Quebec crash won't slow rail shipments of oil

oil

Patti Domm CNBC.com

9 hours ago

Rangeland Energy, LLC via AP

In this June 5, 2012, file photo, a train leaves the company's crude oil loading terminal near Epping, N.D.

The catastrophic crash of an oil-laden freight train in a small Quebec town last weekend will bring more scrutiny to the railroad industry's transport of oil and may boost the case for pipeline development.

But it is unlikely to slow the momentum of rail shipments of oil in North America, which has grown dramatically from about 100,000 barrels a day in 2010 to about 900,000 barrels a day by the first quarter of this year, according to IHS CERA estimates.

"This was a freak accident. The record of this industry in safety overall in moving a lot of hazardous product has shown steady improvement over the last decade, and I'm very convinced that there will be steps taken to continue this trend," said Tom Petrie, chairman of Petrie Partners.

But, he said, the accident might help the case for the XL pipeline in the short term. The Keystone XL pipeline, an extension of TransCanada's system that would link the Canadian oil sands with Gulf Coast refineries, has been delayed by the Obama administration and is still under review for its potential greenhouse gas impact.

The Canadian oil sands in Alberta are an important piece of the North American energy picture, and together with growing U.S. oil production, will essentially make the continent independent of foreign oil before the end of this decade, industry experts have said. The U.S. currently is producing 7.3 million barrels of oil a day, up 20 percent from year-ago levels.

"I think the Keystone pipeline proponents will cite this as a reason why pipelines are safer than rail. There's no doubt in my mind that they will point to it," said Andrew Lipow, president of Lipow Oil Associates. But he said rail transport was likely to increase as North Dakota oil production continues to climb, as well as production from Wyoming, Colorado and Ohio.

"I do expect continued growth (of rail) in Canada. We're still not building any pipeline," Lipow said. "You can get train service up quickly."

The accident occurred early Saturday when an unmanned train hauling 72 tanker cars of oil sped seven miles into the town of Lac-Megantic, before derailing, exploding and bursting into flames. Thirteen people were killed and dozens were reported missing. Montreal, Maine & Atlantic Railway, owned by privately held Rail World Inc. of Chicago, was the operator of the train.

Chris Wetherbee, a Citigroup railroad analyst, said the North American railroad industry makes about 3 to 4 percent of its revenues from hauling oil, a tiny amount but a big jump from about a half percent just a few years ago. He also said the industry is investing about 18 percent of its revenues in infrastructure, up from an average of about 15 percent in 2001 to 2008.

"I think the rail infrastructure in the U.S. is top notch.The capital investment...has resulted in a significant improvement and enhancement of infrastructure."

Federal Railroad Administration spokesman Kevin Thompson said 2012 was the safest year in the history of rail in the United States. While the FRA has no jurisiction in Quebec, it is closely monitoring the situation there.

The safety debate may be louder in Canada, since already this year there have been a string of accidents and derailments involving Canadian Pacific, one of the biggest haulers of crude. In June, four rail cars carrying flammable petrochemicals used to dilute oil were derailed on a flood-damaged bridge over Calgary's Bow River. There was also an incident in April when 22 cars derailed near White River, Ontario, leaking 400 barrels of oil. In March, a Canadian Pacific train derailed in western Minnesota, leaking thousands of gallons of fuel into a ditch and field 150 miles northwest of Minneapolis.

Wetherbee said the deadly accident could result in calls for more regulation. "You have to look at the confluence of data to suggest that the rails are very safe. You don't need additional regulation to address something like this," he said.

Rail transport of crude has quietly grown as the increase in U.S. energy production resulted in an abundance of oil, especially from inland fields. "To tell you today that the railroad industry is moving almost a million barrels a day is an astounding fact to me," said Petrie.

The increase in transport of North American crude, both with new pipeline capacity coming on line and rail transport, has helped drive the price of West Texas Intermediate crude price closer to international bench mark Brent crude. It has also made an impact on U.S. imports.

"It's already reduced reliance. You can see from the import numbers that we're reducing our total amount of imports, and the increased amount of production in the U.S. is clearly displacing crude oil imports from places like Algeria, Libya and Nigeria," said Lipow. Canadian oil will begin to displace crude oil imports from places like Iraq, Venezuela and other OPEC nations, he said.

Analysts say the boost to pipelines from the rail accident will be marginal, at best. There is a flexibility that rail has provided. Kinder Morgan, for instance, recently scrapped a plan to convert a natural gas pipeline to carry crude from West Texas to Southern California because of a lack of interest among refiners who found it easier to bring in crude by rail.

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