Rail blockbuster could open way to more Canadian CBR shipments

Gary Park

for Petroleum News

Canadian crude exporters to the United States may benefit from a friendly blockbuster US$25 billion takeover of Kansas City Southern by Canadian Pacific Railway which could raise hopes for increased access to Gulf Coast refineries, the world’s largest complex of heavy oil processers.

But all that hangs on CP negotiating a long journey to gain approval from a U.S. regulatory agency that has a record of blocking consolidation in the rail industry by resorting to time-consuming reviews and rigorous merger rules.

Railroad combinations must clear the five-person U.S. Surface Transportation Board, which former board member Deb Miller said will have “total authority” over whether the deal proceeds.

“I think this will get a very long and hard look,” she said.

However, she said this merger stands a better chance of success than one proposed in 2016 by CPR and Norfolk Southern which raised concerns from other railroads and shippers.

Miller said a combination of Kansas City Southern and CP which would provide a continuous link from Canada through the U.S and into Mexico as part of a 20,000-mile north-south network, should not raise concerns about displacing rivals’ east-to-west service.

Early responses positive

Richard Chilton of Chilton Investments said his hedge fund has been a railroad investor for “a long time and we know the industry very well. This really is a terrific combination.”

Edward Molson, a senior partner with Egerton, said the deal would create value for shareholders while fostering competition and shifting truck-borne freight to trains in a benefit to the environment.

However, the large institutions that dominate shareholders in both railroads have yet to comment. No dates have been set for shareholder votes.

Jennifer Hedrick, executive director of the National Industrial Transportation League, an association of shippers, told Bloomberg that while her organization is “optimistic” about the deal any merger “on this scale will be viewed with healthy skepticism based on prior history and experience of rail mergers.”

Alberta Premier Jason Kenney said that if the proposal gets a go-ahead it would be a win for crude oil export capacity from Western Canada following the loss of the 830,000 barrels per day Keystone XL project.

CP Chief Executive Officer Keith Creel noted that crude-by-rail, CBR, comprises only 5% of CP’s business, and said enhancing crude oil movement did not drive the transaction, although the merger could expand those opportunities.

A veteran CBR exporter doesn’t expect the blending of the two companies would make much difference.

John Zahary, chief executive officer of Calgary-based Altex Energy, which moves about 40,000 bpd of oil through its Saskatchewan terminal on the Canadian National line, said most of the crude moved to market out of Western Canada goes by CN rather than CP.

However, he conceded there could be efficiencies for shippers gaining access to CP rather than shifting from one railroad to another to gain access to the Gulf Coast refining complex.

Canadian CBR shipping has been volatile over the past year, with shipments reaching a record 412,000 bpd in February 2020, then tumbling to an eight-year low of 39,000 bpd last July before recovering to 190,000 bpd in December.

- GARY PARK