How the pipeline backlash gave a boost to oil exports by rail

The anti-pipeline movement has led to a rail renaissance for crude oil

Stephen C. Host/CP

Stephen C. Host/CP

As residents of Lac-Mégantic, Que., prepare for the immense task of rebuilding a downtown obliterated by an oil-filled runaway train that killed 47 people last summer, they are grappling with progress of a different sort: the realization that trains filled with crude oil will once more be trundling through the centre of town.

Days after Quebec police charged three former Montreal Maine and Atlantic Railway employees in the deadly derailment of a train carrying 72 cars of crude oil between North Dakota and New Brunswick in July, the railway’s new owner announced it hoped to resume shipping crude oil within 18 months. “The railway is important to the community, people, jobs and commerce,” John Giles, CEO of the newly rechristened Central Maine and Quebec Railway—purchased in May for $17 million by a New York investment firm—told the Associated Press. Local officials have been pressing senior levels of government to build a bypass that would route the railway outside of town, but have admitted the project could take years, if it gets built at all. In the meantime, Giles says the new owners are anxious to compete for the burgeoning market of crude oil moving by rail across North America. Their enthusiasm is not surprising given the industry’s stunning growth in the past year. Rail shipments of Canadian crude jumped 83 per cent in 2013, the National Energy Board said, even as the Lac-Mégantic disaster put an international spotlight on the industry and inspired a slate of new safety regulations. The Canadian Association of Petroleum Producers expects to ship more than 200,000 barrels of oil a day by rail this year, up from fewer than 50,000 in 2012. That could swell to 720,000 barrels a day by 2016 as more rail infrastructure gets built, which would make the crude-by-rail industry in Canada almost as large as the proposed Keystone XL pipeline that has been waiting more than five years for U.S. approval.

Anti-pipeline activists can thank themselves for the rail renaissance. The political backlash against pipelines that has blocked projects like Keystone XL and Northern Gateway effectively caused massive stockpiles of crude to build up in storage facilities in places like Cushing, Okla., last year. That drove down the price of Canadian crude, suddenly making the economics of transporting oil by rail—which can cost as much as three times more than pipeline but faces relatively little red tape—suddenly seem reasonable.

Railways are chomping at the bit for the lucrative business, which has helped offset declining shipments of coal. Canadian National Railway reported that petroleum and chemical revenues rose 23 per cent in the first quarter of this year, more than offsetting a drop in automotive shipments. Crude shipments now make up close to 10 per cent of railway revenues, says Steven Paget, director of institutional research at Calgary investment firm FirstEnergy Capital.

The renewed interest in rail has sparked a rush of new investment in infrastructure. TransCanada CEO Russ Girling told Reuters last week he was “absolutely considering a rail option” to move oil now that the company’s proposed Keystone XL pipeline seems forever stuck in regulatory purgatory. While companies like TransCanada are using rail to find new ways to get more oil to their existing pipeline networks, some oil producers are opting to skip pipelines altogether in favour of rail. Last year, Calgary-based MEG Energy Corp. built the first oil sands pipeline that connected directly to a rail terminal in Bruderheim, Alta. Imperial Oil and Kinder Morgan Energy Partners announced a joint venture to build a rail terminal in Edmonton, and Suncor started shipping oil by rail to its Montreal refineries last year. Grizzly Oil Sands, a private oil sands company, plans to ship its oil exclusively by rail, saying it thinks railways “can achieve economics superior to using the Keystone XL pipeline.”

The enthusiasm for rail is so overwhelming that analysts believe the capacity to transport oil by rail will soon far outstrip the demand. A report by Calgary investment dealer Peters & Co. predicts that there are enough proposed new rail terminals and facilities in Western Canada to transport more than one million barrels of oil by the end of the year—nearly five times the amount of oil currently being exported from Canada on trains.

Rail companies believe these early investments will eventually pay off. While oil producers may have shifted to rail as a temporary solution to the pipeline backlog, proponents say rail is quickly becoming an attractive long-term solution to many of the problems Canadian oil sands producers face when it comes to getting their product to market. Pipelines can cost billions to construct and face regulatory hurdles and resistance from landowners. Railway tracks, meanwhile, have criss-crossed North America for hundreds of years, so expanding shipments can often be done in months and for a fraction of the price of building a new pipeline.

