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Page added on July 9, 2013

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Pipeline vs. Rail: Canada Oil Train Crash

Production

By EconMatters

 

Almost exactly like the 2010 movie “Unstoppable” which tells the story of a runaway freight train carrying hazardous chemicals, another unmanned 73-tanker runaway train full of crude oil also was passing through a small town of Lac-Megantic in Quebec, Canada on an early Saturday morning, July 6.  However, in the movie, the runaway train was eventually stopped by two railroad workers (played by Denzel Washington and Chris Pine), sadly, this runaway train derailed and caused five tanker rail cars to explode in the downtown district of Lac-Megantic.

 

Graphic Source: BBC

Loose Oil Market Remains Calm 

 

What ensued was described as “a war zone with multiple blasts came over a span of several hours” in the town of 6,000, which is about 155 miles east of Montreal and about 10 miles west of the Maine border. The latest news reported 13 dead, 50 missing, and crews are still working to contain 27,000 gallons of light crude that spilled from the tankers and possibly into a near-by river.

 

Typically, this kind of oil related disaster would have sent at least a spike or two to the oil price. However, attesting to the current loose and already over-supplied environment, traders and crude oil market hardly even blinked.

 

Further Reading: Oil Is The Next Major Commodity to Crash


Bakken Oil Rail Shipping Economics 

 

The train, which belongs to Montreal Maine & Atlantic (MMA), reportedly was shipping the crude oil from the Bakken Field (in Williston Basin) in North Dakota towards Maine. Some of you may be wondering how this trade could make any economic sense considering shipping by rail adds about $20 a barrel, on average, to the cost of oil. Here is how the math works:

 

The modern day shale revolution has helped elevated North Dakota as well as the U.S. to be the most prolific oil producing regions in the world, but also has caught the energy and oil transport industry by surprise.

 

Chart Source: Minneapolis Fed

The lack of sufficient pipeline takeaway capacity was a major factor behind Bakken oil priced at a discount of $28 a barrel to NYMEX WTI in February 2012. Mind you that there’s also an additional WTI-to-Brent discount of up to $25/bbl at some point during 2012, owing largely again to the pipeline constraint leading to the oil glut at Cushing, OK, artificially depressing the price of NYMEX WTI.

 

The light and sweet Bakken crude is actually more suited for the refineries in the U.S. East Coast since plants there are mostly older and require higher grades of crude oil such as Bakken’s as feedstock, whereas the refineries on the Gulf Coast are geared more towards handling cheaper and heavier crude grades.

 

Further Reading: Seaway Pipeline No Panacea for Cushing’s Oil Glut

 

This unprecedented huge spread between the land-locked Bakken, WTI and Brent has made shipping crude oil by rail across Maine to a refinery in the Maritimes an attractive alternative. For example, by mid- 2012, both Pan Am Railways and MMA were looking to move vast amounts of crude to an Irving Oil refinery in St. John, New Brunswick.

 

Pipeline’s Loss Is Rail’s Gain

 

So while most of the environmental attention has been focused on boycotting new pipelines like the Keystone XL, railroad companies such CSX Corp. (NYSE: CSX) and Canadian National Railway (NYSE: CNI), hurting from decrease coal volume and a weak economic recovery, have emerged as significant players in the oil transport business at the Williston/Bakken field.

 

The North Dakota Pipeline Authority now estimates that 71% of the crude oil moved out of the Williston Basin was transported on rail cars while only 20% of it was carried in pipelines. Rising production and legislative gridlock on new pipelines means rail would have an increasing market share of transporting oil out of Williston basin.

 

Chart Source: EIA

Pipeline, Rail, or Truck?

 

Within the continental U.S., pipeline, rail, and truck are the three main transport modes for crude oil. Pipelines are the most cost-effective to transport crude oil in the United States, but they require heavy capital investment with many regulatory hurdles. Rail, on the other hand, is not as big an environmentalists’ target as oil pipelines, and is cheaper than truck in transporting oil. Ultimately, a legislative veto of pipeline projects like Keystone XL actually has pushed the underlying oil transport need and investment money towards rail.

 

Further Reading - Keystone XL: Economics, Idealism and Politics


Energy Security & Infrastructure

 

While the surging shale oil production has made “energy independence” seem more feasible for the U.S, it also has exposed the lag in the country’s infrastructure to transport new domestic production in a safe and the most cost-efficient timely manner to the end users, which is the more important aspect of achieving the ultimate energy security.

 

According to EIA, Bakken pipeline capacity will increase to more than 650,000 bbl/d and rail capacity to nearly 900,000 bbl/d in 2013. The price spread between Bakken oil, WTI and Brent has narrowed since 2012, and the trend is expected to continue. As this oil rail trade gradually becomes uneconomical, the fact remains that the U.S. needs more pipeline infrastructure in order to keep the nation’s energy cost in check.

