As Keystone looms larger, Canada oil-rail builders face delays

Mon Feb 3, 2014 12:26pm EST
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By Nia Williams and Patrick Rucker

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: Quote) 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.   Continued...