By Alex Binkley

From virtually nonexistent three years ago, shipments of crude oil are fast becoming a significant business for CN and CP while triggering considerable debate about their future importance. The rapid growth of oil-by-rail transportation is the result of North American oil companies suddenly having far more product to transport to market than existing pipelines can handle, James Cairns, CN’s Vice-President for Petroleum and Chemicals, told the annual Rail Government Interface conference in Ottawa.

As well, building new pipelines faces considerable opposition from environmental and First Nations groups while the railways have the ability to ramp up capacity with additional locomotives and tank cars, he added. National Steel Car Co. in Hamilton has begun building tank cars and that should help reduce the backlog in orders for them. “Pipelines will remain the dominant way of transporting oil and natural gas but rail can play a significant role,” he continued. “This is a niche opportunity for the railways.” They move the oil in unit trains, which on their return trips from refineries to the loading terminals can carry the diluent that’s mixed with the crude so it can be moved through pipelines.

Norman Rinne, Senior Director of Business Development for Kinder Morgan Canada, noted that in the U.S., oil-by-rail shipments have jumped from just under 30,000 tank cars in 2011 to 203,500 last year. “This was driven in part by the huge increase in oil production that has both industry and regulators struggling to keep up.”

The ability to ship by rail has some oil companies rethinking the design of their terminal facilities, he added. The rest of the industry has to realize that few people understand the enabler role the railways could play for the oil companies that are anxious to move their product. One of the problems is that oil companies don’t know how to discuss working co-operatively with the railways.

A study that will be presented later this year to the Canadian Transportation Research Forum by Ottawa consultant Malcolm Cairns, a former CPR employee, says the railways’ safety record is as good as that of the pipelines and the cost of shipping rail is not significantly higher. Cairns says preliminary numbers indicate CP could move 70,000 carloads of crude this year and CN 60,000 carloads. “This is a significant level of growth given that CP only moved 500 carloads of crude in 2009 whereas CN didn’t move any.” Those figures have the potential to become even greater during the next few years.

A number of factors are driving the crude oil boom for the railways, Cairns explains. “One is the rapid development of non-conventional crude as is currently taking place in the Bakken formation located in southern Saskatchewan and North Dakota. The region does not have sufficient pipeline infrastructure in place to move crude from wellhead to transmission pipelines.” More than half the oil from the area is moving by rail, compared to 22 per cent a year ago.

In the Alberta oil sands, “pipelines are operating at or near capacity and rail is being used as an option for moving crude,” he adds. The lack of transportation capacity is forcing Alberta producers to take a painful discount of more than $30 a barrel. Rail could play a much greater role here as well. Also, the railways have tracks “into refineries that are not served or are underserved by pipelines,” he continues. Moreover, “moving crude by rail offers other advantages: the relatively low levels of capital investment to develop a crude trans-load facility; heavy oil does not require diluent to be transported (in tank cars); speed to market; flexibility of routing options; supply chain diversification, and the scalability of volumes. In addition, bitumen can be loaded into cars whose contents can be heated to ensure the bitumen flows,” he points out. Lastly, unlike transportation via pipeline, energy firms do not have to enter into long-term contracts for the movement of crude by rail.” The extra cost of moving crude oil by railway over pipeline “is likely in the range from $2 to $20 per barrel depending upon the markets being served,” Cairns projects. Given their capacity, the railways can serve as a significant crude transporter until more pipelines are built while providing the industry with backup to meet future needs.

After a detailed look at the accident rates of pipelines and trains, Cairns concluded that both “are extremely safe on any reasonable measure. The relative difference between the two modes of transport is small. However, the performance of rail in quantities of product released is better than pipelines, while the performance of pipelines in fatalities and personal injuries is better than rail.”

Bob Bleaney, Vice-President External Affairs of the Canadian Association of Petroleum Producers, said the Canadian oil industry is earning $20 a barrel less than foreign competitors because of inadequate access to export terminals and refineries. Canada is third behind Venezuela and Saudi Arabia in terms of total crude reserves. While proposals are under discussion for domestic pipeline expansion or conversion, rail is hauling increased volumes of crude to Saint John, Montreal and Quebec City as well as Portland, Me, Bleaney said. He predicated that by the end of this year, crude movements by rail will be almost triple on a daily basis compared to what they were in mid 2012. Rail has the advantage of being able to expand service relatively quickly and serve many different markets. Its main drawbacks are higher cost and tight supply of cars.

Kinder Morgan’s Rinne said that in addition to using rail to supplement pipeline capacity, the oil industry should consider establishing co-operative spill containment and recovery teams that can handle either rail or pipeline accidents. That will provide faster and more effective accident cleanups. CN and CP are already discussing creation of joint clean up teams. Kinder Morgan has set up a joint venture with Watco Crude for hauling oil new oil new development in the United States by rail, Rinne added. That includes terminal and other expansions in North Dakota and Pecos, Texas and along the Gulf Coast.