Lac-Megantic Train Disaster Renews Discussion on Crude Oil Transportation

Jacob Harper |

PipelinePrior to July 6, all indicators pointed to rail continuing its oil carrying-boom. As crude continues to flow out of North Dakota, rail has increasingly shouldered the responsibility of moving oil within and outside the US. In 2010 the US ran 9,500 train car loads of crude. In 2012 that number shot up to 233,811.

This has been exceptional news for companies like Berkshire Hathaway (BRKB), Union Pacific (UNP) and CSX (CSX), companies either directly involved or heavily invested in rail transport. Rail had been hurt by declining coal shipments, and increased crude production in the North seemed to be their godsend.

But with the July 7 disaster in a small town of Lac-Megantic near Quebec, where a train carrying 72 tankers of crude oil exploded and killed at least 60, has put renewed focus on the increasingly common oil transportation method. But until alternative energy methods take hold, the crude needs to move. And if not by rail car, then by another method – specifically pipelines, which currently account for 90 percent of crude transport.

In light of the tragedy, pressure is mounting on the Obama administration to move on approving the 875-mile northern leg of the Keystone XL pipeline. Analysts and academics cite the fact that pipelines tend to run cheaper and have far fewer accidents than rail cars.

Garland Chow, an associate business professor at the University of British Columbia who specializes in supply chain management, put it bluntly: “Railroads never were a substitute for pipelines,” and pointed to the vast amounts of oil expected to be extracted from the Alberta oil sands. “The volume of crude that is forecast to be shipped out of Alberta simply cannot be transported by rails.” According to the Pipeline and Hazardous Materials Safety Administration between 2002 and 2009, there were just over 3,000 “incidents” with pipeline transport while train cars experienced almost 5,000.

The railroad companies have already begun pushing back at this notion that rail transport is more dangerous. They cite the fact that when a pipeline does have a spill, it tends to be much more severe. The Association of American Railroads claims they spill 0.38 gallons for every million barrel-miles of crude moved while pipelines spill 0.88 gallons.

There’s no question the amount of crude coming out of the north is going to continue increasing. The question now is who will transport it, and who will benefit. If the Keystone is approved, it will certainly affect rail transport negatively.

The owners of the Keystone Pipeline are understandably leery of a silver lining for them in the rail disaster. TransCanada Corp. (TRP) CEO Russ Girling, said “This is a tragic event that shakes everybody and shakes all of us that are in the business.” He dismissed a possible change in oil transportation trends, saying there's "no good news here for anybody" and that TransCanada benefiting from the tragedy "makes no sense."

But tragedy or no, utilizing rail to transport crude long-term is almost always considered a stopgap until cheaper methods can be implemented. According to Bloomberg Industries analyst Lee Klaskow, train transport is more costly than pipelines, and is only common in the North because an adequate pipeline like the Keystone does not yet exist.

The advantages of train transport aside from necessary logistics are cosmetic. Train transport makes it easier to move many different types of crude, enabling companies to more easily make special blends tailored to regional tastes. The monetary gain from this is not usually enough to offset the increased cost of train transport. This is compounded by the fact that type of crude being transported out of Canada – tar sands – is heavier and thus more expensive to transport via train than the light sweet crude normally shipped around the US.

There are no guarantees the Keystone Pipeline will be a go, though remarks from President Obama in June seemed to indicate he is leaning towards approval.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CFST Communities First Financial Corp 10.05 0.00 0.00 0
CSX CSX Corporation 29.64 0.07 0.24 4,995,726
TRP TransCanada Corporation 47.80 -0.48 -0.99 1,170,529
UNP Union Pacific Corporation 94.33 -0.75 -0.79 2,912,890

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