Canada's Pipeline Challenges Will Force More Tar Sands Oil to Move by Rail

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The Motley Fool has beenย advising investors on โ€œHow to Profit From the Re-Emergence of Canadaโ€™s Crude-by-Rail Strategy.โ€ย But what makesย transporting Canadianย crude oil by rail attractiveย toย investors?

According to the Motley Fool, the reason is โ€œโ€ฆ right now, there is so much excess oil being pumped out of Canadaโ€™s oil sands that the pipelines simply donโ€™t have the capacity to handle itย all.โ€

The International Energy Agency recently reached the same conclusion in its Oil 2018 market report.

โ€œCrude by rail exports are likely to enjoy a renaissance, growing from their current 150,000 bpd [barrels per day] to an implied 250,000 bpd on average in 2018 and to 390,000 bpd in 2019. At their peak in 2019, rail exports of crude oil could be as high as 590,000 bpd โ€” though this calculation assumes producers do not resort to crude storage in peak months,โ€ theย International Energy Agency said, as reported by the Financialย Post.

To put that in perspective, however, the industry was moving 1.3 million barrels per day at the peak of the U.S. oil-by-rail boom inย 2014.


Graph of American crude-by-rail volumes. Credit: U.S Energy Informationย Administration

And Canada hasย plenty of capacity to loadย oil on moreย trains, which meansย if a producer is willing to pay the premium to move oil by rail, it can find a customer to do it. The infrastructure is in place to load approximately 1.2 million barrels per day.
ย 


Canadian crude-by-rail loading facilities. Credit: National Energyย Board

With the cancellation of the Energy East pipeline project, which would have moved western Canada’s tar sands eastย toย Quebec and New Brunswick,ย the industry now is pursuing two remaining major pipeline projects:ย Kinder Morganโ€™s Trans Mountain and the Keystone XL. The Financial Post reported that theย International Energy Agency predicts the earliest start date for either of those projects asย 2021. Both pipelines are facing fierce opposition.

Additionally, the surge in U.S. crude oil exports has been affecting the value of Canadian oil, and some are predicting the flood of U.S. crude abroad could deliverย a serious blow to the tar sands industry in theย long-term.

Over the next several years, however,ย the Canadian tar sands industry appearsย poised to relyย heavily on rail to export its product while awaiting construction ofย new pipelines, much like the situation that led to the Bakken oil-by-rail boom in the U.S.

Risks of Canadian Oil by Rail Areย Unknown

When hydraulic fracturing (fracking)ย turned North Dakota into a major oil producer, the state had little pipeline capacity. But it did have railroad tracks, many built over a century earlier, crisscrossing itsย plains.

As a result,ย the oil industry started filling up trainsย with highly volatile oil โ€” under virtually no regulatory oversight โ€” and in the process invented what rail workers would come to call โ€œbomb trains.โ€ After the trains hauling Bakken oil in unsafe tank cars began exploding, it became apparent that the Bakken oil was theย culprit.

As the Canadian oil industry begins to ramp up its rail exports,ย has it learned anythingย from the Bakken โ€œbomb trainโ€ experiment (which in 2013 claimed 47 lives in Lac-Mรฉgantic,ย Quebec)?

Unfortunately, the industry appears to have learnedย very little. While it no longer uses the most dangerous DOT-111 tank cars to ship oil,ย most of the major oil trainย derailments and fires actuallyย have involved the newer CPC-1232 tank cars, which make up the majority of the oil tank carย fleet.

In addition, the rail industry has refused to use modern braking systems to improve safety and was able to get U.S. regulators to repeal a ruleย requiring modern brakes on oil trains. The industry is also fighting proposed regulations requiring two-person crews for oilย trains.

Furthermore, it remains unclear what exactly will be inside those tankย cars.

Will the industry choose to move some form of diluted bitumen or synthetic crude or raw bitumen? That information isnโ€™t available but makes a big difference whenย evaluating the risks posed by theseย trains.

Raw bitumen requires special tank cars that can be heated (to allow the thick, viscous bitumen to be pumped in and out)ย as well as the infrastructure to heat the cars. To date, there is little evidence the industry is moving much raw bitumen by rail. Thatย leaves the option of pumping the cars full of diluted bitumen orย synthetic crude oil (a processedย intermediate product derived primarily fromย tar sands which is apparently chemically identical to conventional crudeย oil).

There have been two significant derailments of Canadian crude by rail โ€” whether the oil was synthetic crude derived from tar sands is unconfirmed, but likely. Coincidentally,ย the derailmentsย occurred just three weeks and several miles apart near the town of Gogama, Ontario. Both trainsย exploded and burned for days. The public was not allowed near the crash sites. One of the trains had several tank cars end up in the Makami River, which was contaminated by a large oilย spill.

