Economics of Rail versus Pipeline

While some of the tolls for heavy crude are published publicly others are not. Where possible public data and public tolls were used as source data. Generally, pipelines have rates for shippers who take a commitment over long periods of time in the 10 to 20 year range and one for no commitment except by month. To note, according to the TransCanada tariffs the batch sizes are very large and the commitment term is long. This would allow only the most credit worthy producers to meet these requirements. Others may have to provide costly letters of credit to meet the requirements for the committed toll rate which is not included in the calculations here.

Either way, the producers balance sheet would be impacted by taking on these long term agreements for so much volume. A 20-year commitment of 100K bbls/day at $11.52/bbl would be over $8.4 billion. It is fair to say that most producers could only avail themselves of the uncommitted toll.

This round trip cycle occurs over and over again in pipelines but can be completely avoided with rail. However, if a dilbit mixture is shipped by rail it will be subject to the same diluent penalty costs.

One way to understand this differential is to look at the cost to transport diluent from the USGC to Edmonton. The cost to buy diluent in Edmonton should at least be the cost of diluent in the USGC plus the cost of transport on the pipelines to get the diluent to Edmonton.

For example, if condensate sells for $50 US/bbl in the USGC then it should sell for at least $50 plus the pipeline tolls shown in the chart here plus the terminal costs and losses.

Notice that there are two rates. One for committed volumes over typically 10 – 20 years and one for uncommitted volume. The rate is exactly double for uncommitted volume. In each case, the minimum daily batch is 20,000/bbls per day which would require about 67,000/bbls per day of bitumen production to blend with on a 30/70 ratio.

Since these pipelines and associated terminals costs billions of dollars to build, it should be expected that the differential should also include some return for those who took the risk in committing to this infrastructure.

There are other sources of diluents. Some of these are not pipeline connected and have used rail to bring condensates in from various sources in the US. Recently, more domestic condensate production has become available from rich gas production from areas in Alberta and British Columbia but these are still not sufficient to supply the market and therefore would not set the market price in an efficient market system.

The analysis in the summary chart assumes the differential to be $12.50 US/bbl which would be reasonable over time in an efficient market system. This cost is labelled the “Diluent Differential Loss” in the summary chart. This cost has to be normalized to the cost to move one barrel of bitumen which would be 30/70 *$12.50US = $5.36 US.

Of course, the differential loss is set by various market influences and can not be precisely set as a fixed number from a formula. Is does fluctuate up and down based on market and other conditions. However, any differential loss less than the cost to move the diluent would mean the system is inefficient and parties along the logistics chain are losing money.

Time Value of Money – Line Fill & Transport Time

A pipeline has to be filled over the distance of the pipeline. This has a time value of money cost both in terms of the oil that must fill the line and the time it takes for a batch to transit the pipeline from one end to the other. A dilbit pipeline flows at about 2 miles per hour. Not accounting for batching, a shipment would take about 52 days to travel 2,500 miles. A unit train moving at an average of 25 miles per hour would traverse the same distance in just over 4 days. The time value of the money of oil in the pipeline is not insignificant and is about 12.5 times higher than rail.

Batching & Storage

Pipelines charge terminating fees for storage and throughput to create batches. A production rate of about 20,000 bbls/day (9,537 M3) would take about 3 days and 6 Stream Days to build a 60,000 bbl batch which is about the same size as a unit train. The cost goes up for smaller stream rates and goes down for larger stream rates. In this example, it would cost $0.23/bbl to build a batch of 60,000 bbls. This example only covers the origin point but if batches have to be interchanged on pipeline systems these costs would be double or more.

Loss Allowances & Quality

Because of the amount of handling of the diluent and dilbit, losses occur. Loss allowances vary from about 0.05% on dilbit pipelines to about 1.5% in condensate pipeline and truck systems. There are also formulas for product quality equalization that are outside of commercial seller-buyer negotiations which can lead to losses for certain producers. Since rail does not need diluent and because the product is segregated in each tank car, losses are minimized and quality is a direct commercial negotiation between seller and buyer.

Excessive Treating Costs

Dilbit pipelines require that the dilbit meet certain specifications and in particular, the amount of water that can be part of the dilbit mixture. This means that the bitumen has to go through expensive treatment to remove the water to meet the maximum water allowed in a pipeline of 0.5%. For rail, this is only a commercial consideration not a transportation consideration. The commercial consideration on rail versus the cost of treatment has tended to set the maximum water content on rail at 2%.

Higher levels of water reduce treating costs and water disposal costs. In some cases, this level can be achieved with field treating and thus reduce the cost of treating and the transport cost of oil to a treating facility and then to a pipeline terminal. Transporting oil to and from treating facilities can add dollars per barrel alone.