Railways can also bypass the usual pipeline routes through middle America and ship oil from northern Alberta straight to coastal refineries in Texas and Louisiana, where oil can fetch higher prices. Producers also have the option of shifting to other markets in order to get the best price. As the public opposition to Enbridge’s proposal to reverse the flow of its pipeline between Sarnia, Ont., and Montreal has shown, its often much easier to reverse a train than a pipeline. On a train, “that oil could head wherever it’s best suited to go,” says Mike Woodward, manager at Torq Transloading, which operates six crude rail terminals in Alberta and Saskatchewan. “There are markets in the Gulf Coast, on the East Coast of both Canada and the U.S. and the West Coast. Eventually it could go to all three.” His company recently announced plans to build Western Canada’s largest crude rail terminal in Kerrobert, Sask., after attracting a $250-million investment from U.S. private equity giant Kohlberg Kravis Roberts in December.

Pipelines are often still the lowest-cost option for large customers who can commit to contracts that run as long as 20 years. For smaller oil producers who don’t want to be locked into long-term contracts, though, rail can be cheaper, Woodward says. Then there’s the fact that oil sands bitumen needs to be diluted with other chemicals in order to flow through pipelines. Railways can ship undiluted bitumen by using steam to move it into insulated tank cars, saving on the cost of diluent.

But by far the biggest driver of rail, says Woodward, is the recent boom in new oil production that has far outstripped the new pipeline capacity to carry it. Torq is focusing its efforts on junior producers in western Saskatchewan, home to a crude oil hub and pipeline constraints. “There is still a lot of production coming on stream in Canada that won’t be served by a pipeline either ever, or in the next three to five years,” he says.

The rail industry does face its share of risks; the biggest is the growing public and political backlash against shipping crude on railways in the wake of a rising number of derailments. The U.S. Pipeline and Hazardous Materials Association reported that train derailments spilled 4.3 million litres of oil last year, compared with three million litres spilled in the previous 37 years combined. In Canada, there have been 52 rail accidents involving dangerous goods so far this year, compared to 45 by the same time last year, according to the Transportation Safety Board. Prompted by the Quebec disaster, Ottawa ordered companies to get rid of the style of tank car that derailed in Lac-Mégantic within three years, meaning companies will have to pay to replace as many as 65,000 cars.

“The regulations that have come into play are going to challenge everybody,” says Michael Bourque, head of the Railway Association of Canada. “This is a very aggressive phase-out, so there’s no question that’s going to be a difficult thing. But it’s the right decision.”

Woodward thinks the rail industry can’t afford to brush off the public scrutiny. “Definitely it’s a risk to the industry,” he says. “Public opinion has halted three pipelines so far, so it’s possible it could halt this as well.”

Yet safety may also end up being a benefit in disguise to Canadian oil sands producers. Although U.S. regulators have raised the alarm about the environmental hazards of oil sands bitumen, which is far more costly to clean when it spills because it exists in a semi-solid state and tends to sink rather than evaporate, those same characteristics also make bitumen less explosive than the type of liquid shale oil on board the Lac-Mégantic train. “The explanation for us is easy; we can say our product isn’t explosive,” Woodward says. “It’s a heavy sludge that gets moved in a rail car. When people start to see that, they’re less concerned.”

So far, the stricter regulations haven’t put a noticeable dent in the growth of oil by rail. Some analysts predict that the cost of rail has now become so competitive that the industry is instead threatening to make some proposed pipeline projects unviable. Kinder Morgan cancelled its $2-billion pipeline between Texas and California last year because its refinery customers on the West Coast were opting to switch to rail.

That’s one more pipeline environmentalists can cross off their list. In that respect, the activists are winning the battle against pipelines. But when it comes to halting the expansion of Canadian oil production, the rail revolution means they’re losing the war.




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How the pipeline backlash gave a boost to oil exports by rail

  1. Easy enough to stop trains too.

    • How many coal trains shipping record amounts of thermal coal for export to Asia and Europe get stopped in the United States?

      The oilsands pipeline was always a silly bogeymen. The US oil industry needs oil trains as much or every more than Canada, and it is all the light explosive stuff that the US oil industry has to ship, not unexplosive bitumen.

      The alternative to Northern Gateway are bitumen trains to Prince Rupert and a massive oil refinery complex there, where all the aboriginal bands will get nothing except a few jobs. With Northern Gateway, they could argue for a big ownership share of the pipeline, and revenue for multiple generations.

      They will soon find out that the environmental groups funded by US money have hoodwinked them out of a multigenerational rentier revenue stream from the oil industry.

      All the southerners moving North to support the refinery will be far more disruptive to their way of life than a pipeline.

      • Obviously you’re not paying attention.

        Perhaps reading Obama’s speech would help.

        You will see the end of oil pipelines and oil trains in your lifetime.

