If Keystone XL gets blocked, can trains save Canada’s tar sands?

April 24, 2013

There's a key question at the center of the debate over the Keystone XL pipeline. If President Obama rejects the pipeline, will all of that Canadian heavy crude find another way to get to market?


After all, the biggest environmental objection to Keystone is that oil from the tar sands of Alberta is far more carbon-intensive than other types of oil. And the proposed pipeline in question, which will transport up to 830,000 barrels per day down to the Gulf Coast for refining, would allow the tar sands industry to keep expanding. As such, blocking the pipeline will hurt tar-sands development and help on climate change.

The counterargument here, meanwhile, is that Alberta's tar sands will keep expanding no matter what. If Keystone is rejected, the oil will just get transported via other pipelines or by rail. And if that's true, well, there's really no point in blocking Keystone, is there?

Two U.S. government agencies are currently wrangling over this exact question. Back in March, the State Department issued a draft assessment arguing that Keystone XL would have a fairly minimal impact on emissions either way. At most, blocking all pipelines out of Alberta would shrink tar-sands production a mere 2 to 4 percent by 2030.

The reason? Rail shipments would fill the gap. "Rail and supporting non-pipeline modes should be capable… of providing the capacity needed to transport all incremental Western Canadian and Bakken crude oil production to markets if there were no additional pipeline projects approved,” the State Department says. Oil by rail is already booming in Canada as demand grows.

Yet not everyone's convinced. This week, the Environmental Protection Agency lodged an objection, arguing that the State Department's assessment "is not based on an updated energy-economic modeling effort... This analysis should include further investigation of rail capacity and costs, recognizing the potential for much higher per barrel rail shipment costs." In other words, EPA doesn't think shipping oil by rail is as easy as State does.

So which argument is right?

There are some signs that the State Department is being overly optimistic. Its draft assessment predicted that rail shipments of Canadian heavy crude down to refiners in the Gulf Coast would reach 200,000 barrels per day by the end of 2013. But, according to Reuters, this forecast appears to be based on a misreading of industry reports. (That was a projection for the total amount of oil on Canada's railroads.)

The State Department's assessment also argued that rail companies should be able to ramp up shipments of heavy crude from the tar sands fairly easily, because they've already done so for lighter crude from the Bakken formation in North Dakota. But as energy reporter Elana Schor details here, a closer look at existing rail infrastructure suggests that the two situations aren't necessarily comparable.

There are also the economics to consider. The State Department report estimates that shipping Alberta's heavy crude by pipeline costs about $10 per barrel, with rail in the $15 to $18 per barrel range. Yet some producers are telling Reuters that shipping by train to the Gulf Coast could cost as much as $30 per barrel.

Now, even at those higher prices, shipping tar sands by rail can still be viable — it all just depends on the demand for oil and available alternatives. Here's one illustrative example: In March, refiners in Texas could buy Mexico's Mayan heavy crude for around $106 per barrel. Meanwhile, Canadian heavy crude was selling for about $83 per barrel up north. At those prices, for tar-sands product to be competitive down in the Gulf Coast, transport costs would need to stay under $23 per barrel. Not impossible, but harder without a pipeline.

Unfortunately, there's no easy way to predict what will happen. If the White House does block Keystone XL, that will certainly make life more difficult for tar-sands producers at the margins. There's a reason why Canada's oil industry strongly supports this $5.3 billion pipeline project. But it's impossible to say for sure that the industry won't find a way to bring that extra oil to market — especially since the rewards are so lucrative.

"There’s no test case," writes Schor. "Either Keystone XL will get approved or it won’t." And how you think about this question goes a long way toward how you think about the environmental impact of the Keystone pipeline.

Further reading:

--My colleague Juliet Eilperin has written an excellent primer on Keystone XL. Also, check out Steve Mufson's terrific new e-book on the subject.

--Here's an in-depth reported look at how oil-by-rail is ramping up in Canada.

--There are a few other options besides rail. Canadian officials are currently mulling over a proposal for a 1,172-mile pipeline from Alberta's tar sands to the Pacific Coast in British Columbia. But that project faces fierce opposition from Canada's indigenous tribes.

--There are also the relative risks of spills to consider. Pipeline spills do happen — and there are worries that the diluted bitumen carried from Alberta's tar sands is particularly corrosive. But oil spills are about three times more likely to occur in rail shipments.

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Dylan Matthews · April 24, 2013