The long-touted idea of a “pipeline on rails” to carry oil sands bitumen from Alberta to a tanker port on North America’s West Coast has surfaced again, with a new twist, along with a mounting push to increase the use of rail within North America.
G Seven Generations, or G7G, a Vancouver-based company whose principals have strong ties to aboriginal communities, has rolled out plans for a 1,200-mile link from Fort McMurray, Alberta, to the trans-Alaska oil pipeline’s pump station near Fort Greeley in Alaska’s Interior. From there the crude would be delivered south to the pipeline’s terminus at the Valdez Marine Terminal and onward via tanker to Asian markets.
G7G director Matt Vickers told an International Indigenous Summit on Energy and Mining in Ontario June 29 that the plan would “simply mean replacing the declining supply of Alaska crude with a new supply of Alberta crude. …
“Studies have already demonstrated that a rail link to Alaska is a viable alternative to the oil pipelines currently being planned through British Columbia,” Vickers said, referring to Enbridge’s planned Northern Gateway project to Kitimat and Kinder Morgan’s options which include expansion of its Trans Mountain pipeline to the greater Vancouver area and construction of a new line to Kitimat.
“Diversifying markets for Canadian oil is an important challenge, but we need to achieve this goal in the most environmentally and socially responsible way possible,” he said.
The Alberta-Alaska option “promises significant economic benefits while avoiding many of the environmental risks associated with current pipeline proposals, Vickers said.
The G7G initiative offers the advantage of using the existing terminal at Valdez, which faces a declining oil supply from the North Slope, and does not face the same moratorium that exists in northern British Columbia waters along with attempts to ban crude tankers along the total length of the British Columbia coast.
Northern Gateway, in particular, has encountered a hostile reception from First Nations and environmental groups in British Columbia as it prepares for regulatory hearings next year before Canada’s National Energy Board.
G7G said its proposal eliminates three barriers to development of the oil sands — the cost, delays and financial risks involved in building pipelines out of Alberta and obstruction from lawmakers and environmentalists in Canada and the United States —while offering better netbacks to producers.
However, the risks of derailments, especially through sensitive mountain regions, could pose a challenge every bit as great as pipeline ruptures.
First phase C$12 billion
G7G has put a price tag of at least C$12 billion on the first phase of its project, compared with the C$5.5 billion estimate for the 525,000-barrels-per-day Northern Gateway plan, which includes a parallel system to import 193,000 bpd of condensate.
G7G said it has already received endorsement from leaders of First Nations in British Columbia and the Yukon and support from Alaska Native tribes along the rail route.
It now expects to complete a feasibility study, business plan and First Nations consultation in the “coming months.”
An Alberta-Alaska link is just the latest in a campaign by Canada’s two dominant railways — Canadian National, or CN, and Canadian Pacific, or CP — to draw the petroleum industry back to its roots, when the only way to get crude oil to market was by rail.
Earlier this year they made presentations to a Saskatchewan forum, making a pitch to ship crude from that province’s Bakken play, targeting business traditionally controlled by Enbridge pipelines.
Mike Foran, CP’s director of sales, said there is a “need for (shipping) alternatives during unforeseen times of pipeline apportionment.
“Crude on rail is here to stay,” he said, confident that several U.S. refineries will expand to take unit trains. “We can help built a network of markets — multiple origins, multiple destinations.”
CN representative Mark Cvar said one unit train would handle all of the daily Bakken production.
Although pipelines have lower costs, they require long-term shipping commitments, he said, adding that interest in rail is being spurred by a spike in oil prices, space allocations on pipelines and producers realizing that rail is a viable option.
Randy Meyer, CN’s manager of oil sands sales, has previously claimed that an international cost analysis showed moving pure bitumen by rail is cheaper than diluted bitumen for pipeline transportation, but he declined to provide per barrel costs, citing confidentiality agreements with various oil sands producers.
He said the costs associated with establishing a bitumen rail system would run to millions of dollars “not billions,” while shipper commitments would last for years, but not the 25 years sometimes required by pipeline companies.
Meyer also said rail transport is more scalable than pipelines and can be designed to meet current demand, which could be as little as 5,000 bpd for smaller producers — a significantly lower barrier to entry in return for the same market access as “more pipeline sized” producers.
He said CN, rather than requiring producers to commit to provide specific volumes at a particular time or face a penalty, “would meet your timing based on your business requirements.”
Rail offers time savings
Meyer also said bitumen should be shipped from Alberta to U.S. Gulf Coast refineries in eight to10 days compared with 40 to 50 days for a pipeline.
James Cairns, CN’s vice-president of petroleum and chemicals, told producers they “shouldn’t think of a rail project as an absolute alternative to pipe. Our view is that rail can be a companion to pipe, be a merging mechanism to pipeline infrastructure while permitting issues are worked out … or, in some cases, a replacement to pipe.”
Stephen Whitney, CP’s vice-president of marketing, said railway officials are working on altering the oil industry’s perception that pipelines are the only choice.
“I don’t think it is rail versus pipe, though it can be in some cases. The modes are complimentary, but the best supply chain model is going to prevail,” he said.
Whitney said rail’s main advantage is its ability to ramp up faster than the years it takes to approve and build pipelines.
Industry welcomes another option
The Canadian Association of Petroleum Producers said the amount of oil moving by rail is still very small, but the industry welcomes having the extra option available.
Diana McQueen, parliamentary assistant to Alberta Energy Minister Ron Lipert, said rail could have a bridging role to play while the industry expands pipeline infrastructure to access new markets.
“The pipeline-on-rail option may pose a trade-off between bitumen transportation costs by eliminating the need for diluents and higher transportation costs from using rail instead of a pipeline,” she said.
In late 2008, CN approached the Alberta government with a plan to move bitumen, estimating it could carry 2.6 million bpd if 20,000 railcars were added to its fleet.