        • http://www.bbc.com/news/business-26820405

          You are not paying attention either. It is easy to make a speech. In the meantime Utah has its own tarsands it is developing and Europe is back mining coal like crazy.

          • You think cherry-picking the news for small items changes the reality of the world?

            No.

    • Pick up truck. Two 40 gallon drums of diesel in cab. Street level rail crossing. 1000s of kms of tracks.

      The Current had a story about kids from Calgary getting radically schooled and then heading off to conflict zones.

      • Mr. [Hunter] Harrison [CEO CP Rail] also believes Canadians would be safer if the government held off on proposals to force railway companies to disclose what products they are shipping. Telling the public what trains are carrying, as well as when and where, is risky.

        “You know what scares me the most out of this? And I hesitate to even mention it. Third-party issues,” he said. “Have you ever thought about, couldn’t this information [fall] in the hands of the wrong people?

        “The Internet is scary. Don’t know how to derail a train? Look it up. Don’t know how to build a bomb? Look it up,” he said. “One of my worst nightmares … is terrorists. So if you want that information [on dangerous goods], we’ll give it to you. Be sure you want it and you need it and you’re going to act effectively with it.”

        https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20140219/RBCDHARRISONATL

    • …yes, and that was called Lac-Mégantic, Que

  2. The oil on the train which exploded in Lac-Magantic was produced in North Dakota and destined for Irving Oil. Does the author think that if Keystone had been built, it would have gone through the pipeline, loaded on tankers and shipped to New Brunswick for refining instead of by rail?

    Apparently “pipeline activists” are also responsible for Transport Canada permitting MM&A to run its trains with one man crews, the failure of the oil companies to test the volatility of that particular oil and the Harper government’s failure to introduce necessary regulations in the Railway Safety Act which was revised in 2011 and came into effect in 2012. At that time, the Minister of Transportation announced that after reviewing 56 recommendations from a blue ribbon panel and 14 from a parliamentary committee and consulting with all the stakeholders over 5 years and with the changes made, the Act was “fundamentally sound”.

    Apparently “pipeline activists” are also responsible for TransCanada Pipelines proposing a route that threatened the aquifer which provides water to much of the central US and it’s failure to develop a clean-up plan specific to bitumen spills as it, unlike light crude which floats, sinks and adheres to the bottom of lakes and rivers. No doubt everyone who values fresh drinking water and farmers who need water to irrigate their crops are are not ordinary people concerned about their and their families’ health or their ability to earn a living but are just “pipeline activists”.

  3. Back in the Middle Ice age (about 50 years ago) I worked in a factory
    in the town where I grew up. That factory was a plant that built rail cars.
    My particular line was refrigerated cars but there was also a line that
    produced tank cars .. probably some of the ones that that are to be
    phased out. That plant, at peak production, employed up to 2,000
    people. The plant, over the years, was owned by various combinations
    of Brit,Yank,and Canuck(including Lavalin) holding companies until it
    devolved to a yank private equity gang who bled it dry, stripped it, and
    walked away. It currently is operated by a Korean group that our provincial
    government pays to make a few wind turbines that nobody wants.

    Anyway .. at one time, as I recall, there were three plants in Canada that
    manufactured rail cars. Trenton, N.S., Hamilton, and, I believe, Thunder Bay. Trenton no longer exists and I don’t believe the others do either.
    So .. my question is :- where are all these new tank cars to be built ?
    My guess is Mexico or maybe the Old Confederacy ? Guess it doesn’t
    really matter in our brave new world, eh.

    • No, it doesn’t matter.

    • …well yes, It does matter, to you, me any many other Canadians, but obviously,
      it does NOT matter anymore, to our Gov’t, (hence the de-regulations), and, of course, Corprate Canada, -who’re too busy lapping it up in Asia, …

      • No, it doesn’t matter.

        We have two

        Active companies
        • Bombardier Transportation – Montreal QC
        • Railpower Technologies – Vancouver, BC

        Defunct companies
        • Canadian Locomotive Company – Kingston ON
        • General Motors Diesel Division – London ON – now Electro-Motive Diesel Canadian operations

        • Montreal Locomotive Works – Montreal QC

        http://en.wikipedia.org/wiki/List_of_locomotive_builders

        • Er, locomotives are good and useful and all .. but left
          to themselves they don’t do a good job of carrying crude.
          Now, the things they pull along the tracks, like tank cars,
          (which is what the article is talking about) well, they do
          a good job of carrying crude. Wiki that.

          • You wiki it. It’s your problem.

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