The new IHS CERA Canadian Oil Sands Dialogue study thus basically agrees with the conclusions of the US State Department’s Draft Supplemental Environmental Impact Statement for Keystone XL that says oil sands production is expected to continue at similar levels regardless of whether Keystone XL goes forward. (Earlier post.)

The IHS CERA report notes that pipeline opponents argue that by opening up additional US markets for Canadian oil sands, the Keystone XL project would lead to significant incremental US GHG emissions. A primary dispute with the State Department’s analysis is based on the economics of moving oilsands by rail—assumed to be the alternative method of transportation if Keystone XL or other pipelines are not constructed.

Pipeline opponents assert that rail costs are prohibitively high and that in a scenario in which pipelines are not constructed, oilsands growth (and consequently GHG emissions) will stall for lack of market access.

Critics cite the steep crude oil price discounts for Canadian producers in the past year as further evidence that rail is not economic. On average in 2012, the price of heavy oils sands was $27 per barrel lower than a comparable barrel on the US Gulf Coast (USGC), and for short periods the difference was more than $40 per barrel.

However, these deep discounts were not the result of rail costs but rather due to a severe supply and demand imbalance: constraints in the pipeline and refining systems limited flows, resulting in a prolonged period of surplus supply. In fact, growing rail capacity from western Canada has helped to moderate the price discounts faced by Canadian producers by relieving this oversupply. By the end of the first quarter 2013, approximately 150,000 barrels per day (bd) of crude was leaving western Canada by rail (compared with negligible amounts at the start of 2012). Based on continuing oil sands supply growth and the lack of new pipeline capacity through the next few years, we expect rail movements to increase to about 360,000 bd by the end of 2014.

Even considering new capacity from rail, the balance between western Canadian supply and export capacity remains tight. Future price volatility is to be expected. However, in some periods such as the past three months—with the help of new capacity from rail—the system has been relatively balanced, and a barrel of heavy oil sands crude priced on average $17 per barrel lower than the value of similar quality heavy oil traded on the USGC. This indicates that oil sands can grow using rail; it is already happening.

—IHS Cera Insight on Keystone XL

IHS currently expects oil sands production to grow from 1.9 million barrels per day (mbd) in 2013 to 4.3 mbd in 2030 and does not expect the Keystone XL decision to have a material impact on the production outlook.

The IHS study points out that 3 mbd of additional oil sands pipeline capacity (not including Keystone XL) is currently proposed. 80% of this proposed alternate capacity travels exclusively through Canada—connecting the oil sands with Canada’s west and east coasts—and thus does not require US government approval.

Even if pipeline capacity were to lag behind oil sands growth, the study says that transportation by rail is expected to play an ongoing role and that greater investment could make rail more economic to a level approaching that of pipelines.

The study found that with sufficient scale and investment the additional cost of transporting oil sands by rail to the US Gulf Coast rather than by pipeline could be lowered from today. If heavy oil sands producers were to invest in improved rail efficiencies, the economics could be within $6 per barrel compared to pipeline (for each barrel of oil sands produced). This would place rail well within the breakeven range for most oil sands production.

One source of improved economics could come from shipping oil sands bitumen in its pure state, the report highlights. A lack of pipeline capacity would incentivize such added investment.

Moving pure bitumen by rail. Although moving crude oil by rail is generally more expensive than by pipeline, the report notes, oilsands heavy oil could be an exception. In its natural form, bitumen is too thick for pipelines, and thus must be thinned by adding light hydrocarbons (typically natural gas condensates) for pipeline transportation. The resulting mixture (called diluted bitumen, or dilbit) is about 70% bitumen and 30% diluents, and 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) 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 USGC, 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.

—IHS CERA Insight

Venezuela. The study also found that, were oil sands not to be shipped to the US Gulf Coast, it would result in little to no change in overall GHG emissions. That region—which contains 50% of total US refining—has a large capacity to process heavy crude. This means that crude oils of similar GHG intensity would continue to be refined in the absence of oil sands, the study says.

Venezuela is currently the largest single supplier of heavy crude to the US Gulf Coast and would be the most likely alternative source of heavy crude supply—which is projected to grow based on ongoing investments (including the Orinoco)—absent crude from the Canadian oilsands. IHS research has found Venezuelan heavy crude to have a similar range of life-cycle GHG emissions as oil sands imported into the United States.

Source: IHS CERA. Click to enlarge.

IHS CERA is an independent energy strategy analysis firm.