Oil Aboard! Tar Sands Industry Eyes Nexen Rail Alternative to Stalled Pipelines

Sat, 2013-02-16 10:00Ben Jervey
Ben Jervey's picture

Oil Aboard! Tar Sands Industry Eyes Nexen Rail Alternative to Stalled Pipelines

Facing enormous opposition to the proposed Keystone XL and Northern Gateway pipelines, Canada’s tar sands industry is taking to the tracks to get its sticky bitumen to China. Canadian and Chinese oil companies have explored the “pipeline by rail” option for years now, but over the past month, the prospect of tar sands trains has taken a few big steps closer toward reality.

For over a year, Calgary-based Nexen, Inc. has been developing plans to load tar sands crude onto trains for transport to the West Coast, where it would be loaded onto barges and shipped to China. Late last month, the Canadian government approved the sale of Nexen to a nationalized Chinese oil company, and earlier this week, the U.S. government, which has some say because of Nexen’s major operations in the Gulf of Mexico, gave its stamp of approval.  According to Nexen, the company now has “all the requisite approvals” and the deal “is expected to close the week of February 25, 2013.” (So much for Canadian tar sands benefiting Canadians first and foremost.)

Rail is considered more and more appealing to industry insiders as numerous plans to ship tar sands crude by pipeline have grown increasingly controversial and have been stalled by climate and private property activists from British Columbia to New England to Nebraska. (See: the Keystone XL, the Northern Gateway, and Trailbreaker/Enbridge Line 9.)

In fact, the industry is growing desperate to find ways to export the heavy Canadian crude, as export pipeline capacity is currently maxed out, causing a glut in supply in Alberta, which is driving down prices and causing, according to the Globe and Mail, “billions in forfeited revenues.”

Nexen – now under the control of the the China National Offshore Oil Corporation, or CNOOC – hopes to deliver tar sands crude via train to Prince Rupert, British Columbia, where an export terminal would be built on federal lands to offload the oil onto China-bound tankers. The Globe and Mail explains the startlingly simple regulatory path to rail-facilitated exports:

Prince Rupert possesses North America’s deepest natural harbour and the shortest distance to many Asian ports from any port outside Alaska. The use of already-built track could also skirt some of the regulatory conflict provoked by Northern Gateway, the planned Enbridge Inc. pipeline to the B.C. coast. Though environmental scrutiny would be applied to the construction of tanks and a terminal, oil can move freely today on train tank cars.

So the tracks exist already, the harbor is seen as ready to go, and the only real hurdle for the industry will be the construction of storage tanks and the physical export terminal itself.

For reference, on this map, you can find Prince Rupert at the western terminus of the northernmost rail line in British Columbia. (The CN/GTR line, or Canadian National/Grand Trunk Railway line.)  

 

This isn’t the first time we’ve discussed oil trains here on DeSmogBlog. A few months back, I explored the growing trend of “pipeline by rail” here in the United States. While that piece was mostly about oil from the Bakken Shale finding its way via rail to coastal refineries, it also noted that there is already a fair amount of tar sands crude crossing the Canadian-U.S. border, bound for the Gulf and East Coasts.

I also broke down how much easier it is to gain regulatory approval for trains. Not that this mode of transport is free of risk, as this Globe and Mail article from January explains:

Though accidents remain infrequent, trains leak hazardous materials more frequently than pipelines, have a higher accidental death rate and produce greater emissions.

But wait, there’s more:

But underlying the euphoria is a set of unpleasant statistics. Trains may deliver big new profits to oil companies and refineries alike. They also deliver the potential for problems. The industry itself acknowledges that trains have nearly three times the number of spills as pipelines. The U.S. State Department found that, when moving liquids, trains have a death rate three times higher than pipelines and a fire or explosion rate nine times higher.

This isn't to say that oil trains are more important to fight than pipelines. Nor that the current battles over Keystone XL and Enbridge's Line 9 and the Northern Gateway should be forsaken.

