How to get oil sands crude to the coast, minus the wrangling

Shipping bitumen by rail is an old idea gaining steam as pipelines go under the microscope

February 01, 2011

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Photo courtesy of CN

When Enbridge Inc. ancestor Interprovincial Pipeline Co. turned the valve on its original mainline in the fall of 1950, the ceremony marked the end of a flurry of construction. It took just 150 days to lay 1,800 kilometers of pipeline from Edmonton to a terminal at Superior, Wisconsin. The Canadian leg of the line was built after negotiations with some 2,000 landowners, including three who remained steadfastly opposed to the project from sod-turning to ribbon-cutting.

The speed with which the oil link was built “is absolutely unheard of in today’s world,” says Stephen Wuori, president of Enbridge’s liquids pipeline unit. A modern day mega-project – the $5.5-billion export conduit planned from Edmonton to a marine terminal on the Pacific coast called Northern Gateway – faces considerably tougher opposition. Blueprints for the project have been on company drawing boards for at least a decade. “We’ve known it would not be a fast project, it would not just be quickly put into the ground,” Wuori says. “It would take quite a bit of time.”

The long road to reach Pacific markets – and the unprecedented pressure faced by today’s pipeline builders in general – has become something of a rallying cry for alternative ways to ship crude oil. Chief among the options is rail. Interest in one of the oldest modes of transport between Edmonton and Fort McMurray is growing. In 2006, Canadian National Railway Inc. bought a suite of short-line routes leading in and out of the bitumen belt.

Warren Chandler, regional manager of public affairs for CN Rail, says the acquisitions are part of a new corporate thrust to become more involved in the oil sands. The plan is to move bitumen where pipelines do not go and maybe cannot ever reach.

On the firm’s muskeg leg, a 202-mile (323-kilometer) stretch from Boyle to Fort McMurray, CN has worked hard on improving transit times and service consistency. “This year alone, we invested $75 million in infrastructure improvements,” Chandler says. “We’ve upgraded the rail, put in new ties, improved the bridge structures and added new bridge ballast.”

This was CN’s fourth recent short-line transaction in Alberta. The company purchased the Mackenzie Northern and Lakeland & Waterways lines in 2006. The Lakeland route is part of the Edmonton-Fort McMurray connection. The majority of the Mackenzie system was built by the federal government as the Great Slave Lake Railway, running from a point on the Northern Alberta Railways at Grimshaw, near Peace River, to the southern shores of Great Slave Lake at Hay River in the Northwest Territories, which opened in 1964. The railroad was built to ease shipments of lead-zinc ore from the Pine Point Mines. CN also purchased the Savage Alberta Railway, which served Swan Landing to Grande Prairie, Hythe, Spirit River and Glavin, in 2006 as well.

“We spent about $58 million upgrading all these lines. It’s all part of our strategy of improving our network and ensuring our customers are able to get their products to port,” Chandler says. “The primary products on the Fort McMurray line include petroleum coke and sulphur. We are working with several parties who are interested in developing land adjacent to our line and others interested in building into and connecting existing facilities into our line. We keep the customers confidential, but they run all the way up from Boyle to Fort McMurray.”

But here’s where the plan gets radical. The idea is to go well beyond providing general-purpose freight hauling. “When we purchased all the short lines in 2006, CN definitely had a plan and it’s definitely more than being about running an efficient system,” Chandler says. Enter a scheme that the company is marketing to the oil sands industry under the trademark PipelineOnRail. “We supply our customers’ needs and if the need is there, and we believe there’s a market there, that was why this decision made sense for CN.”

There’s never been an organized, advertised plan for railcars to carry bitumen from the mine site to refineries or shipping ports before. Chandler reports “some interest” in the concept – especially moving the sticky product to terminals at Prince Rupert and Kitimat on the West Coast for possible transportation to the Pacific Rim. “When it comes to pipeline on rails, we have seen some interest from oil companies and refineries, but we are not currently moving oil by rail. We’re optimistic oil will play an increasing role in the movement [by CN] of all petroleum products.”

PipelineOnRail’s promoters include pipeline industry veteran and Altex Energy Inc. president Glen Perry. He has big-league experience in problem solving when it comes to moving locked-in energy sources, getting a better price for them and getting them to market.

“I was the guy who started Alliance Pipeline [to Chicago from northern Alberta and British Columbia] in 1994. We’d been giving the natural gas away for about a buck a thousand cubic feet (Mcf) for about 20 years, even though the price was five or six bucks in the States, because of transportation bottlenecks. The producers were beating up on each other [in competition] to get their gas into the pipeline [available before Alliance]. There was never enough room, so the price of gas dropped to what their shut-in costs were. I didn’t like that,” Perry recalls. “So I proposed this new Alliance Pipeline, a high-pressure shotgun line designed to drain the gas out of Western Canada. And we did.”

The new gas bullet line took six years to get approved and built. But from the day in 2000 when deliveries began the price of natural gas in Alberta rose. Along with the industry, the province has made billions of dollars in improved royalty revenues.

Heavy oil has a similar problem of limited sales outlets affecting prices and revenues. “Heavy oil has been beating up on itself,” Perry says. “There was never enough market access. It wasn’t so much a pipeline issue as a market access issue. There always seemed to be more supply than there was demand. So I got to work looking at this. The biggest thing you can do is save the diluents [costly gas byproducts and synthetic crude oil used as thinners to make bitumen flow in pipelines]. It became obvious that was the way to do it. That’s where the genesis came from — just looking at heavy oil and saying ‘how can you use the economics of it’?”

