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TransCanada Corp.’s Keystone XL pipeline.Nathan VanderKlippe/The Globe and Mail

The long-delayed Keystone XL pipeline has been tangled up in environmentalist opposition and political wrangling. Now some energy experts say the oil market is moving on without it.

A combination of growing oil-by-rail capacity and other new pipelines is increasingly providing alternatives to Keystone XL, just as Ottawa redoubles efforts to persuade U.S. President Barack Obama to green-light the project.

As Washington's approval process for the contentious TransCanada Corp. project plods into its sixth year, several other options are emerging for Canadian energy companies to get their crude to Gulf Coast refineries and elsewhere, said Phil Skolnick, a New York-based analyst at Canaccord Genuity.

"The oil will find a way down, and if Keystone gets delayed, at the minimum you still don't have a pinch point because this rail capacity should be built by that time anyway," Mr. Skolnick said. Energy investors, nervous about Canadian oil producers' access to markets, should be encouraged, he said.

"The main message is that Keystone XL, and the fear of rejection, has been the overhang on these [Canadian energy] stocks. Because of all the rail advances that are coming on, that should no longer be a fear," he said.

Transport problems and heavy oil pricing have weighed heavily on Canadian energy stocks. Large producers are down 14 per cent since the end of 2010, while their U.S. counterparts are up 38 per cent. It is time to reassess, Mr. Skolnick said.

Western Canada Select heavy blend, a benchmark domestic oil, sank to as much as $40 a barrel below West Texas intermediate in January, but recovered throughout this year, with traders citing increasing rail shipments as a factor. WCS oil for October delivery sold for $24.25 a barrel under WTI on Monday, according to oil broker Net Energy Inc.

Keystone XL continues to have strong industry support. Cenovus Energy Inc. has bolstered its options for moving crude, including by rail, but it believes the pipeline "is in the best interests of our industry and all North Americans," spokeswoman Rhona DelFrari said.

Valero Energy Corp., which runs refineries in the United States and Quebec, said its desire for Keystone hasn't diminished. Any notion that the pipeline is not needed is "overblown," spokesman Bill Day said. "We remain very upset that it has not been approved yet."

Environmental groups are dead set against Keystone XL, which would extend 1,897 kilometres to Steele City, Neb., from Hardisty, Alta. They argue it would foster a massive expansion of the Canadian oil sands projects and, hence, carbon emissions. Kate Colarulli, a director at the Sierra Club in the U.S., said there's a group of oil industry supporters who are trying to play down the significance of Keystone because they believe it will push Mr. Obama toward approval.

What is not clear is the appetite among Americans for exponential growth in shipments of crude by rail, especially after the disaster in July in Lac-Mégantic, Que. There, an unmanned oil train careened down an incline and exploded, killing 47 people and wiping out many buildings downtown.

Still, a North American backlog of new tanker cars should start being delivered in 2014, and loading terminal capacity is expanding quickly, showing that oil-by-rail is more than a stop-gap measure for an industry waiting for pipeline aprrovals, Mr. Skolnick said.

He also pointed to the major retooling of BP PLC's Whiting refinery in Indiana, which, when all the new processing equipment is up and running next year, will boost demand for Canadian heavy oil in its tried-and-true U.S. Midwest market by a hefty 340,000 barrels a day.

Other pipelines will combine with rail to boost excess export capacity by 800,000 barrels a day into 2018 even without Keystone XL, Mr. Skolnick said. They include the southern leg of Keystone between Oklahoma and Texas, which has its approvals and is expected to start up later this year, and Enbridge Inc.'s Flanagan South line, also aimed at increasing access the U.S. Gulf, by mid-2014.

TransCanada spokesman Shawn Howard said the report was produced with an eye to the short-term effects to oil sands operators, and their stock prices. It does not address the long-term need for Keystone, or the impact of moving more than one million barrels a day by train, "because the cost of moving oil by pipe is about half of what it is to move by rail – let alone how much safer it is to move oil by pipeline," Mr. Howard said.

Oil producers remain committed to the proposed Keystone project, having signed binding contracts that span as long as two decades. "Our customers have not wavered," he said.

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