The Transportation Board of Canadaย reportedย that the material in the tank cars wasย โ€œHorizon Sweet Light Oil.โ€ The agencyย described it as โ€œsynthetic crude oil distillate; sweet light oilโ€ and was classified as Packing Group 1 โ€” which is the most dangerous classification. To put that in perspective, Packing Group 1ย is a higher risk classification than the oilย involved in the deadly Lac-Mรฉganticย disaster.


Oil samples taken from the 2015 Gogama train crash.ย Credit: Transportation Safety Board ofย Canada

Additionally, the Gogama crashes were caused by track failures. The American rail industry has successfully fought for years against any regulations on rail wear, and current rail regulations are stalled in the Trumpย administration.ย 

More Oil Trains, Still No Spill Responseย Plans

A 1996 U.S. legal loophole exemptsย oil and rail companies from needingย spill response plans for oil trains. Thisย gap in oil spill regulationsย came to light during the U.S. boom in oil train traffic more than four years ago and has not been resolvedย yet.

However, the Pipeline and Hazardous Materials Safety Administrationย (PHMSA) hasย proposed aย rule to change that. According to a Department of Transportation report, the regulation is in the โ€œFinal Ruleโ€ stage, but a PHMSA spokesperson was unable to provide further detail on the timing or status of the rule actually taking effect. There is no guarantee the proposed rule, which would require oil spill response plans for trains carrying at least 20 continuous cars of liquid petroleum oil or 35 cars throughout the train,ย won’t simply languish underย the Trumpย administration.ย 

Another troubling aspect of this latest surge in oil-by-rail traffic is the fact that the oil industry, scientists, and U.S. and Canadian governments are still getting a grasp on how different types of tar sands oilย behaveย when spilled in fresh and saltwater environments. Oneย large tar sands oil spill in Michigan’s Kalamazoo River in 2010ย and subsequent studies hintย that there’s more to the picture than theย industry’s spinย that tar sands oil spills areย no different than other crudeย oils.

Local Governments Takingย Actionย 

With the Trump administration actively rolling back safety regulations for oil trains, some U.S. states and communities are taking the initiative to protect themselves from the risks of tar sands oil and oilย trains.

Washington state has been a battleground in the fight against new oil-by-rail infrastructure. The recent decision to reject the proposed Vancouver Energy oil-by-rail project at the Port of Vancouver was a major victory for that movement and the latest in a string of such efforts on the Westย Coast.

Washington is also taking things a step further and is now requiring rail companies to have oil spill response plans. The state recently approved such plans for oil-by-rail leader BNSF.

โ€œThis plan is a significant step forward for the protection of Washingtonโ€™s communities and environment,โ€ said Dale Jensen, the spills prevention program manager for the state of Washington. โ€œOil by rail has expanded significantly in recent years, and itโ€™s imperative railroad companies are prepared to work with the state to respond to a spill in a rapid, aggressive, and well-coordinatedย manner.โ€

In New Jersey earlier efforts to improve oil-by-rail safety were vetoed by then-Governor Chris Christie, but they have been restarted now that Christie is no longer governor. The proposed plans โ€œwould require railroads to develop oil spill response plans in case of aย derailment.โ€

More recently, the city of Baltimore voted to ban the construction of new facilities that could be used to export crude oil from its port, an effortย specifically targeting proposed oil-by-rail projects. This is a similar approach to South Portland, Maine‘s ban on loading crude oil onto ships and to Albany, New York’sย efforts to stop tar sands by rail. These bans take on new significanceย now that the first ocean-going tanker was recently filled with Canadian tar sands oil, which arrived byย rail in Portland, Oregonย and is destined forย China.ย 

The first wave of oil trains in North America resulted in several major oil spills and the deathsย of 47 people in Lac-Mรฉgantic, Quebec. However, there were several other very close calls with oil train crashes in recent years, resulting in multiple declarations of how lucky communities were that there werenโ€™t more deaths due to these oil trainย derailments.

With no meaningful changes to how they are regulated,ย this second wave of oil trains will need that lucky streak to continueย holding.

Main image: Gogama oil train derailment.dย Credit:ย Transportation Safety Board ofย Canada

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Justin Mikulka is a research fellow at New Consensus. Prior to joining New Consensus in October 2021, Justin reported for DeSmog, where he began in 2014. Justin has a degree in Civil and Environmental Engineering from Cornell University.

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