Costlier and more dangerous crude by rail set to rise again as oil production swells

With new oilsands megaprojects commencing operations in the next few months, the amount of oil traveling on rail lines could escalate, especially as construction of new pipelines is delayed.

The sentencing of Irving Oil last week to pay about $4-million in fines for its involvement in the Lac Megantic disaster of 2013 brought the issue of shipping oil on rail lines back into the spotlight.

The attention paid to moving crude by rail peaked after the explosion in Quebec, but has subsided since, as volumes of oil transported by railways have fallen.

You could see companies looking at knocking the dust off their rail strategy.- Kevin Birn, IHS Energy

Oilsands production keeps growing and will surgeonce Suncor's Fort Hills facility and Canadian Natural's Horizon project begin processing bitumen in the coming months.

"With the supply growth that is going to be happening, late this year [and] next year there just simply is not enough physical capacity to move those barrels to market on pipelines that are currently available, so it will have to go to market on rails," said Martin King, a commodities analyst with GMP FirstEnergy in Calgary.

He's already noticing higher volumes being moved by trains.

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"We're starting to see more and more indications of barrels getting on the rails especially in September through October," he said."It's slowly trending in that direction."

Crude by rail is more expensive than transporting crude oil by pipeline andconsidered more dangerous.

Production jump

The FortMcMurraywildfire in 2016 and an explosion atSyncrude'sfacility this summer are two reasons why less oil was loaded intotank cars and exported out of Alberta duringthe last few years.

Suncorsays itexpects Fort Hills to be operating at 90 per cent capacity within 12 months of startup at the end of this year. The facility was built to produce about 200,000 barrels per day. The company won't say how the crude will be shipped to refineries.

The oil industryacknowledges that crude by rail will become more prevalent in the coming years.

"Since the pipeline capacity out of Western Canada is essentially full and with increasing production coming on line, we would expect that more will have to move by rail," said Chelsie Klassen of the Canadian Association of Petroleum Producers.

Added costs

Large oilsandscompanies have constructed rail loading terminals in recent years or have access to those facilities. While the terminals may not have been busy in recent years, that could change.

"We think that amount of supply will overtake the available pipeline capacity, and we will see a resurgence of crude by rail," said Kevin Birn, a Calgary-based oilsands analyst withIHS Energy. "In advance of that, you could see companies looking at knocking the dust off their rail strategy and start testing it out with refiners to make sure they are ready to move this by rail."

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Shipping by rail instead of pipeline is more expensive and can cost a company about $3 or $4, on average, per barrel, according to Birn, although that can vary as some companies own their own loading terminals and rail cars. Some have also signed contracts with railways. Increased costs for Canadian producers could result in less interest from investors.

"It's a cost companies in the U.S. don't face, so there are competitiveness issues. It's an investment disadvantage," he said.

To be sure, new export pipelines are nearing construction, but they face obstacles.

Kinder Morgan's Trans Mountain Expansion is delayed as it waits for permitsin British Columbia. TransCanada's Keystone XL is awaiting approvalfrom state regulators in Nebraska. And Enbridge has run into problems in Minnesota with its Line 3 replacement project.

The National Energy Board examined what would happen if none of the major proposed pipeline projects were built (Northern Gateway, Keystone XL, Trans Mountain, and Energy East).

While the regulator's analysis included many assumptions, it found that Canada's crude by rail volume could climb to destinations such as the U.S. Gulf Coast, Midwest, and East Coast.