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Irving Oil workers inspect rail cars carrying crude oil at the Irving Oil rail yard terminal in Saint John, New Brunswick, March 9, 2014.

DEVAAN INGRAHAM/REUTERS

Canada has staked its future on the oil sands. In November, Report on Business magazine together with Thomson Reuters examine what that means both at home and abroad. Read more from the issue at tgam.ca/oil.

Lac La Biche is, quite literally, a town divided. Located three hours by car south of Fort McMurray, the Alberta hamlet got its start as a fur-trading post in the late 1700s. Today, it lies smack in the middle of the bitumen trail that takes heavy crude from the oil sands and transports it south, to refineries across the continent.

It's not uncommon to see mile-long trains of tanker cars cutting through the centre of Lac La Biche, carrying tens of thousands of barrels of crude to market, snarling traffic as they go. And it's not about to stop. Former mayor Aurel Langevin, who ran the town from 2012 to this past spring, estimates that, a year ago, Lac La Biche averaged three oil trains a day. That figure is expected to hit about eight per day, carrying upward of 100 tankers each, in the year ahead.

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This new reality for Lac La Biche, and thousands of other towns across North America, is symptomatic of the critical–and costly–transportation bottleneck that now hangs over the oil sands. The lack of options for transporting Alberta's heavy crude south, to oil refineries on the U.S. Gulf Coast, means it is sold at a significant discount to the benchmark West Texas Intermediate.

TransCanada Corp.'s $5.5-billion Keystone XL pipeline was supposed to be a key part of the solution–until it became a symbol for the debate over whether new pipes should be built anywhere in North America.  And Keystone isn't the only stalled project. Enbridge Inc.'s Northern Gateway pipeline was originally–perhaps optimistically–slated to be operational by 2018. Project manager John Carruthers told investors in September that the company's opportunity to hit that deadline is "quickly evaporating" as Enbridge struggles to secure agreements with B.C. aboriginal groups, who are concerned about the impact the pipeline will have on their land. The $7.9-billion project would ship up to 535,000 barrels of oil sands crude per day along 1,200 kilometres of pipe to a port in Kitimat, B.C. The oil's destination: Asia–via 220 tanker trips annually through the Douglas Channel, an important feeding ground for humpback whales.

Northern Gateway has been approved by a panel of federal regulators, but they attached 209 conditions to the proposal, and analysts now wonder if Enbridge will be able to satisfy them all in the next four years, let alone get the thing built. In the meantime, the company has given ownership stakes to 26 aboriginal groups, worth about $300-million, in exchange for the right to build through their land. But with many more deals yet to be negotiated, the goal of shipping Alberta oil to Asia by the end of the decade looks doubtful.

Kinder Morgan, meanwhile, isn't faring much better. Its expansion of the Trans Mountain line between Edmonton and Vancouver–worth $5.4-billion over the next four years–has been stalled amid concerns over routing, environmental impact and tanker traffic in the environmentally sensitive Burrard Inlet.

With the way west effectively blocked, at least for now, Trans-Canada is pushing its Energy East pipeline, which would carry 1.1 million barrels of crude from Western Canada to Quebec and Saint John. At a starting cost of $12-billion, it would be one of the largest energy projects in North America. But it, too, faces regulatory hurdles and pushback from stakeholders along its 4,600-kilometre route.

The railways have enthusiastically stepped into this market void, with 100-tanker trains moving barrels of crude from both the oil sands and North Dakota's Bakken fields to refineries on the Gulf Coast and on Canada's East Coast. Between late 2011 and mid-2013, Canadian oil shipments by rail grew from 100,000 barrels a day to roughly 300,000. A recent U.S. State Department report says crude shipments by rail out of North Dakota ballooned from less than 100,000 barrels a day in late 2010 to 750,000 at the end of 2013.

Sensing an obvious shift in the market, pipeline companies are hedging their bets in the train business too, with Kinder Morgan partnering with Imperial Oil to build a rail-loading facility for crude in Edmonton that will move 100,000 barrels a day.

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But the oil-by-rail solution to the pipeline crunch is at its own crossroads. The Lac-Mégantic disaster forced a regulatory rethink of the nascent yet booming industry, and the reverberations from the tragedy will be felt in the rail sector for years to come, as regulators work through tougher rules on shipping volatile light crude by rail.

For the oil sands, the concerns are less pressing, since heavy oil hardens when shipped in rail cars. Railway officials have compared it to pouring molasses in the wintertime, and suggest it is unlikely that oil sands crude would explode like the Bakken light oil in Lac-Mégantic did. But "unlikely" is not the same as "impossible."

Beyond safety, rail is not immune to the environmental concerns that have stalled pipelines. A study by the New York-based Manhattan Institute found that between 2005 and 2009, pipelines had 0.61 spills per billion barrel miles, while railways had 20.5 spills. However, the American Association of Railroads says that trains leaked 9 per cent less oil per billion miles between 1990 and 2009. U.S. environmental activist Read Brugger sums up that debate as: "Pipelines spill more, rail spills more often."

But to frame the debate as rail vs. pipeline is missing the bigger point. With billions of dollars of infrastructure–and investors like Warren Buffett putting investment dollars into oil-by-rail terminals–the trains will keep running, regardless of whether additional pipeline capacity comes online. And the longer the delays for Keystone XL et al., the larger the share of oil transportation rail will claim. Which means those mile-long trains will keep right on chugging through towns like Lac La Biche.

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