Quebec disaster spurs rail-versus-pipelines debate on oil

A train disaster that killed five people in Quebec promises to touch off debate over the safety of shipping crude oil by rail or pipelines such as TransCanada Corp. (TRP)’s Keystone XL.

As authorities began investigating the explosion of refinery-bound tank cars hauled by Montreal, Maine & Atlantic Railway Ltd., Quebec’s Green Party demanded stricter regulations and an energy industry association predicted tough scrutiny ahead for rail carriers.

“People think rail is costless until something like this happens,” said John Stephenson, fund manager with First Asset Investment Management Inc., said from Toronto, where he helps manage C$2.70 billion ($2.65 billion). “This is another data point that shows how much costlier and riskier rail is compared to pipelines and will probably move Canada closer to having an energy strategy.”

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The July 6 accident forced the evacuation of 2,000 near the town of Lac-Megantic as Montreal, Maine & Atlantic moved oil to Irving Oil Corp.’s Saint John refinery in New Brunswick. The cargo was part of Canadian producers’ growing use of rail amid tight pipeline capacity.

“It’s been a real shame that a lot of the public and especially the activists have pushed the public to sway so much from pipelines which are likely much, much safer over time,” said Arthur Salzer, chief executive officer of Northland Wealth Management, which oversees C$225 million. “It is going to be something that’s going to weigh on the public’s mind.”

Regulators’ Decisions

Canada shipped about C$73 billion ($69.3 billion) of oil exports last year, mainly to the U.S. With the industry waiting for a decision on the Keystone XL pipeline by President Barack Obama and from Canadian regulators on approval of Enbridge Inc. (ENB)’s Northern Gateway route through British Columbia, more shipments by rail are being planned.

“There will be some very hard questions that will be asked about why an unmanned, parked train moved,” said John Herron, president of trade group Atlantica Centre for Energy in Saint John, New Brunswick. He said that attention is “more than appropriate” with plans in the works to increase oil-offloading capacity on the eastern seaboard by 840,000 barrels a day.

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Without the Keystone XL, designed to carry 830,000 barrels a day, rail shipments of Canadian crude would rise an additional 42 percent by 2017, according to an April 2 report by RBC Capital Markets. Cenvous Energy Inc. plans to boost rail shipments fivefold to 30,000 barrels a day by the end of 2014 to help reach coastal markets.

Pipeline Argument

“Pipeline companies will use this to point out the advantages and safety records of pipelines,” said Bob Schulz, a professor at the University of Calgary’s Haskayne School of Business, in an interview. “It gives those companies an additional point to support their argument.”

The Natural Resources Defense Council, a Washington-based environmental group, said it was inaccurate to assert that the Keystone XL pipeline was “something that can save us from oil on rail.”

“Rail will continue, and its safety problems can’t be ignored,” Anthony Swift, an energy analyst with the group, said in a telephone interview.

Railroads have gained from rising oil shipments. Canadian Pacific Railway Ltd. (CP)’s average revenue per car rose 12 percent in the first quarter from a year earlier, largely because of increased oil traffic, Chief Marketing Officer Jane O’Hagan said on an April 24 conference call.

Index Beaters

Canadian Pacific and Canadian National Railway Co. (CNR) are both outperforming the country’s benchmark S&P/Toronto Stock Exchange Composite Index this year, with gains of 26 percent and 15 percent through July 5. The index fell 2.4 percent in the same period.

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Canadian Pacific has had half a dozen derailments this year, including leaks on March 27 in Minnesota and April 3 in Ontario that spilled a combined 757 barrels, a spokesman, Ed Greenberg, said on May 22. An accident in May near Jansen, Saskatchewan, spilled 545 barrels of oil.
Canadian Pacific declined to comment on crude-by-rail shipments, Greenberg said yesterday in an e-mailed response to questions.

In 2005, Canadian National Railway spilled 1.3 million liters of bunker fuel into Wabamun Lake, Alberta, west of the provincial capital Edmonton, when 43 cars derailed on the railway’s main line through western Canada.

Trout-Fishing River

More recently, a Canadian Pacific train carrying diluent used to dilute oil-sands bitumen almost collapsed into the Bow River, one of Canada’s best trout-fishing rivers that runs through downtown Calgary, where the carrier is based. Floods in that city damaged the century-old bridge that the rail cars were traveling over.

Transporting crude oil by rail results in almost three times the number of spills compared with pipelines, according to the Washington-based Association of American Railroads.

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Rail transport also costs three times as pipeline shipments, along with higher risks, Enbridge CEO Al Monaco said during a conference in March in Houston.

Jean Cloutier, interim leader of the Green Party of Quebec, said the province needs rules to ease the danger of train disasters.

“It is also important that we act quickly to better monitor and regulate corporations” that transport hazardous cargos by rail, road, water or pipelines, Cloutier said yesterday in an e-mailed statement.

Safety Rates

Railroads and pipelines both deliver more than 99 percent of products without incident. U.S. pipelines carried 474.6 billion gallons of crude and petroleum products in 2012 and reported 2.3 million gallons spilled, an effective rate of 0.0005 percent, according to the Association of Oil Pipelines.

Over the entire decade ending with 2012, railroads hauled 11.2 billion gallons of crude with 95,256 gallons spilled, the majority from just one 2008 accident in Oklahoma that accounted for 81,103 gallons, according to the rail association.

“I’m not sure this accident is the tipping point yet,” said University of Calgary’s Schulz, referring to the disaster in Quebec. “We probably need to see a barge sink in the Mississippi River or a major derailment in British Columbia before people really change their minds about moving oil by rail.”

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