It is cheaper if China, Japan and India own Canada's oils sands

by Diane Francis

The energy and geopolitical ramifications of Canadian National Railway's "Pipeline on Rails" initiative is a game-changer for Canada. As I wrote on April 9, 2009, the railway has developed a transformative strategy to move oil sands production more quickly and cheaply to markets in North America or Asia.
This project, in its early stages, will eliminate three barriers to the development of Canada's vast oil sands: the cost, delays and financial risks involved in building multi-billion dollar pipelines; the politics of obstruction south of the border from environmentalists and the danger of selling oil to monopoly buyers in the US which has, in the past, resulted in contracts being ripped up when times were tough.

It also allows Canada to decouple from the American economy when it comes to its most important commodity which is oil products. This is because all the oil sands production can be routed to the west coast for shipment to Asia or anywhere, thus avoiding monopoly pricing and bullying by the Americans.
Besides that advantage, oil sands are the national trump card in the future and the American economy, now sputtering, will never be as robust as before.

Cheaper especially if Chinese, Japanese and Indians own the oil
The business model is that currently pipelines charge C$ 17.95 per barrel to ship oil from Alberta to the gulf coast and "we can do it cheaper", said CN Executive Vice President Jim Foote.
This is because CN doesn't incur the staggering capital and financing costs involved with increases in pipeline capacity. Estimated cost of building lines to ship four mm bpd from the oil sands to the US gulf coast is $ 24.7 bn. A proposed increase in capacity to the west coast adding 600,000 bpd is another C$ 4 bn.

CN will be shipping 10,000 barrels daily from producers whose reserves are now stranded within months. The railway will deliver the oil sands production through the use of insulated and heatable railcars or by reducing its viscosity by mixing it with condensates or diluents.
But the "scaleability" of the concept -- up to 4 mm bpd -- means that the railway can ramp up production vastly by just adding rail cars. Shipping 4 mm bpd is possible with current rail capacity, said Foote.

Financially, this could be a godsend to the two land-locked provinces -- Alberta and Saskatchewan -- which are dependent upon the US for export markets. Rail transport cheaply and quickly can provide immediate cash flow to producers which otherwise would have to wait years for completion of upgraders and/or pipelines or simply shut in their wells.
Geopolitically, the rail option is very interesting. It opens up the world markets for producers, but also allows Canadian oil producers to bypass protectionism as well as the fickleness of environmental politics south of the border.

As for Canada's own environmental concerns, the oil sands are absolutely essential to maintain the future living standards of Canadians. They should not be stopped, but perhaps the environmental challenges could become another opportunity.
The age of oil is decades away from ending and responsible development should include huge commitments to research into carbon capture by debt-free Province of Alberta, increasingly wealthy Saskatchewan and Ottawa. Norway, for instance, has declared carbon capture its principle technology research project as a nation because of its huge economic reliance on oil and natural gas production.

Canada should do no less. That aside, Canadian National is to be applauded for thinking out of the box, using common sense, and sharp pencils, to get around the political, regulatory, legal and financing challenges which face the country's most important sector.
It is quite brilliant.