A conservative estimate for all these and other hidden costs would be at least $2.00 US/bbl.

Railways are common carriers and are required to provide rates on all of the rail lines they operate. Public rates can be found in open tariffs or the public can request a rate and it would be published in an open tariff, limited distribution tariff or a confidential contract. Open tariff rates are non-negotiated rates and tend to be higher than negotiated rates and specific to a particular market segment.

With the deregulation of the industry in Canada and the US in the late 80’s and mid 90’s, parties can negotiate a private confidential contract. Railways and shippers can enter into confidential contracts on commercial terms versus the regulated terms and rates prior to deregulation.

Common carrier pipelines still operate commercially in many ways like the old regulated rail industry. The regulatory authority prescribes formulas for the pipeline open tariff rates like some of those tariffs cited here. However, there are pipelines that are built that are proprietary and thus rates are not public.

Railways set commercial rates using the following criteria:

• Track weight limitations. Generally, the track weight limit is 286,000 lbs gross weight on rail (GWoR). Meaning the rail cars total weight can’t exceed 286,000 lbs. Not all track has that high of a limit. The track to Ft. McMurray for example is limited to 268,000 lbs.
• Shipment weight (GWoR)
• Distance and route travelled
  • Railways are very efficient on long hauls. Their cost per mile tends to go down as the distance travelled increases.
  • Railways often have to interchange traffic with one another to get to destination. Generally, rates are higher when more than one railway is involved in the shipment.
• Service type
  • Manifest service is generally for smaller shippers whose shipments will be aggregated with other shippers to make a full train.
  • Unit train service is for larger shipments usually of 100 cars or more from one origin to one destination for one shipper.
  • Rates for unit trains are typically in the range of 25% cheaper than for manifest shipments.
  • Transit time for unit trains are about 1/3 faster.
• Market conditions
• Commodity being shipped
  • Generally, regulated dangerous commodities are charged a higher rate.
  • Very dangerous products will have much higher rates than for other commodities.

Because of the confidential nature of rail contracts and the lack of commercial open tariffs, it is difficult to cite a direct public source for specific rail rates.

Although the rail industry is governed by government regulatory authorities in Canada and the US for items such as safety and operating rules, the American Association of Railways (AAR) is an industry body that governs industry matters such as interchange and car hire rules. The AAR has many functions but one is to collect data about the rail industry.

One of the data elements they collect from all railways is a sample of the revenue they make on a $US cents per ton-mile basis. The sample is based on all services types, all commodities and over various distances and routes. This a good representation of what a shipper could expect to pay a railway in Canada and the US without much if any negotiation. This is the generic AAR rate used here in the rate model.

The rate rail model is significantly simpler to understand since it is only concerned with shipping pure bitumen or heavy oil. However, there are some concepts that need to be understood.

• Tank cars are typically leased for a term of 1 – 7 years and are paid for by month.
• The lease cost per shipment depends of how fast the cars cycle between loads.
• The amount of oil that can go into a tank car depends on:
  • Volumetric capacity
  • The tare weight (weight of the empty car)
  • The load weight limits of the car
  • The temperature and density of the oil at loading
  • The lowest track weight limitation in the route
• It is very important to use the optimal car type so that the car will have the maximum volume in it before it exceeds either the weight load limit of the car or the track.
• To provide for a margin of error, the tank car used in the model is loaded to 98% of it’s weight load limit and 94% of it’s volume at the loading temperature of 60C.
• Rail rates include moving the car back empty to any origin to reload, not just the original origin. Empty to empty moves will however be charged.
• Rail rates do not include loading or unloading the car. There are fees to be paid both at origin and destination to load and unload the car.
  • Terminal fees at origin generally include throughput tank storage if used otherwise the cars are loaded direct from truck
  • Terminal fees at destination will generally include only unloading the car into terminal storage so the local distribution network can take the oil to final destination. In some cases, cars are unloaded directly at the refinery.
• Undiluted heavy crude or bitumen is not a regulated dangerous commodity in Canada. It ships under US regulations as an NA1993 placarded commodity.

Moving diluted oil by rail suffers the same diluent penalties borne by pipelines. But the diluent penalty is far worse for rail since the rail rate, loading and unloading terminal fees and lease car costs have to be normalized to one barrel of bitumen.

Diluent transportation = 30/70 x $16.56 = $7.10

Terminal & Lease fees = $5.62/0.70 = $8.02

The diluent penalty makes shipping diluted crude oil by rail uneconomic versus pipeline. However, there may still be situations where a producer may need or want to use rail. For example, credit is less of an issue with rail and can access more markets.

Below is a list of reference documents used for the calculations in this model. Links are also given to the website sources for updated document information.