Oil rides the rails

Train delivery is proving to be more flexible than pipelines for crude

Fraught with lengthy construction timelines, environmental scrutiny and bottlenecks, oil pipelines are beginning to take a back seat among producers to a more flexible and old-fashioned delivery system: railways.

“It is rail that is proving to be the viable alternative and the flexible solution to oil pipelines,” says Jason Konzuk, an oil and gas analyst with Dundee Capital Markets. “And this trend will continue for a while.” In a recent report, Konzuk said that U.S. petroleum rail carloads increased by 64 per cent over the past year thanks to the Bakken oil play in North Dakota. In Canada, where the fates of the Keystone XL and Northern Gateway pipelines—needed to move crude from the oilsands south to U.S. markets and West to Chinese markets, via British Columbia—are still up in the air, rail carloads increased by 29 per cent over the same period.

Though rail is more costly per barrel than pipelines, producers are finding it makes economic sense to invest in the infrastructure to load and off-load railway shipments. The rising volume of heavy oil produced in Western Canada is clogging up existing pipeline capacity. That is creating a sizable price gap between Western Canadian crude prices and other crude grades worldwide. Western Canadian heavy oil, for instance, is selling for between $15 and $40 less per barrel than a comparable grade found in Mexico, a discount large enough for producers to justify the $4 to $10 per barrel extra it costs to ship to their refineries via rail rather than pipeline. Producers in turn get increased market flexibility and shorter delivery times.

Konzuk’s report said Canadian Pacific anticipates crude oil shipments will rise from 13,000 carloads in 2011 to 70,000 carloads in 2014 and CN shipments will climb from 5,000 carloads in 2011 to over 25,000 carloads this year. One oil firm, Calgary’s Gibson Energy Inc., recently expressed interest in building a train loading facility near Hardisty, Alta.—a key departure point for crude from the oilsands. It would allow the company to bypass the pipeline bottleneck at the oil hub in Cushing, Okla., and move up to 60,000 barrels of oil per day to markets across North America.

Looking for more?

Get the Best of Maclean's sent straight to your inbox. Sign up for news, commentary and analysis.