In the words of one West Virginia resident, when the CSX crude train derailed in February it “was like an atomic bomb went off.”
Certainly, a hyperbolic observation, but nevertheless the reverberations might have been felt in the offices of North America’s big railroads where there is already considerable anxiety over how far the U.S. and Canadian governments might go in tightening regulations.
That prospect is accompanied by a current narrowing of crude price spreads that is undermining the business model for crude-by-rail.
The unease is already surfacing in Enbridge, whose plans to build rail terminals in Illinois (a 140,000-barrel per day unloading facility in Pontiac) and Manitoba (a 30,000-bpd loading facility at Cromer capable of loading crude from both Saskatchewan and North Dakota) are part of its strategy to tide the company over while it awaits permitting for its Alberta Clipper pipeline and possibly TransCanada’s Keystone XL.
The challenge in deciding whether to go ahead with the terminals rests with the “unpredictability of how long the window will stay open,” Guy Jarvis, the company’s president of liquids pipelines, told analysts Feb. 20. “If that is a short period it is not likely we will go ahead (with the terminals).”
The safety factor
Without question, the derailment and explosion in West Virginia, two days after a Canadian National Railway derailment in northern Ontario involving a number of crude tankers, has raised questions about the safety of using trains to move crude.
Bruce Campbell, executive director of the Canadian Center for Policy Alternatives, told the Globe and Mail that the CSX accident is “troubling ... you’ve got such an increase in the transportation of oil moving by rail and yet you still don’t have the question of the means of containment under control.”
“These accidents continue to happen and it’s really troubling that these (CSX and CN Rail) cars were either new cars or cars that were retrofitted. They still puncture when they derail.”
Ali Asgari, a professor who specializes in emergency management at Toronto’s York University, said there should be action to run trains that are shorter than the current unit trains of 100-plus tankers. He noted that the type of car will not stop derailments.
In addition, the volatility of the crude being shipped - a special concern about Bakken crude - has yet to be addressed.
Crude price effects
Jarvis said the need for rail by crude shippers will tend to be in a “swing mode” until pipeline capacity becomes more available, at which time he predicted the use of trains for Bakken shipments will “shrink to minimal volumes by the end of the decade.”
Enbridge, using North Dakota Pipeline Authority Case 2 production and export capacity projections, calculated that crude volumes carried by rail could decline from about 700,000 bpd this year to under 100,000 bpd in 2019 (see slide).
Enbridge Chief Executive Officer Al Monaco said that rail will be the first to suffer if there is a sustained period of low oil prices - a shift that Bridget Hunsucker, an analyst at Genscape, suggested might already be taking place.
She told the Financial Post that currently “there are very few movements of crude by rail coming out of Western Canada into the Gulf Coast because it just does not make sense economically.”
Softening rail demand
In addition to the slump in crude prices, the rail option is eroding because of a narrowing of Western Canada Select’s discount to less than US$13 a barrel compared to West Texas Intermediate and Mexican Maya.
The latest available National Energy Board statistics in Canada showed that Canadian exports by rail reached about 182,000 bpd in the third quarter compared with 165,000 bpd at the start of 2014, while the number of tanker cars slipped to 13,773 units in November from 15,672 in the same period of 2013.
John Zahary, chief executive officer of midstream company Altex Energy, said that instead of volumes matching earlier forecasts of “fairly dramatic growth” there has been a downturn in projections.
Altex operates seven terminals in Western Canada with combined capacity of 75,000 bpd, but the actual volumes have been averaging only 35,000 bpd.
CN Rail Chief Executive Officer Claude Mongeau told analysts in late January that his company has reduced its expectation, although the markets will need the services that are still being introduced in 2015 and beyond.
Enbridge itself has cooled the demand for rail by opening its Flanagan South pipeline from Illinois to Oklahoma and Enterprise Products Partners’ Oklahoma-to-Texas Seaway system has introduced another 1 million bpd of pipeline capacity for oil sands and Bakken producers.
Not deterred
Even so, Altex, Imperial Oil, Kinder Morgan and Plains Midstream Canada are pressing on with terminals in Western Canada, prompting TransCanada Chief Executive Officer Russ Girling to forecast that terminal loading capacity in Western Canada will grow to 2 million bpd from the current 1.2 million bpd.
But oil sands producer MEG Energy is among those not happy about the increase in rail transportation costs to C$1.82 in the fourth quarter of last year from C$0.51 a year earlier, partly the result of the railroads needing to increase revenues to meet the new safety rules.
Enbridge estimates that rail transportation costs from the Bakken are US$12-US$13 per barrel to the Gulf Coast and US$12-US$14 to the U.S. East Coast.
