How Likely is a Canadian Oil-by-Rail Boom?

In the weeks since Kinder Morgan’s announcement that it was suspending all “non-essential spending” on the proposed Trans Mountain pipeline, we’ve seen yet another round of concerns about a spike in the shipping of oil by rail.

The argument goes that failing to build Trans Mountain means that excess oil from Alberta will just be shipped to markets by rail — a more costly option with the potential for fiery spills and explosions in the middle of communities, like what happened in Lac-Mégantic back in 2013.

But there are two major issues with such analysis: 1) there’s not enough rail capacity to substitute for pipelines; and 2) transporting oil by rail wouldn’t be nearly as unsafe as it currently is if government updates its rules and enforcement.

Ignoring such realities may allow for convenient pro-pipeline mythmaking, but not for reasonable fact-based debate.

“Governments and industry uses it to fearmonger a little bit to justify pipeline capacity expansions,” said Patrick DeRochie, climate and energy program manager at Environmental Defence. “But if they were actually concerned about mitigating the risks of oil by rail, there are some pretty clear and simple steps they can take.”

Here’s a breakdown of what’s actually going on.

IEA predicts rail exports could nearly triple by 2019

In February 2018, the most recent month that we have data for, Canada shipped a daily average of 134,100 barrels of oil to the United States on trains. While not an insignificant amount, it was nowhere close to the historical high of December 2014 — when oil-by-rail exports hit 175,600 barrels per day (bpd) due to pipeline constraints.

Such figures don’t include oil that’s shipped by rail across Canada. A recent Globe & Mail article reported that more than 150,000 barrels of oil are moved daily on British Columbia’s railways. Much of that ends up being exported to the United States.

To put such numbers in perspective, Alberta produced an average of 3.4 million barrels of oil per day in February. So rail shipments represented only five per cent of the province’s output.

The concern is that those numbers will rapidly rise in the near future, well beyond the December 2014 threshold.

“It’s real and people have been predicting it,” said Bruce Campbell, former executive director of the Canadian Centre for Policy Alternatives and author of an upcoming book about the Lac-Mégantic tragedy. “As production keeps increasing, there’s uncertainty about the pipelines, so there is that looming possibility.”

In March, the International Energy Agency forecasted that Canada’s oil-by-rail exports could increase to 250,000 bpd in 2018 and 390,000 bpd in 2019. Kevin Birn of IHS Markit told Reuters that exports could go higher than 400,000 bpd if pipelines face more delays.

To put all those numbers in perspective, the rosiest forecast would mean an increase of 266,000 barrels per day via rail. Meanwhile, Kinder Morgan’s Trans Mountain pipeline expansion proposes to add more than double that with 590,000 barrels per day of capacity.

CP and CN already facing major backlog of grain shipments

According to the Canadian Association of Petroleum Producers, there’s already a total of 754,000 bpd in rail loading capacity in Western Canada, including 210,000 bpd at Kinder Morgan’s very own co-owned terminal in Edmonton.

So why on earth aren’t oil producers using that spare rail capacity? Well, for the very same reason that some are doubtful oil-by-rail is going to see any kind of major increase: there simply aren’t enough trains to go around.

DeRochie is skeptical about projections by the International Energy Agency.

“There might be a small incremental increase in the oil being shipped by rail, but we’re looking at the tens of thousands of barrels, which is nowhere near the capacity that pipelines would introduce to the system,” DeRochie said.

Canada’s two freight rail companies, Canadian Pacific (CP) and Canadian National (CN), are facing ongoing criticism from grain producers on the Prairies for critical delays that have left massive quantities of wheat and canola unable to get to markets. Grain shipments are ultimately the “bread and butter” of freight rail in Canada — and the companies are failing to adequately service even them.

Rail companies look for long-term shippers

Both companies have rebuffed calls from the oil industry to enter into short-term contracts to ship more crude.

