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Railroads delivering crude as oil firms await Keystone XL pipeline decision

If President Barack Obama rejects the Keystone XL pipeline, large quantities of the Canadian oil it's designed to carry will still roll into the United States — on railroads.

The proposed pipeline across Montana, South Dakota and Nebraska has provoked opposition from environmental activists who say extraction of crude oil from tar sands increases greenhouse gases that cause global warming.

As antipipeline groups have pressed the White House to kill the project, the oil and railroad industries have been building oil-loading terminals and buying tank cars to ship Canadian crude oil by rail.

"There is no permitting required — you can put oil on rail and nobody can complain," said Sandy Fielden of RBN Energy, a Houston-based consulting firm that has tracked the oil-by-rail boom.

In the campaign against Keystone XL, the National Wildlife Federation and other groups have issued two reports since 2011 critical of pipeline safety, singling out Canada's heavy oil called bitumen as especially hazardous. Neither report mentioned the risks of using rail.

The dramatic growth of the crude-by-rail business in North America illustrates how quickly shippers can adapt to a new option. North Dakota, the nation's No. 2 oil-producing state behind Texas, ships the majority of its oil by rail from loading terminals built mostly in the past three years.

The two major carriers, Canadian National (CN) and Canadian Pacific (CP), say 32 Canadian oil-loading terminals now operate on their rail networks, and more are being built, including some to load crude from the oil sands region near Fort McMurray, Alberta. That's the same heavy bitumen that the Keystone XL pipeline would carry.

Tank cars won't completely replace pipelines, officials in the oil and rail industries say. Yet even if the $5 billion Keystone XL is approved — and a decision could come soon on the presidential permit to cross the U.S. border — industry officials expect crude to keep moving by rail partly because it takes years to build pipelines.

Industry officials say tank cars offer one important advantage for shipping bitumen: It is so thick it must be diluted with other petroleum products to flow through pipelines. Bitumen can be shipped in special tank cars without dilution.

"We believe this business is going to be around for a long time," said Wayne Bobye, chief executive officer of Altex Energy of Calgary, Alberta, which has four Canadian oil-loading terminals and is building a fifth.

Canadian National, whose rail network stretches from western Canada's oil region to the U.S. Gulf Coast, says it hauled 30,000 tank car loads of crude last year, a sixfold increase over 2011. It expects that to double this year. On the Canadian Pacific, shipments also jumped last year, partly because of the boom in North Dakota, where the railroad has major operations.

The Gulf Coast is a target destination for Canada's heavy crude because many refineries there have technology to process such oil.

On the East Coast, PBF Energy last year built a rail terminal at its Delaware refinery to accept heavy crude. The company also ordered enough rail cars to carry 80,000 barrels of Canadian crude per day.

"We are confident, very long term, on the movement of heavy Canadian crudes to the U.S. East Coast," Tom O'Malley, the company's chairman, told analysts last month.

NuStar Energy Corp. of San Antonio, Texas, which owns refineries in New Jersey and Georgia, also is shipping Canadian bitumen by rail to the East Coast. The company plans to develop a terminal to load Canadian bitumen onto "unit trains" of 80 to 120 tank cars, vastly expanding oil-by-rail capacity to U.S. markets, said NuStar vice president Gregory Kaneb.

"At the moment, you have pipeline constraints and that is why rail is working," said Kaneb, who estimated that about 150,000 barrels of Canadian crude of all types now move daily by rail.

Railroads delivering crude as oil firms await Keystone XL pipeline decision 03/16/13 [Last modified: Friday, March 15, 2013 6:27pm]
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