By R. Bruce Striegler

A CN derailment near the small Ontario town of Gogama on March 7, 2015 was the second in three days in Canada and the fifth in three weeks in North America. Thirty to forty tankcars loaded with crude oil came off CN’s mainline tracks, at least five caught fire, and others tumbled into the Mattagami River. The train was 6,089 feet long and weighed 14,355 tonnes. On February 14, a CN derailment occurred in the same area south of Timmins, when 29 cars loaded with crude oil and petroleum distillates derailed and caused a fire. A BNSF Railway train loaded with crude oil derailed and caught fire two days earlier in a rural area south of Galena, Illinois. In that accident, 21 of the train’s 105 cars derailed near where the Galena River meets the Mississippi. BNSF said the resulting fire spread to five railcars. Local reports indicated that firefighters could only access the derailment site by a bike path.

Last month, a CP Rail freight train derailment in nearby Dubuque, Iowa, spilled ethanol fuel into the water and set three cars on fire. Dubuque, which is 14 miles to the northwest of Galena, has almost 60,000 inhabitants. On February 16, a CSX train carrying three million gallons of North Dakota crude derailed in a West Virginia snowstorm, shot fireballs into the sky, destroyed a house and leaked oil into a Kanawha River tributary. The derailment and fires forced nearby water treatment plants to temporarily shut down, and caused hundreds of families to evacuate. Twenty-seven of the 107 tankcars derailed, and 19 of those were involved in the fires, which smoldered for days after.

Kenneth Green, Senior Director of Resource Studies at the Fraser Institute says, “We clearly need to find out why these trains have derailed, and one of the questions goes to the commonalities between the accidents. What common factors may be behind these derailments? I don’t think we know enough about that yet, so environmental groups who may be calling for moratoriums of oil-by-rail are really only trying to leverage their anti-oil agenda with these accidents.”

Green points out that the difference between pipelines and rail is not a complicated thing. “Compared to rail, pipelines go from point A to point B, they’re mostly underground, they’re generally away from highly populated areas, and they are monitored in real-time for pressure and flow, so we are able to tell quickly if they are operating correctly.” He notes that with pipelines, safety equipment and spill response gear can be pre-positioned, whereas with rail, things are a vastly more complex challenge. “Railcars can be re-routed on the fly, you may not know where they are at all times, there are many, many more railcars to keep track of and there are far more opportunities for operator or mechanical error.” He adds that given the flexibility of rail, there will always be a place for it in the movement of oil, but that pipelines still present the safest method for long-distance transport.

A typical oil tankercar carries about 700 barrels of oil (approximately 30,000 gallons) and most oil unit trains range in length from 90 to 110 cars. With respect to oil, the Canadian rail industry has evolved from a manifest system (which involves multiple stops), to trains that go directly from the point of origin to the point of destination. Called unit trains, they cut costs for a railway by eliminating the need for stops, starts and switching, making a trip shorter, faster and resulting in cost savings.

In a January conference call reported by Canadian financial media, CN Chief Executive Officer Claude Mongeau is quoted saying CN expects shipments of energy-related commodities, including crude oil and frac sand, to rise by 75,000 carloads in 2015 to 292,000, from 217,000 in 2014. “There’s a lot of investments that are being made by our customers in the energy markets, whether it’s new frac-sand plants or new infrastructure to move crude. We believe those investments are made for the long term,” he said.

Meanwhile, Canadian Pacific Railway Ltd. has slashed its forecast for crude-by-rail volumes amid the collapse of oil prices. The Calgary-based carrier said it moved less oil in the final three months of 2014 and it expected to haul about 140,000 tankcars this year, down from an earlier estimate of 200,000. In published reports, Hunter Harrison, CP’s Chief Executive Officer, said the decline in crude prices should give the economy a boost and the railway will see a rise in demand for other commodities as a result. CP has set ambitious growth targets of doubling per-share earnings and boosting annual revenue to $10-billion by 2018. One-third of this growth is expected to be derived from moving oil as new terminals come on-stream, including the Kinder Morgan and Imperial Oil facility in Edmonton, and a Plains Midstream Canada terminal in Saskatchewan.

Lack of pipeline capacity turns to huge oil-by-rail surge

National Energy Board figures released March 5 show that Canada exported 173,342 barrels per day of crude by rail between October and December last year, down five per cent from 182,396 barrels per day (bpd) shipped across the border in the third quarter. However, fourth-quarter rail exports were still 16 per cent higher than the same period a year earlier. North American oil producers have increased their reliance on rail as new pipelines have become mired in regulatory processes, environmental and public protests. Oil produced from Canada’s oil sands in Alberta and the shale production from the North Dakota Bakken fields, has instead moved by rail.

The Fraser Institute’s Kenneth Green says, “There may be a slowdown in the growth of oil by rail while prices are low. The higher cost of transport by rail, combined with higher production costs for oil from Alberta may make it uneconomical to bring those producers on-line.” Green says in the short-term, the growth rate may slow, but the long-term outlook, according to all those who track energy demand, suggests demand will rebound and prices will rise and the surge on rail will continue.

According to the Canadian Association of Petroleum Producers, the Canadian crude oil industry faces a three to five year period of constrained pipeline capacity given the current status of proposed major crude oil expansions such as Keystone XL, the Trans Mountain Expansion, Enbridge’s Northern Gateway Project and TransCanada’s proposed Energy East Pipeline. None of these projects are yet in the construction phase and some still face protracted regulatory and legal proceedings. By the end of 2015, western Canadian rail uploading capacity for crude oil is expected to exceed 1.0 million b/d. Several proposed facilities can be further expanded so rail capacity could increase to 1.4 million b/d.

Producers like ExxonMobil, Chevron and ConocoPhillips want a temporary way to transport oil while waiting for the U.S. to act on Keystone XL. Reports last spring show oil producers and Keystone XL developer TransCanada Corp. exploring options of transporting Canadian crude oil by railcar until the pipeline is approved. TransCanada CEO Ross Girling is quoted saying, “Our customers asked whether we would explore with them potentially building rail-car loading facilities at a place called Hardesty, which is the initiation point of the current Keystone XL project, and we’ve said we will do that, and we’ll do it expeditiously.”

Two years after Lac-Mégantic Canadian government introduces new safety regulations

In February 2015, the Government of Canada introduced the Safe and Accountable Rail Act. The new legislation details proposed amendments to federal railway legislation, including the Canada Transportation Act, aimed at strengthening the liability and compensation regime for federally-regulated railway companies transporting certain dangerous goods, including crude oil. The amendments establish minimum liability insurance levels for freight railway operations.

The minimum liability insurance coverage is based on the type and volume of goods transported and ranges from $25,000,000 for transportation of minimal quantities of dangerous goods to $1,000,000,000 for transportation of large volumes of dangerous goods, including crude oil. Railway companies that do not maintain the applicable minimum liability insurance will be prohibited from operating and may be subject to a fine of up to $100,000. Oil companies shipping their product in railway cars, meanwhile, will now face a levy of $1.65 for every tonne of crude shipped, working out to roughly 23 cents per barrel.

In spite of the derailments, oil-by-rail will be with us for the foreseeable future. The Canadian Association of Petroleum Producers reported in 2014 that insufficient railcar supply and rail loading facilities are the current constraints for Canadian oil producers to move their product. They report that a number of manifest and unit train loading facilities have been completed in Western Canada and more projects have been announced. In the longer term, as crude oil production from western Canada is expected to grow significantly, even with new pipeline projects in operation, rail transportation is poised to play a more significant role in the near term and rail will continue to offer a transportation alternative as producers seek to expand market access.