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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!


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:


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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