Teamsters Canada Rail Conference

Canadian National Railway Co. has developed a transformative strategy it calls the "Pipeline on Rail" that can move oil-sands production quickly and cheaply to markets in North America or Asia.

Currently, pipelines charge $17.95 per barrel to ship oil from Alberta to the U. S. Gulf Coast. Estimates are that the increase in pipeline capacity to four million barrels a day from the oil sands to the Gulf of Mexico would cost about $25-billion to build and take years to complete. CN could gear up its capacity to ship by rail up to four million barrels a day of oil at less cost and more quickly, bypassing the need to finance huge pipelines. By the end of this year, the company will be shipping 10,000 barrels daily from producers whose reserves are now stranded.

"Not enough pipeline capacity exists today to move bitumen [gooey oil-sands production], diluted bitumen [called dilbit] or synthetic crude," Jim Foote, CN's executive vice-president of sales and marketing, said in an interview this week. "We can get their products today to market using the concept of a pipeline on rail and move it directly either into the U. S. or to the West Coast [for shipment to Asia], which creates the flexibility. It means smaller producers are not just tied to a refinery down in Texas."

Mr. Foote, an American from Chicago, is excited about the concept, which may, once volumes build, eventually replace freight tonnage lost in the manufacturing and forestry sectors during this severe recession.

CN recently acquired the Athabasca Northern Railway linking Edmonton to Fort McMurray, Alta., to cash in on the oil sands action. The railway will deliver the oil sands production through the use of insulated and heatable railcars or by reducing its viscosity by mixing it with condensates or diluents.

The "scalability" of the concept -- up to millions of barrels per day -- means that the railway can ramp up production cheaply and quickly to provide immediate cash flow to producers, who otherwise will have to wait years for completion of upgraders and/or pipelines.

"That's the beauty of having the rail system. It's scalable, can go in any direction they want to go -- to the West Coast ports of Prince Rupert, Kitimat or Vancouver, or down to the Gulf coast -- where the capacity is already in place and where they are used to refining heavy crude," he said.

The cost of a pipeline expansion from Edmonton to Kitimat, B. C., is estimated at $4-billion to handle nearly 600,000 barrels per day of bitumen and diluent. But producers will have to sign on, and take the pricing risk, for 20 years and wait years to get it built.

CN estimates it could ship and have the capacity to handle 2.6 million barrels a day of oil products to the West Coast if 20,000 railcars were added to its fleet.

For instance, CN's current volume of coal shipments is equivalent to transporting 624,000 barrels per day and represents only 5% of CN's business. CN moves about 130 trains a day in Western Canada alone. To add 10% of the potential oil sands production of four million daily to the company's operations, or 400,000 barrels daily, would be equivalent to between four to six new trains a day.

The rail option also circumvents the problem, for Canadian producers, of reliance on monopoly markets in the United States, and on the fickleness of environmental politics south of the border.

"As the oil sands issues have developed recently, and prices come down, and a lot of the upgrader facilities have gone away, the need for some way to get the smaller and medium-sized players into the marketplace is becoming critical," Mr. Foote said.

"The number I have seen for constructing a pipeline to serve the West Coast is $4-billion. Our rail network is already in place to get to all the West Coast ports. Any terminal facilities needed would have to be put in place whether customers used pipeline or rail.CN's service is scalable, meaning capacity can be matched with production," Mr. Foote added. "Our target is to be moving 10,000 barrels a day by the end of this year. "

CN is going to test its concept shortly with producers. Immediate beneficiaries will be projects now being developed by Japanese, French and American partnerships, which are located along CN's line between Edmonton and Fort McMurray.