The Canadian oil sands offer a unique opportunity for moving crude by rail. Rail is already a growing part of transport from Western Canada. Growing from almost nothing at the start of 2012 to about 150,000 bd by mid-2013; increased rail shipments are the direct result of limited pipeline capacity exiting Western Canada. Although moving crude oil by rail is generally more expensive than by pipeline, oil sands heavy oil could be an exception. If pipeline capacity from western Canada continues to lag oil sands growth, we expect that rail could be an ongoing and economic part of the transportation puzzle for heavy oil sands. In a scenario in which pipeline access was severely restricted, we would expect greater investments to make rail economics more efficient than today, approaching those of pipelines.

What makes oil sands unique is the need for diluent. In its natural form, bitumen is the consistency of peanut butter-too thick for pipelines. Prior to pipelining, the bitumen is thinned by adding light hydrocarbons (typically natural gas condensates). The resulting mixture (called diluted bitumen, or dilbit) is about 70% bitumen and 30% diluents. This is how bitumen is transported today, whether by pipeline or rail.*

However, unlike pipelines, rail cars do not necessarily require diluent for moving oil sands. With the appropriate investment, they can transport pure bitumen, using heat to thin the bitumen during railcar loading and unloading.

By railing pure bitumen (instead of dilbit in a pipeline or rail car) an oil sands producers can avoid some expense-specifically cost for the diluent-plus there would be fewer barrels to transport (compared with dilbit, shipping pure bitumen decreases the total volume moved by 30%). These savings offset some of the extra costs associated with rail transport. Assuming sufficient scale and investment, our view is that producer netbacks from the USGC for transporting pure bitumen by rail would be comparable to about $6 lower than for moving with pipeline (for each bitumen barrel produced).** This compares favorably with netbacks for railing dilbit to the US Gulf Coast, which would be in the range of $10 to $15 lower than pipeline for each barrel of bitumen produced. Assuming the comparative economics between pipeline and rail were in this range ($6 per barrel or less), over the longer term, we would expect oil sands growth would not be affected, even if rail is an ongoing component of the transportation options for oil sands*** Moving to pure bitumen by rail if pipelines are constrained Pure bitumen rail movements today are not happening because the necessary infrastructure for shipping pure bitumen does not exist. Moving pure bitumen requires specialized equipment in Alberta, such as heated tanks connected by heated pipelines, modifications to rail on-loading facilities, heated rail cars, and units for removing diluent (diluent is added to the bitumen in the extraction and processing steps, this needs to be removed before shipping pure bitumen). In the USGC specialized rail off-loading facilities are also needed. The advantage today of moving dilbit, rather than pure bitumen, by rail is that it does not require as much unique rail infrastructure as pure bitumen. However, by moving dilbit by railcar producers are making part of the investment needed for supporting pure bitumen movements.

The rationale, so far, for not investing in the pure bitumen transport option is that most oil sands producers are assuming that sufficient pipeline capacity will become available in a few years. In order to receive a payback on building pure bitumen railing infrastructure, producers must anticipate its use over a longer time frame-perhaps five years. However, if producers anticipate that new pipeline capacity will not keep pace with oil sands growth, we expect that they will make investments in more efficient rail transport, including equipment for moving pure bitumen. These investments would narrow the gap between the economics of transporting oil sands by pipeline and by rail.

* Dilbit moved by rail sometimes has slightly less diluent, between 20-25%.
** Netbacks are calculated by subtracting cost of diluent and transport from revenue for each barrel of bitumen produced. Netbacks are appropriate for this comparison because the transportation costs cannot be directly compared since each case requires a different volume of total product moved. Pipeline economics assume a pipeline to the US Gulf Coast exists with tolls in the $7.50-9.00 per barrel range.
*** IHS CERA oil price outlook is that Brent crude will average $92 per barrel between 2013 and 2020 (constant 2011 dollars). Meanwhile, over the same time period, we expect oil sands SAGD projects to require a $65-85 per barrel Brent price for continued investment. Hence, even if oil sands breakevens were to increase by $6 per barrel due to the use of rail, oil sands would continue to grow.

Posted 10 September 2013

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.