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September 12, 2013

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Ok, here's a question. Take a look at "“Even if Keystone XL continues to be delayed, we do not think lack of takeaway capacity from Canada will be a key driver of demand for rail service as production does not begin to test the limits of takeaway capacity until 2017/18,” analysts David Vernon and Bob Brackett wrote."

The idea that the "limits of [rail] takeaway capacity" might be tested as early as 3 years from now implies a significant factor that might impact investment in productive capacity, no? Nobody is investing with the expectation that they recoup over the course of 3-4 years.

Additionally, assuming that the $3.00/bbl can't be gotten rid of, you're talking about a significant increase in the time to recoup investment. What's break-even for a tars sands play now, $75-$85? An additional $3 in shipping costs makes a difference at WTI=$96/bbl.

Good questions. Let me take them in turn.

Rail capacity might be tested in three years ... if no new investments are made. But new investments are being made!

http://www.nytimes.com/2013/10/31/business/energy-environment/looking-for-a-way-around-keystone-xl-canadian-oil-hits-the-rails.html?_r=0

The article doesn't specify, but the cheap way to transport oil by rail is via gigantic 100-car+ "unit trains" fed by specialized loading facilities. That's where the new investment comes from; you will likely never need new trackage.

The second question has to do with the effect of a $3-per-barrel increase in the cost structure. There's an easy answer: break-evens are calculated at the no-Keystone transport price.* In other words, relying on rails won't make the current break-even estimates look any worse.

* Subtle irrelevant point: in general, analyses use the realized price of bitumen in Alberta. So transport costs are taken off the top. Same difference, really. Here's a nice calculation for a tar sands project from one of my favorite energy blogs:

http://andrewleach.ca/uncategorized/fort-hills-tale-of-the-tape/

Point taken on #1, though I have to think that quadrupling capacity at the endpoints is going to mean congestion + extra wear & tear on the lines themselves.

On #2, I think the point I really wanted to make is that $3/bbl is meaningful given the actual margins being obtained. I agree that the $3 has to be baked in right now, but the continuation of its existence makes each project somewhat riskier than it could otherwise be by pushing out the point at which a well (mine in this case?) breaks even. That presumably pushes some projects over the cliff, particularly if there's uncertainty about whether the cost will remain at $3.

I like the "Rescuing The Frog" site, BTW.

Point taken on the $3. The thing is that the overall supply elasticity in the tar sands isn't all that high. Prices are currently above the breakeven; it's other constraints what keep production from expanding faster.

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