He figures it’ll take a while to build the rail business on shipping bitumen without using thinners. That potentially cuts costs of deliveries by as much as $8 per barrel. But he and CN are pitching a new idea to an industry that routinely deals in huge volumes, has been accustomed to relying on pipelines for generations and needs to be convinced that an alternative works reliably and safely.

People like to have options, Perry says. He gave his first speech on using rail to move bitumen about 20 months ago at an annual oil sands symposium. But converts have been slow to materialize. “It’s a big paradigm change. Producers and buyers and refiners, they move oil by pipe or ship. But what we’ve proved is that when you pipeline heavy oil it costs a lot more than you think. You’re paying to move the diluent there and back. For every barrel you move to the market, only seven-tenths of it is oil and you’ve got to bring the three-tenths that is diluent back.”

PipelineOnRail promises a solution. Pure bitumen is about as fluid as molasses. But there are two ways to make the stuff flow, Perry says. Using thinner is only one way. “What we do is heat it up. The stuff that comes out of those steam-assisted gravity drainage plants is pretty near 100 degrees Centigrade. They’ve injected that steam into the ground at nearly 1,000 degrees.”

Rail lines are already available from the Fort McMurray airport across North America. “The big market for Canadians is the Pacific Rim, and CN goes to Prince Rupert and Kitimat. There’s the traditional Midwest market – Sarnia, Minneapolis and Chicago. The rail goes to all those places and beyond, to places where pipelines don’t go. The other new market is the one on the U.S. Gulf Coast and CN actually goes to the Gulf Coast – but others do too. When you talk about the rail network, it’s a big network in North America,” Perry says.

Enbridge Inc.’s pipeline chief, Stephen Wuori, has been working on a West Coast export line for at least a decade
Photograph by Jason Stang

At the very least, a viable, well-equipped rail system could serve as backup in moving bitumen to places it now can’t go. “We really don’t have a pipeline connection down to the Gulf Coast,” Perry notes.

“Basically, there are about five refineries in the Midwest that buy all our heavy oil. You can only move oil to where the pipelines go. With rail, you have options and the best part of it is that the tracks are already built. You have those options at very low cost. If you wanted to have a pipeline to the West Coast to give you an option, that’s $6 billion. If you wanted a pipeline to the Gulf Coast to give you an option, that’s $7 billion. If you want a rail system, it’s already built. You have to have railcars and terminals, but that’s a fraction [of a new pipeline’s cost].”

Perry points out that oil trains are in use elsewhere. “In Russia, around the Black Sea, they move a lot of heavy oil by rail because they don’t have the same pipeline infrastructures we have. If it arrives at the terminal and it’s cooled off a bit, these cars are jacketed and they have tubes running through them. You just run steam through them. It’s the same as you run molten sulphur or asphalt. They are actually called asphalt railcars.”

The biggest Alberta oil sands producers, Suncor Energy Inc. and Syncrude Canada, are less likely to be interested in rail movement than others, Perry says. They have spent fortunes on synthetic crude upgraders. Their product is chiefly light oil. “The guys who are primarily interested in what we’re doing are just making heavy oil, and in order to move it, they have to cut it 30 per cent with this gasoline-like material. They’re the guys we go to and say, ‘You don’t have to do that. You can just put the bitumen on a railcar and we’ll keep it heated’,” the Altex chief says.

The Pipeline Industry understandably questions the railway alternative. Brenda Kenny, president of the Canadian Energy Pipeline Association, says the rail option will never fly – or if it does take off, it will not fly very high. “There’s a lot of ways of getting energy around and, certainly, transporting crude oil by rail is not a new thing.” The key question, she points out, is determining the most appropriate way for large oil volumes to be safely and economically shipped over long periods. “So I think, naturally, it comes down to a question of skill and a question of timing,” Kenny says.

“We have witnessed over many decades of market choices, that 97 per cent of oil and gas is moved by pipe – and that speaks to the economics alone. I know there can be some complementary opportunities, but we certainly wouldn’t go so far as to call rail anything like a pipeline system.”

Provincial Energy Minister Ron Liepert likewise has questions. In an Alberta Oil interview, he wondered how much bitumen traffic could be switched over to railways. Sectors that rely heavily on freight trains, led by agriculture, might not tolerate a major change in priorities for the tracks, the minister adds.

Much depends on what the established market is and the oil volumes to be shipped, Kenny says. “Short-term diversion is plausible, sure, but if you’re talking about a value chain that involves some significant capital at both ends of the pipe by way of significant production and if you’re thinking of refining and upgrading, those are capital-intensive as well and you tend to see some fairly long-term market implications that would suggest pipe would be a long-term solution.”

To move the big volumes sought by CN and Perry would likely mean a “significant” investment in rail infrastructure, she adds. “Any kind of significant movement would require quite a lot of investment, on the rail side as well. You’re going to have much more reliability and consistency in a below-ground system and much less risk.”

Reaching new markets beyond the U.S. won’t happen without new pipeline capacity, Kenny contends. “It stands to reason to have an alternative and Canada’s position on the world scale is well-served by having strong trading relations with a number of emerging nations. And energy is something we have a lot of. It’s a natural with geopolitics. If you are going to establish those long-term trade links, you’re going to need pipeline capacity to do that.”

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