and Suncor Energy Inc. are increasingly relying on rail to get their product to U.S. markets. At the same time, environmentalists say rail is too expensive to be a true pipeline substitute.

"Your choices aren't 'leave the oil in the ground and move to alternative energy,' the choices really are 'rail or pipeline,'" Mr. Girling told The Globe's editorial board this month. "Pipeline, by far, is the best alternative."

Keystone XL has become a cause célèbre in U.S. politics, with environmentalists saying a rejection would demonstrate U.S. leadership on climate change by stifling growth in the oil sands. In Canada, Prime Minister Stephen Harper – who once called approval a "no brainer" – has expressed frustration over the glacial pace of the administration's decision-making.

Still, shipping large volumes of Canadian oil sands crude more than 2,000 kilometres from Hardisty, in central Alberta, to Steel City near the Nebraska-Kansas boundary and terminus of the southern and completed section of Keystone XL would also require large numbers of scarce tank cars.

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Keystone XL is intended to ship about 800,000 barrels of oil daily. At least 10 dedicated 100-tank-car oil trains a day would be required to deliver similar volumes.

Mr. Girling said even if rail fills the gap pending an eventual approval of Keystone XL, big oil shippers would prefer a pipeline. "Even if we build a rail solution, they would give up that in a heartbeat if they could put it in a pipeline," he told The Hill.

But TransCanada's Mr. Howard also said consideration of a rail bridge was at an early stage. It remains to be determined whether the costs of building facilities for loading and unloading and the availability of large number of oil trains would make it economically feasible.

"It is too early to know exactly what it will cost or what all will be involved," Mr. Howard said in an e-mail. "Some of our customers may have existing relationships in place with rail companies, while others do not."

Rail exports made up less than 5 per cent of Canada's 2.6 million barrels a day of crude exports in 2013, and pipelines are still the method of choice for moving oil. However, National Energy Board figures released earlier this year show that crude-by-rail exports continue to ramp up. In 2012, Canada exported 16.8 million barrels of oil by rail. In 2013, that number hit 46.3 million barrels.

Oil exports shipped by pipeline and tanker – and a small amount by truck – have also increased, but not as dramatically.

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With a report from Kelly Cryderman in Calgary

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