Who needs the Keystone XL pipeline?

North of Regina, Sask., sits a mountain of steel pipe in storage. Say hello to TransCanada's Keystone XL pipeline. It's been this way several years as TransCanada wages a political fight against environmentalists for the heart of President Barack Obama. TransCanada's supporters say the pipeline is needed to get Canadian heavy crude oil in Alberta and North Dakota light sweet crude in the Bakken shale formation to U.S. refiners; they wave the flag of energy independence. Enviromentalists say pollution spawned by tar sands oil in Canada will be the tipping point that makes the Earth unlivable.

Well, I've been attending a conference in Calgary, Alta., this week focusing on the mechanics and economics of hauling Canadian crude by rail. And it is becoming increasing clear to me that many companies involved in extracting heavy oil from the ground in northern Alberta--the small and mid-sized producers, in particular--don't really give a damn about the XL. They do give a damn about getting their product out by rail.

The matter was addressed quite directly at Crude Markets & Rail Takeaway Summit Canada by panelist Ed Koshka, vice president marketing for E-T Energy, an "emerging" producer. "Does Keystone really matter, given that we have rail and other pipeline expansions?" he asked. "If you produce 100,000 barrels a day and backstopped [agreed to use] XL years ago, then the XL is important. But if you are a small emerging or even bigger producer who didn't sign on to XL, then it's a different matter. We see other alternatives. Projects will not stop, because we will find ways to get the product to market." Several other speakers make similar remarks.

So the bottom line is that while the Canadian government bends Obama's arm as hard as it can, the oil people here in Calgary could, by and large, care less. The Keystone XL is proposed to supplement the existing Keystone pipeline into the Midwest. According to the original environmental impact statement, it would carry 900,000 barrels a day of heavy Canadian crude and 100,000 barrels of light sweet crude from North Dakota to either Cushing, Okla., or the St. Louis area. Because it would cross a national border, the U.S. Department of State must approve it, which is where the problems began. (The lower portion of the XL, fromn Cushing to Nederland, Tex., near Beaumont, didn't need such approval and will open late this year.)

The fact is that big pipeline projects like the XL take years and years from conception to completion. And events can take strange turns during that time. Three years ago there wouldn't have been a conference like this in Calgary, because the oil people weren't interested in a railroad alternative. Today railroads are on everyone's mind, and here's why: The natural market for heavy Canadian crude is the U.S. Gulf Coast. That's where the refinery capacity is, particularly refineries set up to handle heavy crude, and that's the market XL was envisioned to serve. (Right now those refineries are being fed largely by Mexican and Venezuelan heavy crude.) But this week speaker after speaker rolled out case studies and cost analyses that suggested railroads are competitive with pipelines to the Gulf Coast and clearly superior if the oil goes by unit train.

Will the Keystone XL be built and all that pipe get pulled out of storage in Regina (by train, of course)? I am not your geopolitical expert, so don't look to me for an answer. But I can make this prediction: By the time the XL cranks up, if it cranks up, railroads will have such a foothold on the Alberta heavy crude oil market that nobody will really notice the grand opening.

I'll have much more to say about this in a future issue of Trains Magazine.--Fred W. Frailey