The Canadian government has shown it will not allow labor disruption to join the normal risks associated with using rail to ship natural resources.
Labor Minister Lisa Raitt introduced legislation May 28 to end a strike by 4,800 members of Teamsters Canada that halted all movement of goods on the Canadian Pacific railway network in North America, and expected service to resume no later than May 31.
Raitt said the economic costs were mounting rapidly after only five days of striking and would reach C$540 million a week if the stoppage was prolonged.
She said the government was not willing to see Canada’s reputation with its foreign customers undermined.
“We’re only one link in a long supply chain,” she said. “What happens here affects inbound and outbound traffic. We cannot afford to be that weak link.”
The strike tied up shipments of 18,000 barrels per day of crude production — mostly from the Bakken plays in North Dakota and Saskatchewan — and refined petroleum products.
Raitt acknowledged she was under pressure from the mining, energy, manufacturing and agriculture industries to intervene.
Nathan Cullen, leader of the opposition New Democratic Party in parliament, said the Conservative government of Prime Minister Stephen Harper is resolved to weaken the role of labor unions.
Rodger Cuzner, the Liberal party’s human resources spokesman, said the Harper administration has “established a dangerous trend of intervening in the affairs of private companies when it suits their ideological position, shifting the balance of power and disrupting otherwise productive negotiations.”
Within 12 hours of strike action, Raitt said the government wanted a negotiated settlement, but the striking Teamsters and Canadian Pacific must be “aware of the fact that we will step in on the basis of the national economy and the greater public interest at some point.”
Rail still marginal
Overall, however, the Canadian Association of Petroleum Producers said rail shipment, although a growing business, carries only a few thousand barrels per day of the 3 million bpd of crude produced in Canada.
CAPP spokesman Travis Davies said producers affected by the strike would likely use trucks during the disruption.
“So the industry won’t be impacted in any meaningful way in terms of product transport,” he said.
Crescent Point Energy, which uses Canadian Pacific for all of the 8,000 bpd of Bakken light crude it ships by rail from Saskatchewan, started preliminary discussions from the outset of strike action with midstream firms on alternative transportation means, said Trent Stangl, vice president of marketing and investor relations.
He said some of the Bakken crude could be moved by truck to rail terminals not owned by Canadian Pacific, or directly on to the Enbridge pipeline that runs through Saskatchewan.
Stangl said his company viewed the rail option as “more competitive” than pipeline transportation, estimating that rail costs are within about C$2 per barrel on either side of pipeline tolls, largely because of the costs of building new pipelines.
Calgary-based Cenovus Energy, which operates in the oil sands and the Bakken region, said it would divert the 2,000 bpd it currently ships by rail until the strike was resolved, said spokeswoman Jessica Wilkinson.
“We are confident that we will secure the pipeline space,” she said.
Baytex Energy relies on Canadian Pacific and its rival Canadian National Railway to carry unspecified volumes of crude to the Texas Gulf Coast and Eastern Canada, with Canadian Pacific moving about 10 percent of the company’s production from Lloydminster, Saskatchewan, and Peace River, in northwestern Alberta.
Brian Ector, vice president of investor relations at Baytex, said a protracted strike would force his company to consider using trucks and pipelines to prevent a backlog.
Baytex Chairman Raymond Chan said earlier in May that Baytex aimed to move 40 percent of its total production, which averaged 53,433 barrels of oil equivalent per day (86 percent oil and natural gas liquids) in the first quarter, by rail by the end of 2012.
But he said the company views rail as only an interim solution and hopes the shortage of pipelines will be overcome by 2014 and 2015.
Randy Ollenberger, a research analyst with BMO Capital Markets, told a conference call he expects Western Canadian producers to rely on rail for at least another five years.
He said the crude price spikes that result from the “lumpiness” of pipeline expansions “give rise to the opportunity for producers to rely on rail.”
Demand could increase
Canadian Pacific has set its sights on advancing the use of rail from 500 carloads, or about 325,000 barrels, in 2009 to 70,000 carloads, or 45.5 million barrels, in 2014.
It expects to start shipping crude this summer from a new 35,000 bpd terminal being constructed by Texas-based U.S. Development Group, at Van Hook, N.D., and is upgrading its North Dakota network.
Tracy Robinson, Canadian Pacific’s energy and marketing vice president, told reporters in April that crude oil business has “grown much faster than we ever expected,” especially in the Bakken where there was “suddenly a lot of oil that had no mode of transportation to the market place.”
She said Canadian Pacific is developing multiple-origin loading points in North Dakota and destination options in Eastern Canada, the U.S. Northeast, Gulf Coast and U.S. Midwest, while considering a test shipment to the U.S. West Coast.
Robinson said Canadian Pacific has discovered it can serve markets that pipelines have no intention of serving.
