Bloomberg News

Quebec Disaster Spurs Rail-Versus-Pipelines Debate on Oil

July 08, 2013

Man Runs From Twelve-Story High Wall of Fire in Quebec Explosion

Wreckage continues to burn after a freight train loaded with oil derailed July 6 in Lac-Megantic, sparking explosions that engulfed about 30 buildings in a wall of fire. Photographer: François Laplante-Delagrave/AFP via Getty Images

A Quebec train disaster that killed at least five people and left about 40 missing 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 July 6 explosion of refinery-bound tank cars hauled by Montreal, Maine & Atlantic Railway Ltd. (0128377D), 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, a Toronto-based fund manager with First Asset Investment Management Inc. who helps manage C$2.7 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.”

Added North American oil production and a lack of pipeline infrastructure has boosted the amount of crude moved by rail, which reached record levels last year, according to the Association of American Railroads. TransCanada and Enbridge Inc. (ENB) are among the pipeline companies that have proposed multibillion-dollar projects to bring more oil to market from booming fields in Alberta and North Dakota.

“We are likely to see increased dialogue on whether or not crude-by-rail is a safe alternative to pipeline transportation,” Steven Paget, Calgary-based director of institutional research at FirstEnergy Capital Corp., wrote in a note to clients today.

Pipeline ‘Sway’

Closely held Montreal, Maine & Atlantic was moving crude to Irving Oil Corp.’s Saint John refinery in New Brunswick when the accident occurred in the town of Lac-Megantic. Several rail cars carrying oil derailed and caught fire at about 1:15 a.m. local time on July 6, forcing the evacuation of 2,000.

“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.”

Canada shipped about C$73 billion of oil exports last year, mainly to the U.S., according to Statistics Canada. The 72 carloads of crude involved in the Quebec accident got loose after being parked at a station outside the town while the locomotive was shut down for a crew change, the company said in a statement.

‘Hard Questions’

“There will be some very hard questions that will be asked about why an unmanned, parked train moved,” said John Herron, president of industry 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.

Without 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. Cenovus Energy Inc. (CVE) 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,” Bob Schulz, a professor at the University of Calgary’s Haskayne School of Business, said in an interview. “It gives those companies an additional point to support their argument.”

Keystone XL opponents have asked U.S. President Barack Obama to reject the $5.3 billion project, saying it poses a threat of oil spills. 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.

Railroad companies 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) have outperformed the country’s benchmark S&P/Toronto Stock Exchange Composite Index this year, with gains of 26 percent and 14 percent respectively. The index has fallen 1.8 percent this year.

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, Ed Greenberg, a company spokesman, 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.

More recently, a Canadian Pacific train carrying a substance used to dilute oil-sands bitumen almost collapsed into the Bow River, a trout-fishing river 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.

Hazardous Spills

The rate of hazardous-material spills by railroads is about 2.7 times higher than pipelines, the Washington-based Association of American Railroads said in a report this year.

Along with higher risks, rail transport costs three times as much as pipeline shipments, Enbridge CEO Al Monaco said at a March conference 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 cargoes 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 decade ending in 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.”

To contact the reporters on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Gerrit De Vynck in Toronto at gdevynck@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net


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