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Disaster likely to hike costs of oil by rail

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CALGARY -- Credit rating agency Moody's says it expects the deadly train disaster in Lac-Mégantic, 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 Thursday, 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 U.S. 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-Mégantic disaster will put pressure on the Obama administration to approve TransCanada Corp.'s (TSX:TRP) 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 holdup in building Keystone XL, more and more oil freight has been moving to that market by rail and even river barge.

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

The CEOs of two major oilsands companies said this week 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 (TSX:SU) CEO Steve Williams told reporters at an energy conference on Wednesday.

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."

-- The Canadian Press

Republished from the Winnipeg Free Press print edition July 12, 2013 0

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