In a January conference call with investors, CP Rail CEO Keith Creel said: “We understand crude is only going to be here for a limited period of time. We are looking for strategic partners with long-term objectives that allows us to have a more stable book of business.”

Meanwhile, CN Rail requires a minimum of a year-long commitment from shippers.

Most oil companies aren’t prepared to enter into long-term contracts and are ultimately banking on new pipeline capacity opening up in the near future. After all, oil-by-rail tends to be more expensive — Birn of IHS Markit recently told CBC News that rail adds about $3 to $4 per barrel in costs — so even the ability to ship backlogged crude to market isn’t necessarily worth it given current oil prices. But rail companies won’t spend on new trains and tracks without commitment.

This week, Bloomberg reported that Cenovus had signed an oil-by-rail contract to start in the second half of the year, seeming to confirm earlier statements by CN.

But workers at CP Rail are on the verge of striking, which could shut down shipping for weeks or months. CN Rail’s CEO has already stated that his company won’t be able to “pick up the slack” if it proceeds. While likely not a long-term issue, the potential strike action represents yet another source of unpredictability for oil producers.

B.C.’s proposed regulations could curtail shipments

Add to those issues the fact that B.C.’s proposed regulations on the transport of diluted bitumen would apply to rail.

In its reference case submitted to the B.C. Court of Appeal this week, the B.C. government outlined regulations that would apply to pipelines transporting any quantity of liquid petroleum products, as well as rail or truck operations transporting more than 10,000 litres of liquid petroleum products.

The proposed regulations would require shippers to meet several spill response criteria to obtain a “hazardous substance permit” from the government.

‘Industry still seems to be running the show’

For the sake of argument, let’s assume that companies evade all these obstacles and oil-by-rail exports triple to more than 400,000 barrels per day by 2019.

There’s simply no reason that shipping oil on trains needs to be as dangerous as it currently is. As we’ve previously reported, there are a wide range of changes that could be introduced by the federal government to greatly reduce risk — amend the Railway Safety Act to restrict certain volumes of dangerous goods, accelerate the phase-out of existing railcars, increase the number of on-site inspections and improve public transparency.

But with the exception of minor changes, the federal government hasn’t moved to make rail transport of oil safe

“The industry is powerful,” Campbell said. “I’ve talked a lot about regulatory capture. Transport Canada, as far as I can tell, is still as dysfunctional as ever. Industry still seems to be running the show, and resources seem to be as wanting, to say the least. You’ve got a weak regulator with insufficient resources.”

The report of the Railway Safety Act Review is expected to be released soon, but Campbell is “almost positive” that it won’t lead to a fundamental rethinking of the system.

Shipping raw bitumen by rail eliminates costly diluent, reduces risk of explosions

There are actually many upsides to transporting oil by rail instead of pipeline.

It physically moves faster in unit trains than pipeline, and doesn’t mix with other grades of petroleum as it does with pipeline “batching.” Rail terminals are also quite low in cost — the Canadian Association of Petroleum Producers reported in 2014 that a typical unit train terminal ranges between $30 million to $50 million and can be paid off in five years or less.

There’s also the potential to ship raw bitumen by rail in a form known as “neatbit.”

As the name suggests, diluted bitumen that’s transported by pipeline requires diluent, a costly natural gas condensate that takes up about 30 per cent of volume in a shipment. Diluent also serves as the volatile component of the mixture, which can explode in a crash. Shipping bitumen by rail without diluent would save companies money and prevent the risk of explosions.

But it requires upfront costs to purchase heated tanker cars and special loading terminals. It’s effectively the same thing preventing the electrification of freight rail, which would greatly reduce greenhouse gas emissions and fuel costs: it just costs too much cash to get started, even though the payoffs would be enormous. Until the government regulates such activities, it likely won’t happen — and the safety of communities will continue to be at risk.

“The reality is that the stuff is going to keep rumbling through Canadians towns and cities across the country,” Campbell said. “While it’s doing that for the next five years or more, make it safer. There are things that can be done.”