Canadian Manufacturing

Moody’s: Quebec train disaster to raise costs for shipping oil by rail

by Lauren Krugel, The Canadian Press   

Canadian Manufacturing
Operations Regulation Risk & Compliance Energy Oil & Gas explosion Lac-Megantic Quebec rail

Capital, operating costs for rail companies expected to rise much like past rail accidents, oil spills

CALGARY—Credit rating agency Moody’s says it expects the deadly train disaster in Lac-Megantic, Que., to make shipping oil by rail more costly, putting pressure on both major railroads and oil producers.

“The Quebec derailment—likely North America’s worst rail accident since 1918—will inevitably lead to increased U.S. and Canadian government scrutiny and permitting delays, along with higher costs for shippers,” Moody’s said in a report published less than a week after an oil-laden train derailed and exploded, killing dozens and incinerating a large portion of the town.

Capital and operating costs for rail companies are expected to rise, as has been the case for past rail accidents and oil spills, Moody’s said.

However, it said American railroads have enough liquidity to cope with any new costly regulations.


Crude producers in North Dakota’s Bakken region—the origin point of the derailed train—are expected to take a hit.

About two thirds of North Dakota’s daily Bakken production—at 727,000 barrels in April—moves to market by rail in the absence of sufficient pipeline capacity.

Even though rail tolls are more expensive than those of pipelines, moving crude by train has some advantages, Moody’s said.

For instance, crude can move easily to coastal ports by rail, enabling it to be sold in lucrative overseas markets.

Contracts to ship on rail also tend to be more flexible than on pipelines.

“But the accident threatens to delay the development of further rail routes, and will prompt a re-evaluation of pipeline transport as an alternative to rail,” Moody’s said.

“Today, refiners on the U.S. East and West Coasts buy Bakken and mid-continent crude at prices that satisfy both parties, but they rely on rail, since most major North American crude pipelines run north to south, not east or west.”

Moody’s also says the Lac-Megantic disaster will put pressure on the Obama administration to approve TransCanada Corp.’s Keystone XL pipeline, which has been stuck in regulatory limbo for years.

If approved, that project will connect oilsands crude—and some Bakken production—to refineries on the U.S. Gulf Coast.

With the hold-up in building Keystone XL, more and more oil freight have been moving to that market by rail and even river barge.

TransCanada CEO Russ Girling told reporters earlier this week that he fails to see any upside for Keystone XL as a result of the Lac-Megantic tragedy, saying “there’s no good news here for anybody.”

The CEOs of two major oilsands companies said this week that while pipeline transport is their preference, rail will continue to play a role.

“We know that the safest way of getting crude and petroleum products to market is by pipeline. The American safety statistics clearly, clearly demonstrate that,” Suncor CEO Steve Williams told reporters at an energy conference.

Suncor, Canada’s largest oilsands producer, moves very little of its crude by rail.

“In the long run, there will always be a mix of different transportation modes,” he said.

Imperial Oil (TSX:IMO) CEO Rich Kruger said pipelines “provide the safest, most reliable, most cost-effective way to transport crude and petroleum products.”

Like Suncor, Imperial doesn’t ship much of its oil by rail, using it mainly to fill gaps that might exist in the pipeline system.

“We will look to selectively supplement that, bridge capacity with incremental rail, where needed and when needed,” said Kruger.

“Right now it’s a relatively small fraction of crude that’s moved by rail, but over time, it will depend on the pace of pipeline developments.”


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