There has been a lot of market interest and investment in moving Canadian heavy crude from Alberta to the Gulf Coast by rail in the face of competing pipeline routes that will come online in the next two years. Our analysis indicates that rail can beat the pipelines but that the infrastructure to achieve the necessary economies of scale are not yet in place. Today we provide a worked example of the cost alternatives.
Recap so far
This series started by asking two questions – is rail capacity needed to supplant a shortfall in pipeline space and can shipping bitumen by rail compete with pipelines on cost (see Go Your Own Way – The Rail vs. Pipeline Bitumen Challenge). Next we surveyed in detail the rail terminals being built in Alberta (see Go Your Own Way Alberta Rail Load Terminals Part 1 and Part 2). In the fourth and fifth episodes we surveyed 8 rail terminals on the CN direct network that are able to handle heavy crude today or plan to be able to handle heavy crude in the future on the Mississippi Gulf Coast. Episode six covered operating or planned terminals further east on the Texas Gulf Coast. Episode seven summarized rail load and unload capacities, which are roughly matched.
Two important points emerged from the detail. The first is that loading railbit or bitumen with low levels of diluent requiring heating equipment is currently limited to 25 percent of the rail capacity. The second is that unit train load and unload facilities do not generally have equipment to handle railbit. That means at the moment it is not possible to ship raw bitumen or railbit (17 percent diluent) on unit trains from Alberta tot eh Gulf Coast. In this episode we do the detailed math to compare the transport costs of moving bitumen by rail or pipe using more or less diluent.
We reviewed the transport options last time but here is a quick recap to help understand what follows. Both refiners and shippers would prefer to use less diluent to move bitumen to market if they could. Bitumen can be made to flow over shorter distances when mixed with less than the pipeline specification of about 28 percent diluent but that flow may require a heated pipeline or railcar in winter temperatures. A common blend of bitumen and diluent used for rail transport is called “railbit”, which contains 17 percent or less diluent. Railbit can be transported by rail but shippers have to use rail tank cars with insulation and heated steam coils to keep the crude from “setting up” (becoming too viscous to transport) in cold temperatures. A third alternative to dilbit or railbit is to move “raw” bitumen with very little or no diluent added. Since some diluent is typically added to bitumen to move it from the wellhead to a pipeline or to a terminal by truck, raw bitumen is not usually transported. However, it is possible to remove diluent from bitumen prior to transportation using a diluent recovery unit (DRU).
Bitumen transport costs
The three different blends of bitumen described above all have different transport options and costs. What follows is a worked through calculation for each of these alternatives in turn using representative cost and pricing estimates. The key factor to bear in mind is that in order to compare apples to apples, we will always use the total cost of shipping one barrel of bitumen. The comparison is for three different transport options - pipeline, manifest rail tank car and unit rail tank car. Manifest rail is estimated to be $3/Bbl more expensive than unit rail. Manifest trains are made up of batches of railcars shipped with other freight that take longer to travel. Unit trains are over 100 car dedicated crude convoys that travel more efficiently as a unit.
Case 1 – Shipping Raw Bitumen by Rail
This is the most straightforward case because no diluent is needed to make the bitumen flow. Table #1 below lays out the costs and the netback the producer receives at the Gulf Coast.
Source: RBN Energy
The first row of Table #1 represents the price of bitumen at the Gulf Coast - $88/Bbl (in this case we used a discount of $4/Bbl to a recent price for the Mexican Maya crude). The next two rows in the table are estimated rail freight costs to ship one Bbl of bitumen from the Hardisty gathering center in Alberta, Canada to the Gulf Coast using manifest ($26/Bbl) or unit ($23/Bbl) rail. The cost estimates includes loading and unloading as well as tank car leasing. The bottom two rows are the netbacks realized by a Canadian producer after paying the freight cost, namely $65/Bbl for a unit train shipment and $62/Bbl for manifest shipments.
Case 2 – Shipping dilbit by rail or pipeline
Table # 2 below contains the estimated equivalent freight cost to ship one Bbl of bitumen to the Gulf Coast using 72 percent bitumen and 28 percent diluent to make a pipeline quality “dilbit” crude barrel. In this case, in order to ship one Bbl of bitumen to the Gulf Coast the shipper has to put 1/0.72 or 0.39 Bbl of diluent in Canada and ship that mixed with the bitumen – meaning they ship 1.39 Bbl of dilbit to move one Bbl of bitumen. All the freight costs therefore are based on 1.39 Bbl. At the Gulf Coast the producer sells their 1.39 Bbl of dilbit containing the one Bbl of bitumen and 0.39 Bbl diluent for the Gulf Coast Dilbit price of $80/Bbl (we used $84/Bbl – a recent price for Western Canadian Select crude at Cushing, OK minus a $4/Bbl transport charge to the Gulf Coast).
