Bloomberg News

TransCanada Explores Oil by Rail on Keystone Permit Wait

May 22, 2014

TransCanada Explores Oil-by-Rail as It Awaits Keystone Permit

Russell "Russ" Girling, president and chief executive officer of TransCanada Corp., right, speaks with workers during a media event at the TransCanada Corp. Houston Lateral Project pipe yard in Mont Belvieu, Texas, on March 5, 2014. Photographer: Scott Dalton/Bloomberg

TransCanada Corp. (TRP) is considering ways to deliver Canadian crude oil by rail to the U.S. as customers of its proposed Keystone XL seek an alternative to the delayed pipeline, Chief Executive Officer Russ Girling said.

The pipeline company is exploring how to modify existing contracts with Keystone XL customers to allow for rail shipments as it awaits U.S. permits for the pipe, Girling said in an interview yesterday at Bloomberg headquarters in New York. A rail option, which may cost twice as much as sending the crude via Keystone, would be an inefficient way of transporting the oil, he said.

The trigger for pushing ahead with rail was the Obama administration’s April 18 announcement that it was delaying a decision on the $5.4 billion project because of a court battle in Nebraska, Girling said. A rail option would have much lower upfront costs than the pipeline -- the company would have to build some infrastructure and may have to buy some tank cars to fulfill customer needs, he said.

“It’s not a path that we had envisioned going down,” said Girling, who still expects to receive permission to build Keystone XL. “It requires modification of our current contractual relationships and that’s basically what our customers have asked us to look at -- what would it cost us to do this and what do we need to do to modify our contracts?”

Output Surge

Keystone XL would link Alberta production with U.S. Gulf Coast refineries, as output from the oil sands is forecast to surge 80 percent from 2012 to 2020, according to the Canadian Association of Petroleum Producers.

Anthony Swift, an international attorney at the Natural Resources Defense Council, said it’s not the first time TransCanada has raised the prospect of switching to rail.

“To be able to move 800,000 barrels a day of tar sands, it would require the largest offloading terminal in the world,” said Swift, whose group opposes the pipeline. “We have seen very little tar-sands oil moved to the Gulf Coast by rail. The few companies engaged in it have indicated that it’s not a particularly profitable business.”

Delivering crude by rail would cost about double the $7 to $8 a barrel shipping cost on Keystone, Girling said. Pipelines are a more efficient, cost-effective way to deliver crude oil, he added.

“This is a market inefficiency created by regulatory impediments,” Girling said. Shipping crude by rail “wouldn’t have been on our radar screen because it’s not logical.”

‘Stop Gap’

Rail “is the stop-gap measure” for Canadian crude oil, Dave Collyer, president of the Canadian Association of Petroleum Producers, told reporters yesterday in Calgary. “We’re still very optimistic that the case is sound for approval of Keystone.”

The pipeline’s path in Nebraska, one of three states the northern leg of Keystone would cross, was thrown into doubt in February when a state judge invalidated legislation that let the Republican governor approve the path. The judge said that only the state Public Service Commission had that power. The decision has been appealed to the Nebraska Supreme Court.

Girling said he’s seeking State Department clarity on whether the federal government will wait for the state court to rule before issuing the project’s required presidential permit.

Obama rejected an earlier proposal for Keystone XL in 2012, citing environmental concerns with its route in Nebraska.

Business Caution

In an interview today in Washington, Girling said delays of Keystone XL will prompt businesses to think twice about capital investments before obtaining regulatory approval.

“This is a very good example of why money is sitting on the sidelines,” he said. “We will never again find ourselves in a situation where we where we have two and a half billion dollars of capital exposed to a project with this kind of uncertainty.”

Oil-sands crude is making its way to the Gulf Coast without Keystone XL as producers spend more money transporting volumes by rail, Girling said. TransCanada also will be able to move crude to refineries by pipeline and barge as early as 2018 without Keystone XL, through its C$12 billion ($11 billion) Energy East line to Canada’s Atlantic Coast, he said.

Canadian crude exports by rail rose to 145,046 barrels a day in the fourth quarter, more than nine times the volume in the first three months of 2012, according to data from Canada’s National Energy Board regulator

Rising Exports

Exports of crude on trains out of Western Canada may rise to 500,000 barrels a day by the end of the year, according to a January estimate from Peters & Co., a Calgary-based investment bank.

The energy industry is drawing up plans for new crude-by-rail projects even as transportation regulators in the U.S. and Canada impose new rules to boost safety following a string of explosions, including a derailment last July in Quebec that killed 47 people.

Imperial Oil Ltd. (IMO) and Kinder Morgan Energy Partners LP (KMP:US) are planning a terminal in Alberta to load crude onto trains that may have the potential to eventually handle as much as 250,000 barrels a day, the companies said in December.

TransCanada called each of its customers to discuss the prospects for the project after the delay last month.

“Their question was, when does this end?” Girling asked. “We can’t answer that question.”

To contact the reporters on this story: Jim Efstathiou Jr. in New York at jefstathiou@bloomberg.net; Rebecca Penty in Calgary at rpenty@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net; Susan Warren at susanwarren@bloomberg.net Steve Geimann


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