Pipeline bottleneck gives boost to railways
Other than Ottawa’s new speed limits on trains moving dangerous goods through urban areas, there was no slowing down the rail industry’s rapid advances into the oil and gas sector this spring.
Canadian Pacific Railway and Canadian National Railway reported record secondquarter financial results in the past week, based in part on strong North American energy markets that included the growing volumes of crude transported by rail as well as increased shipments of frac sand and drill pipe.
“Our opportunities to continue to grow in the energy market … I mean it’s a sea change,” J.J. Ruest, chief marketing officer for CN, Canada’s largest railway, said Monday. “The shale plays, the new movement of crude by rail; all of these markets are looking for transportation opportunities.”
Record grain shipments were the big story for Canada’s two Class 1 railways in the spring following a harsh winter, but the growth in the energy sector for rail was undeniable. For example, as part of the effort to improve “visibility” around its operations these were the first results where CP broke out shipments of oil from the old category Industrial Products.
In the April-to-June quarter, CP moved 25,000 carloads of crude in Canada and the U.S., an increase of 1,000 carloads from the same period a year ago. CP’s revenues from hauling crude rose 18 per cent to $114 million. CN’s revenues from transporting petroleum and chemicals rose by 17 per cent year over year.
“Everybody’s focused on the crude story. There’s certainly going to be some upside opportunity,” CP chief executive Hunter Harrison said when the Calgary-based railway released its results last Thursday. “How much? Over the long run, (it’s) hard to predict given what happens with pipelines and other competition.”
Harrison’s caution notwithstanding, the Canadian Association of Petroleum Producers forecast in June that the volume of oil moving by rail would increase from 200,000 barrels a day in 2013 to about 700,000 by 2016 as producers find ways around persistent pipeline bottlenecks.
CAPP has said rail plays a “complementary” role to pipelines, which transport more than 3 million barrels per day of oil in Western Canada. CN officials predicted demand growth will come from new rail loading terminals across Western Canada able to process so-called unit trains with a single product and as many as 100 cars.
It’s not just oil. In May, CN used a unit train for the first time to deliver 10,000 tons of frac sand from Wisconsin to a facility near Grande Prairie that will be used at shale oil and gas wells in the Duvernay and Montney basins in Alberta and British Columbia.
The rail industry has ramped up its operations in response to the surge in production from Alberta’s oilsands and new light oil basins in North America — most notably the Bakken in North Dakota and Saskatchewan — where the pipeline infrastructure has failed to keep pace with development.
Protesters have targeted major pipeline projects out of Western Canada — Keystone XL to the U.S., Northern Gateway and Trans Mountain expansion to B.C. and Energy East to Quebec and New Brunswick — that need regulatory approval or must meet dozens of conditions before construction can begin.
RBC Capital Markets estimated as much as 440,000 barrels a day of new rail loading capacity will be added in Western Canada this year to bring the total to more than 1 million.
The dangers of moving highly flammable crude by rail became apparent last July when a train loaded with Bakken crude derailed and exploded in Lac Mégantic, Que., killing 47 people in the town.
The safety of transporting dangerous goods — from oil to chlorine or ammonia — by rail has been under intense scrutiny ever since.
The federal government established new regulations to tighten rail safety this spring included the retirement of 5,000 of the most dangerous of the controversial DOT-111 tanker cars immediately.
Another 65,000 of the cars must be retrofitted or phased out of service within three years.
There are also speed limits of 80 km/h or less for trains carrying dangerous goods in populated areas or near drinking water.
Harrison called it an unnecessary move that will slow commerce.
“They got it wrong with speed,” he said.
“I don’t know of any incident with crude caused by speed.”
The ability to move quickly to capture market share is a concern for the industry. A recent report from CIBC World Markets noted pipelines will eventually get back on track.
“As new pipeline capacity starts up, we would expect demand for crude-by-rail to fall,” the CIBC report said. “The need for crude-by-rail in the Western Canadian Sedimentary Basin will fall in the 2018/19 time frame.”
The railways will need to move quickly to do more than just bridge the pipeline gap.