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Vol. 20, No. 11 Week of March 15, 2015
Providing coverage of Bakken oil and gas

Rail’s apprehensions

Canadian Pacific’s board expresses reluctance to stay in crude-by-rail business

Gary Park

For Petroleum News Bakken

Canadian Pacific Railway has disclosed that its directors are reluctant to continue transporting crude oil - an idea that was swiftly quashed by the Canadian government, but was reignited by two more derailments of crude trains.

CP Rail Chief Executive Officer Hunter Harrison divulged for the first time on March 2 that his board is giving “careful consideration” to whether it can “get out of (the crude-by-rail) business.” That element of its business has increasingly burdened the company with risks and regulations that have offset a rapid growth in related revenues over recent years and involved the company in spending millions of dollars on new facilities in North Dakota and Canada.

Hunter said a meeting of the board earlier this year discussed CP Rail’s liability and the dangers faced by the public from a derailment and agreed that the company should not be required to haul some dangerous goods.

Harrison told Canada’s Business News Network television that, despite the impact of moving crude on the company’s bottom line, he was “very proud” that the board raised the matter.

However, he conceded railways are required to service all customers, provided their goods are legal and carried in approved containers, under so-called federal “common carrier obligations.”

“We don’t get to choose what we haul,” Harrison said. “Whatever is tendered to us, we by law have to haul. Do I want to haul to some of the places I have to? No.”

He said railroads are the “only form of transportation that I’m aware of that have a common carrier obligation.”

A spokesman for Canada’s Transport Minister Lisa Raitt said there are no plans to “review the common carrier obligations” despite the recent spate of fiery derailments in Canada and the United States.

The Railway Association of Canada said that “preferably, railways should be given the right to decline to carry dangerous goods.”

Recent derailments

Public concern about the safety of moving hazardous materials by rail increased when 21 of 103 tanker cars loaded with crude from the North Dakota Bakken left the tracks March 5 in western Illinois in an area where the Galena River meets the Mississippi.

BNSF Railway said the resulting fire spread to five rail cars, which split open despite being retrofitted with protective shields to meet higher federal safety standards. All of the tank cars were the newer model known as CPC-1232 (Casualty Prevention Circular), which have been designed to reduce the chances of rupturing during derailments.

Steve Barg, director of a nature preserve near the BNSF site, said the accident “begs the question when (the new tank cars) failed to prevent leakage and explosions that threaten human safety and environmental contamination.”

U.S. Sen. Dick Durbin, D-Illinois, released a statement March 6 calling on the White House to quickly finalize tougher standards, saying the number of derailments is unacceptable.

“There is mounting evidence that stricter standards are needed in the handling of Bakken crude, which appears to be particularly volatile. The safety of our communities depends on it,” he said.

On March 7, 10 cars on a Canadian National Railway train from Alberta to Eastern Canada derailed near Gogama, a community of 400 in northern Ontario, some of them catching fire and entering the Mattagami River system, about 25 miles from the location of another CN Rail accident in February.

The wake of Lac-Megantic

The pressures on the railway industry have intensified since mid-2013 when an unmanned Montreal, Maine & Atlantic train carrying Bakken crude to the Irving Oil refinery in New Brunswick derailed in the Quebec town of Lac-Megantic and exploded, killing 47 people.

Harrison said the government “over-reacted” to that event with new legislation when it should have addressed the human role in the disaster.

Those rules were further strengthened in late February when Ottawa introduced legislation forcing railways to buy minimum amounts of insurance, based on their crude oil volumes, and requiring oil shippers to pay a fee that goes into a fund to help pay for damages or cleanup after a derailment.

In addition to having the right to reject certain commodities, the CP Rail board wants the ability to refuse to transport dangerous goods through heavily populated areas such as Chicago or Toronto, as well as the right to refuse to haul dangerous goods such as crude or ammonia from Edmonton to Toronto.

A CP spokesman said the “rail industry should have the right to choose whether it carries dangerous goods or not.”

CN Rail would not say whether it endorses the CP position, noting the government has given no indication that it is open to reviewing the common carrier obligations.

Rising crude volumes

The debate is occurring at a time of rapid growth in the demand for crude-by-rail business to overcome delays in building new pipelines.

The Association of American Railroads said crude shipments by rail have soared from 9,500 carloads in 2008 to 500,000 in 2014, mostly driven by the rapid rise in Bakken production and the absence of new pipelines.

Canada’s National Energy Board reported March 6 that exports by rail from Canada to the U.S. dipped by 5 percent to 173,000 barrels per day in the fourth quarter compared with the third quarter, but year-over-year shipments were up 16 percent.

CP Rail’s revenue from hauling crude rose by 29 percent in 2014 to almost C$500 million, or about 7 percent of its total sales. It is projecting an increase in the number of tank cars of crude it moves to 140,000 this year from about 110,000 in 2014.

AAR is forecasting industry-wide crude volumes will climb by 10 percent this year.

The terrorist threat

Harrison picked up on one of his favorite themes, telling reporters after his speech that terrorism poses a greater threat to railways and the communities they pass through than derailments, regardless of the frequent accidents involving trains carrying crude and other dangerous goods.

He also said that pressure from municipalities to be notified of hazardous materials destined for movement through their communities may increase the risk of terrorist attacks.

“I will notify every public official every day of what’s on what train if they want to know it,” he said. “But if you want to give someone the opportunity to break that custody chain and look at the list and say, ‘Here’s what that car has got in it and here’s the location and here’s all the bad things I could do’ - I don’t think we want that.”

But the best way to prevent tampering with shipments or rail tracks is to reroute trains hauling dangerous goods to bypass major cities and keep details of the cargo confidential, Harrison said.

He said reducing the risks of terrorism needs to be addressed, “but the lobbying factor is awfully powerful in Washington and Ottawa both and it’s hard to get changes done in a timely fashion.”

Room for improvements

Effectively conceding that his hopes of removing crude from the list of commodities being shipped by rail are slim, Harrison argued that bureaucracy is stalling progress on efforts to improve the safety of tank cars.

Canada and the United States have focused on the need for stronger cars, better braking systems and other improvements, with regulators in both governments concentrating on next-generation cars to replace the CPC-1232 standard car for moving flammable liquids.

“It’s time to get on with this,” he said. “We can certainly minimize and improve the exposure that hauling these materials presents to the public.

“Can I tell you there’s never going to be another (Lac-Megantic)? No. I wish I could,” he said.

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