THE BLOG
04/09/2009 04:24 pm ET | Updated May 25, 2011

Game-changer: Canadian oil sands will bypass US for Asia

A project by Canadian National Railway called the "Pipeline on Rails" is an energy and political game-changer for Canada and the financially struggling United States.
I first broke this story today in my blog in the Financial Post that the railway company can move millions of barrels of oil sands production daily from Alberta and Saskatchewan to ports on Canada's west coast for shipment to asian markets by rail and ship.
"We can do it cheaper than pipelines to the west coast or to the U.S.," said CN Executive Vice President Jim Foote.
This has interesting, and potentially troublesome, consequences for the United States where all of Canada's oil exports currently go. Canadians have been concerned about American energy policy notions and about the degree of anti-oil sands sentiment.

Get out from under the US
In essence, this railway strategy will decouple Canada's dependence on the U.S. for energy purchases and eliminates five key barriers to the development of Canada's vast oil sands:
1. America's financial crisis which means multi-billion dollar pipelines will be impossible to finance for years;
2. protectionism by oil and ethanol interests;
3. endless American red tape;
4. the politics of obstruction south of the border from environmentalists even though oil sands is dramatically cleaner than the use of American coal.
5. and the danger of selling oil to monopoly buyers in the U.S. some of whom have, in the past, ripped up contracts when times were tough.

The CN Rail said Canadian oil producers and their customers are paying C$17.95 per barrel to ship oil from Alberta to the U.S. gulf coast refineries. Rail is cheaper and faster and dramatically lower if it is diverted to the west coast instead for Asian markets.
This is because CN doesn't incur the staggering capital and financing costs involved with increases in pipeline capacity. Estimated cost of building lines to ship four million barrels a day from the oil sands to the U.S. gulf coast is US$24.7 billion. A proposed increase in capacity to the west coast adding 600,000 barrels a day is another C$4 billion.

Godsend for Canada

CN will be shipping 10,000 barrels daily from producers whose reserves are now stranded within months. 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.
But the "scaleability" of the concept - up to four million barrels per day -- means that the railway can ramp up production vastly by just adding rail cars. Shipping four millions barrels per day is possible with current rail capacity, said Foote.
Financially, this could be a Godsend to the two land-locked provinces - Alberta and Saskatchewan -- which are dependent upon the U.S. for export markets. Rail transport cheaply and quickly can provide immediate cash flow to producers which otherwise would have to wait years for completion of upgraders and/or pipelines or simply shut in their wells.
It also opens up the world markets for producers, but also allows Canadian oil producers to bypass protectionism as well as the fickleness of environmental politics south of the border.

This will also spark large-scale investments in Canada's oil sands by Chinese, Indian, Japanese and other oil-starved countries as well as oil companies. It may also mean that the building of gigantic pipelines in North America is a thing of the past.