But it is, as I wrote a few months back, “a reminder that, above all else, demand is what drives the oil boom,” and that as long as there is strong demand, oil is always going to keep finding a way to refineries, and the plundering of the tar sands will continue to expand dangerously for the global climate.

Comments

A couple of things.

First, since pipelines are maxed out making delivery capacity constrained, how does this in turn create a “glut in supply”? If anything it would create a shortage in supply due to the inability of getting all the oil demanded to the market. This would drive up prices not drive them down. Unless I am missing something?

Second, I notice how the dirtier rail option is being seized on by the mainstream media as a way to blame environmentalists for making companies  consider this form of delivery due to the protests against pipelines.

If there is a glut trapped in Alberta, then either

  1. sales relative to costs of sustaining larger sales are low (i.e. we have an upgrader sitting idle), or,
  2. the oil companies will go cut throat against each other to get sales.

The fact that it is illegal to sell the stuff in parts of the US doesn't help.

I prefer to think its #2 and they are rehersing Bond's line at the end of Skyfall.  “Last rat standing.”

But if the oil can't make it to the market doesn't that create more demand?

In the back of my mind I'm thinking of an example with Apple computers. The latest iMacs, for instance, have screens using a new laminating process. But there are problems with the new laminating process, causing yield problems. This in turn means fewer acceptable units are making it out the factory door, resulting in long delays for customers who ordered them.

Now, this hasn't affected the price of new iMacs, (nor has it seemed to affect demand) but I am assuming with a commodity like oil on the world market, delays to market would pressure prices up. No?

But if the oil can't make it to the market doesn't that create more demand?

In the back of my mind I'm thinking of an example with Apple computers. The latest iMacs, for instance, have screens using a new laminating process. But there are problems with the new laminating process, causing yield problems. This in turn means fewer acceptable units are making it out the factory door, resulting in long delays for customers who ordered them.

Now, this hasn't affected the price of new iMacs, (nor has it seemed to affect demand) but I am assuming with a commodity like oil on the world market, delays to market would pressure prices up. No?

Umm… I think its more complex that that.  And frankly economics isn't my thing.

Supply, Demand, and Price are determined on a global scale.  Not a local one.  The Bitumen bubble is on a local scale, Alberta only.  On the global stage, there isn't a shortage.  (Although higher prices make it possible to drill in places that were previously unaffordable.)

Alberta Oil companies are competing with a glut of growing US supplies.  In effect they are undercutting one another to stay in business.

http://www.albertaoilmagazine.com/2012/09/price-discounts-for-canadian-c...

Interesting article!  The discounts have nothing to do with pipelines!  Redford lied!

http://www.albertaoilmagazine.com/2012/02/deep-discounts-for-canadian-oi...

Yeah, sorry for the double post. ( I miss the ability to edit one's own posts. Whatever happened to that feature…Jim? Richard?)

Anyway, thanks for the links. I finally found something that helps me understand the price drop (a little):

http://www.theoildrum.com/node/9811#more

It turns out demand in the US has dropped, at the same time supply is growing. So the constrained pipelines don't have anything to do with the price.

In fact, after thinking about it some more, constrained pipelines actually create a mini futures market effect, since what is “expected” comes from what is “known” about the supply. The maxed out pipelines don't really factor into the speculators of world prices because they know the oil is there and being produced, it's just that it may be delayed getting to market, and NOT the fact that oil itself is becoming scarce due to pipeline constraints (only the “delivery” is scarce right now). I could be wrong, but I think that's probably a better explanation of the price drop.

Interestingly the super high oil prices would obviously drive down consumption.

Remember when conservatives got all up in arms about Kyoto adding $4 to the cost of a barrel?  Somehow it would be the end of the world.  That was when oil was $35 a barrel.

When I found out that Kyoto was only going to add $4 to the cost of a barrel, I laughed.  I knew it would have no effect on the consumption side of things.  You need massive taxes (or high prices) to put a dent in the consumption of oil.

through Prince Rupert is a very bad idea.

[x]

The Sierra Club, National Wildlife Federation (NWF) and other green groups recently revealed that pipeline giant Enbridge got U.S. State Department permission in response to its request to construct a U....

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