Vol. 18, No. 52 Week of December 29, 2013
Providing coverage of Bakken oil and gas

XL: pipe and rail?

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TransCanada considers rail as Keystone alternative from Canada to Cushing

Gary Park

For Petroleum News Bakken

If TransCanada ever decides to throw in the towel on Keystone XL, the announcement will be formal. But these days there are increasing reasons to interpret comments by Chief Executive Officer Russ Girling that the company is close to the breaking point with the Obama administration.

In year-end interviews, he has disclosed TransCanada is in discussions with railroads and oil producers about the possibility of moving oil sands crude from Alberta to Cushing, Okla., where it could enter the Gulf Coast pipeline, the southern leg of XL that feeds Texas refineries.

Girling also said Mexico’s plan to end its government monopoly on energy development could open the way for TransCanada to add oil pipelines to two natural gas delivery systems in Mexico.

In a less-than-subtle comment, he said TransCanada is unlikely to ever “stop pressing the pipeline option” to move 830,000 barrels per day out of Alberta and the North Dakota Bakken on Keystone XL.

“But there is a point in time at which we would consider a rail option. If we need to bridge with rail, we will bridge,” he told Canada’s National Post.

Environmental issues

On the upbeat side, Girling said he expects the imminent release by the U.S. State Department of its final environmental impact statement on the $5.4 billion XL project will show the northern leg of the system will have minimal environmental impact. That was the conclusion in a draft statement issued in March.

When the State Department issues its finding that will start a 90-day national interest determination, possibly setting the stage for President Barack Obama to decide by the end of March whether to issue a presidential permit.

Girling openly admits that he worries the environmental opponents of XL have already created a political tug-of-war over XL that could see the project suffer in the mid-term U.S. congressional elections.

Although critical of the safety aspects of moving crude by rail, he noted that there is unrestricted movement across the Canada-U.S. border, which could force TransCanada to make rail a big part of its future pending regulatory approvals for pipelines, which are now taking twice as long as previously because of the opposition.

Girling said crude-by-rail out of Western Canada is expected to reach 1 million bpd in 2015, more than double current volumes of 400,000-500,000 bpd.

Harold Hamm, chief executive officer of independent oil producer Continental Resources, which is committed to shipping on Keystone, told Reuters that his company and the U.S. oil industry no longer assume that XL will go ahead.

Continental has agreed to move 35,000 bpd on the route from the Bakken, but Girling was not prepared to concede the game to rail.

He also said TransCanada is thinking about completing parts of XL’s section north of Cushing, without crossing the Canada-U.S. border, to provide a link from the Bakken.

Otherwise, he is open to having discussions with environmental groups about their demand for reduced greenhouse gas emissions, noting that a shift to rail would actually increase GHGs.

However, Girling said “nobody will engage in a dialogue with me because (XL) is too big of a boon to them, for their ability to raise money. They'd rather keep this symbol.”

Opposition to rail

Aware of TransCanada’s rail gambit, environmentalists are preparing to fight any attempt to raise shipments of Canadian heavy crude across the border.

“Debating rail or pipeline is like debating which kind of poison you want,” said Daniel Kessler, a spokesman for the environmental group, adding there is a “substantive effort under way in many places to block rail.”

The organizations are taking aim at rail terminal projects in California, Washington State and elsewhere and applying pressure on federal regulators to require expensive retrofits of tanker cars to slow a scramble among oil producers to expand their access to rail.

They have already posted some success, blocking permits for two crude terminal projects at Grays Harbour, Wash., while demanding additional studies of the environmental risks of increased use of rail and barges.

Valero Energy’s plans to build a terminal at its Benicia, Calif., refinery to offload crude have been held up as city officials consider an environmental review.

Valero spokesman Bill Day said that rather than increasing GHGs, the terminal would displace the use of ships, which could improve the air quality, arguing the campaign against the plan is “misguided.”

The Sierra Club is also urging Washington Gov. Jay Inslee to prevent Tesoro and Savage Cos. from building a rail terminal at Vancouver, Wash., a project designed to mostly unload light sweet crude from the Bakken, although Sierra insists some oil sands crude from Alberta could be involved.

Heavy oil and rail

The Canadian Association of Petroleum Producers estimates that heavy oil makes up about 75,000 bpd of 175,000 bpd being moved by rail from Canada to U.S. refineries.

Rail projects in Western Canada could load as much as 450,000 bpd within the next year, although Goldman Sachs said a shortage of tanker cars could create a bottleneck in 2014.

In the event that XL is turned down by Obama, rail could significantly mitigate that decision, said the Royal Bank of Canada.

Philip Verleger, a Colorado energy economist, said environmentalists may have difficulty blocking rail projects because many are either additions to existing facilities or require only limited regulatory processing if they are located on industrial land.

Alex Pourbaix, TransCanada’s president of energy and oil pipelines, told a conference call earlier in December that the total rail capacity in 2015 could reach 800,000 bpd in Alberta, reinforcing the argument that the oil sands will be developed with or without XL.

TransCanada’s hunt for other capital investments has been spurred on by Mexico’s move to end the state monopoly of energy development and open its oil fields to foreign operators, Girling said.

If Mexico is able to reverse its flagging production it might also start exporting crude to Asia, prompting TransCanada to explore the construction of new oil pipelines in addition to the two gas delivery systems its owns in the country, he said.

“Companies like us can come in with our capital and our expertise and build the infrastructure (across difficult and remote terrain) to get crude to a place where it can be exported,” he said, suggesting India and China would likely be the primary destinations.

But Girling did not view a ramp up in Mexico as a threat to XL, adding “the market’s big enough for everybody.”

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