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CALGARY/WASHINGTON (Reuters) - Cost overruns, logistical woes and regulatory uncertainty had already cast a shadow over the Canadian crude-by-rail boom even before a long-awaited report last week appeared to give a boost to the oil-train industry's main competitor, the Keystone XL pipeline.
A U.S. State Department study released on Friday found that TransCanada Corp's (TRP.TO) proposed $5.4 billion pipeline to the U.S. Gulf Coast from the oil sands of northern Alberta will not increase the pace of oil sands development, and therefore have minimal impact on climate change.
Even without the 830,000 barrel per day (bpd) pipeline, the report said, mile-long oil trains will ensure that Canadian crude keeps flowing to market.
The environmental study found no "substantial impediment" to efforts to build the billions of dollars worth of specialized rail-terminal facilities needed to support the expected growth in oil sands output. It estimated that at least 1.1 million bpd of rail-terminal capacity would be running in Western Canada by year's end.
But at facilities across much of Alberta, it has become clear in recent months that development work has been slower and costlier than many in the industry had expected due to difficult weather, labor costs and logistical challenges.
With setbacks in the near term and with major new pipeline competitors now looming larger on the horizon, terminal operators such as Torq Transloading Inc, Canexus Corp CUS.TO and Gibson Energy Inc (GEI.TO) could be facing a shrinking time period in which to capitalize on demand for crude-by-rail.
"Let's say KXL (Keystone XL) were to get approved - it may signal to rail developers there's a little bit more uncertainty in terms of how much capacity is needed," said Jackie Forrest, IHS CERA director of global oil in Calgary.
After the State Department report, many analysts and observers are now placing bigger bets on President Barack Obama approving the controversial Keystone pipeline later this year. Construction is expected to take around two years.
Forrest said Keystone XL alone would not quash Canada's nascent crude-by-rail industry. Many refiners also believe the trend is likely to carry on even after pipelines are built as it offers them greater flexibility in choosing what crude they burn.
But with railway rates more than double what pipeline tariffs are expected to be to get oil to Gulf Coast refiners, many producers see crude-by-rail as more of a short-term alternative.
As well as Keystone XL, Canadian regulators are considering other pipeline proposals: TransCanada's Energy East pipeline, Kinder Morgan Energy Partners LP's KMP.N Trans Mountain expansion, and Enbridge Inc's (ENB.TO) Northern Gateway. The four projects in total would add more than 3 million bpd of takeaway capacity.
"If two out of four are built we will probably not need as much rail capacity as we are building," said CIBC analyst David Noseworthy.
Friday's State Department review dropped a March finding that crude-by-rail costs could match that of pipelines.
Last week, officials allowed that train transport was more costly and that some future projects might be dropped if rail were the only option and global oil prices were low.
Oil sands production is expected to more than double to 5.2 million barrels per day by 2030, industry officials have said.
The State Department's data also showed that the growth in Canada-to-Gulf shipments has been slower than expected. A year ago, it cited forecasts for 200,000 bpd of Canadian heavy crude to reach Gulf Coast refiners by rail by late 2013.
But the actual tally was no more than 40,000 bpd through November, according to a Reuters analysis of data from the Energy Information Administration.
The State Department changed its crude-by-rail reference in Friday's report to say that about 180,000 bpd of Canadian crude of all kinds was moving by rail late last year.
But total rail-loading capacity in the Western Canadian Sedimentary Basin - most of which is oil sands output - had surged to 665,000 bpd by the end of last year, and should rise at least 1.1 million bpd by the end of 2014, the study found. The final tally could be even higher as new projects come online such Kinder Morgan's KMP.N plans to build a new Edmonton joint-venture facility to load 100,000 bpd.
The crude-by-rail industry's biggest concern is that a series of fiery derailments is prompting regulators to consider safety measures that could erase efficiencies in the rail model, making it a less palatable alternative to Keystone.
Tougher tank car standards are anticipated but regulators might also order shipments to be routed around cities, to move at slower speeds, or to limit the use of unit trains. Unit trains, 100-car-or-more deliveries that have transformed North Dakota energy patch, have been involved in several recent derailments.
But practical problems are also arising in the sector's race to build more than half a dozen new unit-train terminals.
Canada's first unit train terminal, operated by Canexus Corp in Alberta, has seen costs rise 40 percent and start dates slip behind schedule.
In addition, many terminals - in theory able to load 120 rail cars or nearly 70,000 barrels of crude per day - will not necessarily ship at headline capacity.
"Weather has not been kind to the construction process. You are always optimistic about being online sooner than you end up being online," said Jarrett Zielinski, president of Torq Transloading. Torq is developing Canada's largest station: a 168,000 barrel per day loading dock in Kerrobert, Saskatchewan.
Harsh snowfalls have knocked that project back months, he said.
Handling oil sands crude is a cumbersome process requiring specialized tank cars and costly, steam-heated unloading docks that refiners have been reluctant to build without a clearer signal from Canada that the deliveries will come.
Independent refiner PBF Energy (PBF.N) has held back on expanding its Delaware offloading facilities for oil sands shipments because of infrastructure delays north of the border.
Those delays mean coiled and insulated rail cars, built to carry raw or diluted bitumen, are being used for light sweet crude and condensate as shippers await new terminals that can load heavy crude, Canadian midstream operators said.
The industry in Canada has emerged differently than in North Dakota, where desperate producers that quickly ran out of pipeline capacity built their own rail terminals. Around two-thirds, or some 800,000 bpd, of Bakken crude was shipped by rail in November, up 60 percent from a year earlier.
"Producers led the charge in North Dakota," said Travis Brock, an executive at Strobel Starostka Transfer, one of the North Dakota's largest crude-by-rail shippers.
"They built their own assets. There's just less experience in Canada, and fewer people who know how to do this stuff. It hampers the development of these projects."
For Zielinski's Torq, and Ceres Global Ag Corp's (CRP.TO) new terminal in Northgate, Saskatchewan, loading a unit train will start with hundreds of truck deliveries of crude a day to the terminals.
In the Canadian prairies, where spring thaws can turn roads to mud for up to eight weeks, that kind of traffic will so tax infrastructure that it could put the longed-for shipping volumes out of reach, said Raymond James analyst Steve Hansen.
"If you really want to run a unit train per day or per two days you will need more than just truck loading," he said.
Editing by Jonathan Leff; and Peter Galloway