The number of rail cars filled with crude oil barreling through North America has reached about 400,000 so far this year, up from 8,000 in 2009, the Globe and Mail reported earlier this month. And, so far, Keystone XL supporters have been cheering the boom. After all, it represents evidence that helps debunk the pipeline opponents’ argument that if you just block Keystone you’ll lock Western Canada’s crude underground forever. Demystifying that argument seemed even more important when President Obama explicitly framed his approval of the Canadian pipeline as hinging on whether or not it would “significantly exacerbate the problem of carbon pollution.” The question of whether crude transport by rail could be a viable substitute for Keystone was also at the centre of the public kerfuffle between the U.S. Environmental Protection Agency (EPA) and the U.S. State Department, which is charged with producing an environmental assessment of the pipeline project. The continuing growth in oil-by-rail transport seemed to be only strengthening State’s finding that oilsands crude will find its way to market with or without the pipeline — and weakening EPA’s contention that development of the oilsands could slow without Keystone.
But as the approval process for Keystone stretches into its sixth year, some oil producers who turned to rail as a stop-gap measure are finding that they quite like option B. Continental Resources, an independent oil producer in North Dakota’s Bakken region that had signed on to ship some 35,000 barrels through Keystone, told Reuters on Tuesday it no longer needs the pipeline. Earlier this year, the company’s CEO, Harold Hamm raved about the convenience of rail compared to pipelines. “The good thing about it is it goes to the market faster and directly where you want it and it doesn’t have to go the pipeline route,” he told Bloomberg.
Keystone godfather TransCanada, for its part, has been waging a fierce PR battle against the idea that its pipeline project may be obsolete. Last month — before Continental’s comments — TransCanada CEO Russ Girling insisted Keystone suppliers remained 100% committed, despite having to renegotiate expiration dates for shipping contracts several times. And there’s a waiting list of producers interested in filling any capacity that should free up, the company said.
Even so, TransCanada said this morning it might itself have to use rail in order to link oil in Alberta to the already-built portions of the Keystone south of the border. (The sticking point is crossing the border, which requires presidential approval.)
The reverberations of the competition between pipelines and rail go beyond Keystone. The Northern Gateway pipeline project to transport Albertan oil to the B.C. coast is also mired in regulatory hurdles and political backlash. It’s no wonder pipeline builders and oil producers are becoming more cautious about signing on for such potentially frustrating enterprises. KinderMorgan, the biggest pipeline operator in the U.S., just scrapped plans for a new pipeline linking oil fields in west Texas to refineries in California after the project failed to arouse interest in the industry. A few months later, the company was pouring money into oil-by-rail.
It’s easy to understand the allure of oil-by-rail. Admittedly, the per-barrel cost of transporting crude on trains is two or three times what it cost to ship it by pipeline. But the tab for building oil-by-rail infrastructure is much lower — in the millions, rather than billions of dollars. That’s because all you need to do is build tracks that connect oil fields to the existing, extensive North American railroad network.
But the regulatory bottlenecks and political battles that favoured the rise of oil by rail might be creating a market distortion that is costly in a number of ways. For one, trains pollute, whereas pipelines do not. Environmentalists who oppose Keystone XL might steer industry toward a more environmentally damaging transport option. Second, trains are less safe. To be fair, the light Bakken oil that caused the explosion at Lac-Mégantic, Que. seems to have caused safety concerns for pipelines too. But the incidence of spills for rail is nearly three times that of pipelines, according to Association of American Railroads. The safety concerns, in turn, are leading to new regulations that will increase the cost of transporting oil in rail cars. Finally, it isn’t entirely clear that oil-by-rail will remain economically viable in the medium term. It only makes sense if price of oil produced on the continent, plus the cost of moving it with trains, beats the price of shipping foreign oil to refineries along the coast. As bottlenecks in Western Canada and North Dakota ease, those spreads are shrinking.
Oil-by-rail is one thing on which Keystone XL supporters and opponents should naturally agree on. Unfortunately, the green movement has spent far too much capital — literally and figuratively — on portraying Keystone as the ultimate environmental evil to admit that, in fact, it might not be such a bad option.