President Obama's decision to reject the Keystone XL pipeline Friday could come with a heavy side of tank cars. Canadian energy companies need about a dozen crude-laden trains each day to replace the volume of oil that could have been transported through KXL.
Now that TransCanada Corp.'s Alberta-to-Gulf-Coast pipeline has been denied, however, it's clear that the contest between KXL and railroads in Canada's western oil patch wasn't a zero-sum game.
Rail shippers could see a modest boost from the pipeline's defeat, but analysts say Canada's crude-by-rail business must first overcome unfavorable price spreads, potentially burdensome new regulations and below-$50-per-barrel oil.
"Keystone wasn't going to come online until 2018 anyway, so current dynamics around [rail] terminal capacity, today's pipeline capacity and whether there are enough rail cars, those are conditions that are present now," said Graham Brisben, CEO of PLG Consulting, a freight logistics research and advisory firm. "Keystone XL doesn't really affect what's happening right now in terms of crude takeaway."
Over time, Brisben said the 830,000-barrel-per-day pipeline's rejection could "sustain the opportunity" for rail shippers.
"Crude-by-rail could certainly fill the void -- it's just a matter of whether it's economically attractive to sell those barrels on the Gulf [of Mexico] versus other supply sources," Brisben said. Currently, refiners along the U.S. Gulf Coast can fetch Mexican Maya crude, for instance, at cheaper prices than buying and railing down Alberta's benchmark heavy crude, Western Canadian Select.
Bridget Hunsucker, publications director at energy research firm Genscape Inc., said Friday that Keystone XL's rejection "could be a tailwind for Canadian crude-by-rail developers, who have recently faced challenges associated with the narrowing of key price spreads."
"Though rail transport is relatively expensive compared to pipeline, as Western Canadian crude production grows, rail should become more key to moving heavy crude supplies to market," she said. "This is especially true if available pipeline capacity does not keep pace with output."
That's in keeping with U.S. State Department findings. The agency examined various what-if scenarios for the pipeline as part of its yearslong review of the project. In 2014, the State Department published an environmental impact statement that said rejecting TransCanada's plan wouldn't have a big impact on Canada's oil sands sector, due to the availability of alternative transport options for the crude, including rail.
The State Department stood by its original assessment Friday in laying out its case that KXL wouldn't be in the U.S. national interest. That record of decision said that there is already 775,000 barrels per day of rail-loading capacity for crude from western Canada. In a conference call with reporters, a State Department official added that "I would anticipate that there could be an increase of transport by rail."
The finding came with a major caveat, however.
"The extent to which rail transport will actually occur ... or would prove to be a major form of transport for [Canadian] crude to the United States in the long term, remains uncertain," the State Department said.
In the same analysis, the department went on to conclude that "since [oil sands] production remains uncertain post 2018, the corresponding amount of transportation infrastructure also remains uncertain."
Crude-by-rail shipments moved around 200,000 barrels per day from western Canada to the United States last year, according to estimates from global consulting and research firm IHS Inc. Only a portion of that Canadian oil went all the way to the Gulf Coast, where the southern leg of KXL lets out.
If no alternative pipelines, such as TransCanada's Energy East line or Kinder Morgan's Trans Mountain expansion, earn approval, "basically, it's the end of growth in the tar sands," said Lorne Stockman, research director at Oil Change International. "Under the current oil price trajectory, [producers] can't afford the extra cost of rail -- it doesn't give them the kind of returns that they would need to greenlight new projects."
"You can't replace something like the Keystone pipeline with rail -- the economics just do not add up," Stockman said.
The U.S. Department of Energy is also unsure about the prospects for crude-by-rail picking up KXL's slack. The recent decline in oil prices has made the issue "more complicated," according to DOE comments filed with the State Department earlier this year.
"With sustained lower oil prices, margins could be squeezed to the point of unprofitability and additional expansion or greenfield [oil sands] projects could potentially be shut in," DOE observed.
By some accounts, railroads including the Canadian National Railway Co. and Canadian Pacific Railway Ltd. are fighting to hang onto their small but lucrative stake in the oil business. Reuters recently reported that Canadian railroads have slashed rates in response to the oil price slump in a bid to secure more volume.
Representatives from CN and CP declined to comment on possible discounts for oil shippers. Regarding KXL, CP spokesman Jeremy Berry said that "should demand to move crude-by-rail increase or decrease over time, CP is well positioned to safely move crude in line with the needs of our customers."
In a recent conference call with investors, CP's president and chief operating officer, Keith Creel, called "some strategic pricing" for crude-by-rail "the right thing to do."
He also alluded to the rivalry between railroads and other modes of energy transport.
"I don't see rail as my competitor when it comes to crude," he said. "Our primary competitor is the pipeline."
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