Keystone Opponents Seize on Rail Constraints to Urge Rejection

Jan 28, 2014 3:17 am ET

Jan. 28 (Bloomberg) -- Environmentalists are making an unusual argument in their attempt to stop the Keystone XL pipeline: that trains can’t move all the oil out of Canada.

Keystone supporters say Canada could just as easily transport the additional oil to the U.S. on trains -- meaning building the pipeline won’t contribute to climate change because the oil’s coming out, pipeline or no.

Opponents have worked furiously to knock down that argument ahead of the U.S. State Department’s release of a key environmental impact statement in coming weeks, pointing to recent oil-train crashes to show railroads aren’t a good alternative.

“The environmental guys are making that argument to State and to the White House,” Michael McKenna, a Keystone supporter and president of MWR Strategies Inc., a Midlothian, Virginia- based lobbying firm, said in an interview. “They’re getting a favorable response. It’s probably a legitimate argument. Maybe all this stuff doesn’t come to market and that affects the profile of greenhouse-gas emissions.”

A draft of the report in March said new railroad cars and pipelines will be developed to get the oil out even without the proposed U.S.-Canada link. It concluded that Keystone, in and of itself, wouldn’t add to the heat-trapping greenhouse gases produced because the carbon-heavy oil sands in Alberta would be developed even if Keystone were never built.

TransCanada’s Application

If the final report alters or reverses that conclusion, it would be bad for TransCanada Corp.’s application to build the $5.4 billion line to link the oil sands of Alberta with refineries on the Gulf of Mexico. President Barack Obama has said he won’t approve Keystone if it were found to substantially boost carbon-dioxide emissions, which scientists say are raising the Earth’s temperature.

In a flurry of lobbying, groups such as the Sierra Club have been pressing for the final report to account for limits on rail. If it’s not feasible to move large quantities of additional oil by rail, the pipeline would be the culprit in worsening climate change, they argued in a meeting last month with State Department officials.

“It has become increasingly clear that Keystone XL is the linchpin for tar sands expansion,” Anthony Swift, an attorney with the Natural Resources Defense Council, said in an interview. “New concerns about the safety of rail are likely to result in more regulated practices. That likely further decreases the feasibility of moving tar sands by rail.”

Central Argument

The question of whether rail can replace pipelines has been central to the debate over Keystone XL since the March release of the draft environmental analysis. The U.S. Environmental Protection Agency filed a response saying the State Department should do a more complete market analysis of pipelines and rail.

New regulations proposed in the U.S. and Canada last week after a spate of oil-train accidents could restrict the ability of trains to carry more oil.

Environmentalists say the March analysis overestimates rail’s ability to make up for Keystone’s 830,000 barrels per day capacity. About 200,000 barrels a day of oil currently leaves Western Canada by rail, and daily volumes could reach more than 500,000 barrels by the end of the year, according to an estimate this month by Peters & Co., a Calgary-based investment bank.

Rail Capacity

TransCanada says delays in building Keystone XL have resulted in more crude shipments by rail, which creates higher carbon emissions.

“The reality is that increasing volumes are moving by rail as new pipeline infrastructure is delayed,” Shawn Howard, a spokesman for Calgary-based TransCanada, said in an e-mail.

Higher volumes of crude on trains has coincided with accidents, such as the July derailment of rail cars filled with oil in Lac-Megantic, Quebec. The accident ignited an inferno that killed 47 people in the town’s center.

The relative safety of pipelines will be a part of the State Department review, said Michael Whatley, executive vice president for Consumer Energy Alliance, a pro-Keystone group whose members include Exxon Mobil Corp.

“At the end of the day, all these trains are safe; pipelines are safer,” Whatley said. He said the industry will continue to use rail and pipelines to transport fuel regardless of what happens with Keystone.

Opponents aren’t so sure.

Expanded Production

With pipeline capacity limited, Canadian oil producers must rely on trains to deliver oil to the U.S., Goldman Sachs Group Inc. said in an October report. Even with an increase in rail terminals that can handle crude, “we remain concerned about the availability of rail cars in 2014,” according to the report.

Growth in Canada’s oil sands could be temporarily deferred if Keystone XL is rejected, RBC Capital Markets said in a September report. It added however that increases in moving crude by rail “should significantly bridge the export capacity gap.”

That was before the U.S. National Transportation Safety Board and Canadian Transportation Safety Board said last week that oil hauled by rail needs to be shipped in stronger tank cars and on safer routes. The recommendations came as part of the probe into the Lac-Megantic disaster.

Modifying the tank cars identified by the boards may cost leasing companies and shippers about $5.2 billion, according to estimates by Bloomberg Government.

Accidents Debated

The rail accidents may add another variable to the debate. The U.S. and Canada safety boards made their proposals after a BNSF Railway Co. train carrying Bakken formation crude crashed in North Dakota last month, forcing the evacuation of a nearby town, and a CSX Corp. train hauling crude derailed Jan. 20 near the Schuylkill River in Philadelphia.

“Rail costs more than pipeline,” said McKenna, a Republican strategist. “That’s going to have a material impact on how much of this stuff gets bought up and how much of it gets sold. That’s a pretty solid argument and it’s getting some traction.”

Peter Howard, chief executive officer of the Canadian Energy Research Institute in Calgary, said it costs about $9 to ship diluted bitumen, as the crude is known, from Alberta to the Gulf of Mexico by pipeline and about $20 to do so by rail.

Higher Costs

The higher costs aren’t deterring rail projects. Shipments by rail will increase “quite significantly” in the next few years as pipelines reach their carrying capacity, he said.

The costs of moving it by train could increase with regulations, he said.

After a final environmental assessment is released, federal agencies including the EPA have 90 days to advise the State Department on why Keystone is or isn’t in the national interest.

“There is no way, no how that the tar sands gets out of the ground as fast -- or at all -- without this pipeline,” Gene Karpinski, the president of the League of Conservation Voters, told reporters. “We’re cautiously optimistic and remain that way.”

“If State conducts a defensible environmental review of Keystone XL -- and we expect it to -- it will have to recognize the mounting evidence showing the project’s critical importance to the tar sands industry’s expansion plans,” Swift said.

--With assistance from Mark Drajem in Washington. Editors: Jon Morgan, Steve Geimann