The bad news is that the producer has to purchase 0.39 Bbl of diluent in Canada at $102/Bbl (a recent price for natural gasoline at Edmonton, Alberta) – a cost of $39.78 but only gets back $31.2/Bbl because it is sold at the Gulf as 0.39 Bbl of dilbit. Row three of Table #2 shows the crude price the producer gets for their 1.39 Bbl of dilbit less the 0.39 Bbl price of the diluent – a bitumen equivalent price of $71.42/Bbl.
Source: RBN Energy
Rows five through seven in column one of Table #2 cover the costs of moving the “bitumen” Bbl from Canada to the US Gulf. Column two is the cost of moving the diluent that will accompany the bitumen when it is shipped as dilbit. Those costs are added together in column three to give total transport cost for the equivalent bitumen Bbl shipped as dilbit. In this table we introduce a new cost in the 5th row from the bottom – the pipeline cost from Hardisty Alberta to the Gulf Coast including terminal and gathering fees. That cost is estimated at $18.50/Bbl – much less than the rail costs in Table #1, but because the producer must also ship 0.39 Bbl of diluent for every bitumen Bbl, the true pipeline cost goes up by 39 percent to $25.72/Bbl as shown in column three of Table #2.
The bottom three rows of Table #2 show the final netback that a producer gets for shipping their bitumen as dilbit by manifest rail ($35.28/Bbl), unit rail ($39.45/Bbl) or by pipeline ($45.71). Note that these numbers are considerably lower than the netbacks for bitumen in Table # 1 ($62/Bbl for manifest rail and $65/Bbl for unit rail). This is because the bitumen price at the Gulf coast is $8/Bbl higher and the producer shipping raw bitumen has not had to purchase or pay to ship diluent. So although the pipeline cost per Bbl is lower than rail, the extra diluent costs eliminate the pipeline advantage.
Case 3 – Shipping railbit
Source: RBN Energy
Our third case is for shipping railbit, which only contains 17 percent diluent and cannot flow on a pipeline. Railbit is easier to move around than raw bitumen since less heating is required, but it has to be moved in insulated coil rail tank cars in case of cold weather. Table #3 above shows the railbit equivalent prices and costs to our dilbit calculations in Table #2 but this time instead of 28 percent diluent the calculation is 17 percent - meaning an extra 1/0.83 or 0.24Bbl of diluent. We also do not include the pipeline option in Table # 3. The diluent price is the same as before ($102/Bbl) but the railbit price at the Gulf Coast is estimated at $84/Bbl – midway between the raw bitumen price and the dilbit price. Because there is less diluent carried with railbit and the railbit price is higher than dilbit, the realized producer price at the Gulf for the bitumen equivalent railbit Bbl is $80.31/bbl – or $8.89/Bbl higher than the dilbit price of $71.42/Bbl from Table #2. The rail freight costs for railbit are also lower than dilbit because there is less diluent to ship alongside the bitumen.
The last two rows of Table #3 show the Gulf Coast producer netbacks for manifest rail ($48.99) and unit rail ($52.60) when shipping railbit. These values are higher than for the dilbit equivalent but lower than raw bitumen because of the diluent burden.
Table #4 below is a summary of the analysis so far:
Source: RBN Energy
Row one shows the respective sale price (less diluent cost) for raw bitumen ($88/Bbl), railbit ($80.31/Bbl) and dilbit ($71.42/Bbl). In row two are the netbacks for manifest rail shipments, row three the unit rail netbacks and row five the pipeline netback. The best netback return ($65/Bbl) is for shipping raw bitumen by unit train, the next best is for raw bitumen by manifest train. After that come the railbit netbacks for unit train ($52.60/Bbl) and manifest ($48.99) with pipeline dilbit $3.28/Bbl behind ($45.71/Bbl). Moving dilbit by rail produces the lowest netbacks of $39.45/Bbl for unit trains and $35.28/Bbl for manifest trains.
The analysis indicates that rail can give pipelines a run for their money – provided that bitumen prices at the gulf Coast are higher than dilbit prices and as long as diluent prices in Canada are more expensive than dilbit on the Gulf Coast. If these price dynamics continue, then moving bitumen by rail can compete with pipelines – so long as the product moved is railbit or raw bitumen – with the latter having a clear advantage. Unit trains also improve the netbacks considerably over the manifest option. Even moving railbit by manifest rail gives a more than $3/Bbl higher netback than dilbit by pipeline.
At the moment, however, our survey of load and discharge terminals in Canada and on the Gulf Coast suggests that the infrastructure is not in place yet to take advantage of this opportunity. Where there are unit train facilities built or under construction, they are primarily shipping dilbit, which produces $6/Bbl less netback than pipelines. The railbit facilities are manifest terminals that have a more slender advantage over pipelines. In other words – for rail to trump pipelines from Canada to the US Gulf, shippers must develop unit rail facilities that can handle railbit or better yet can remove all the diluent to ship raw bitumen.
 We estimated the railbit price as midway between the raw bitumen price and the dilbit price. In a more rigorous analysis we would use typical refinery yields for raw bitumen, dilbit, and railbit to determine a more accurate value of these different blends on the Gulf Coast. For more information (see Refinery Yields Forever).