 

Chart Source: EIA

This rail disaster at Lac-Megantic most likely will not slow down the rail development, but it is also time for the U.S. government to put idealism, politics and lobbying money aside and let the pipeline do what they do.  It is bad business if we have to import foreign oil because the country lacks more cost-competitive infrastructure to transport domestic oil production.

 

Zerohedge



15 Comments on "Pipeline vs. Rail: Canada Oil Train Crash"

  1. Malarchy on Tue, 9th Jul 2013 10:04 pm 

    Can someone tell me how “crude oil” can explode? And if it is that volatile why didn’t all the rest of the tankers go bang? Petrol vapour mixed well with air is certainly explosive, but thick crude oil? Liquid diesel, parafin, and petrol are certainly not.
    I don’t think we are being told the whole story here.

  2. GregT on Tue, 9th Jul 2013 10:57 pm 

    My wife, one of my coworkers, and myself, were having a conversation about a month ago. We were discussing the proposed Keystone XL pipeline. Public sentiment has not been very supportive, and CAPP (the Canadian Association of Petroleum Producers) has been running full page ads in newspapers across Canada for several months to try to gain that support. In the meantime they have been transporting crude by rail, and it has greatly reduced their capacity of getting their crude to the refineries.

    My wife said to us, “I wonder how long it will take before there is some kind of a planned major train accident with a crude oil spill”. We all laughed it off as not being a possibility.

    Who would’ve guessed that a crude oil spill from a train, could have been this bad. Every newscast, newspaper and radio show that I have listened to since this tragedy occurred, has been pushing for the pipeline to go through.

    Things that make you go hmmmm.

  3. rollin on Tue, 9th Jul 2013 11:19 pm 

    Malarchy, it’s not crude oil, it’s tar sands oil. The product is so tick that in order to pump it low molecular weight NGL’s like butane, pentane etc. are added to the mix to thin it. All those low molecular weight NGL’s are highly flammable so any spark would ignite it. Lots of ignition sources in a town.

  4. James A. Hellams on Wed, 10th Jul 2013 1:05 am 

    I think that, when the investigation of this terrible disaster is complete; it will reveal that someone, other than a railroad employee, deliberately tampered with the brakes on the tanker cars; and made the cars go down the track without control.

    First, the cars were, according to reports; decoupled from the rest of the train. When the cars were separated from the train, the brakes on the cars should have automatically engaged to stop the cars.

    Second, someone, other than a railroad employee, must have had knowledge about train braking systems; and knew exactly how to disable the automatic brake stopping on the cars. Thus, creating the disaster that caused so much misery.

    I heard that the train accident is now being investigated as a criminal case.

  5. BillT on Wed, 10th Jul 2013 1:19 am 

    At least it happened in Canada…

  6. keith on Wed, 10th Jul 2013 1:41 am 

    Rollin the crude oil was from North Dakota, it was headed to Virginia or some place near there. It wasn’t tar sands oil.

  7. Mike on Wed, 10th Jul 2013 1:42 am 

    Even so, when a train crash occurs it’s limited to a few cars. When a pipeline leaks it leaks for days and days on end until someone notices.

    As the pipeline industry doesn’t do maintenance and is very poorly staffed, I’ll still take trains.

    Trains also mean American and Canadian Jobs.

  8. DC on Wed, 10th Jul 2013 1:44 am 

    Right now the news just reported that there are NO regulations at transport Canada, governing the parking of unattended volatile tankers filled with w/e on slopes, at or near built up urban areas.

    Most Canadians are under the (mistaken) illusion that govt oversight and regulations exist to ‘protect’ the public at large. LoL! The regulatory regime and enforcement in Canada is spotty on a good day, and non-existent in most others. This whole tar-by-rail-to-US was probably green-lit by one of Harpers cronies as a way of making sure his beloved heated tar-goop makes it to the US come hell or high-water.

  9. GregT on Wed, 10th Jul 2013 3:41 am 

    Yes, and they also reported on our local news, that the tanker cars involved were not designed to transport flammable liquids. They were apparently thin single walled with no bulkheads. I also heard what Keith said, North Dakota Bakken crude headed for the Irving refinery in New Brunswick.

  10. James A. Hellams on Wed, 10th Jul 2013 7:35 am 

    To the credit of American railroad practice, the tank cars in use in the US are equipped with special couplers that are designed to prevent separation and puncture of the tank cars in the event of a crash.

  11. Arthur on Wed, 10th Jul 2013 10:59 am 

    “My wife said to us, “I wonder how long it will take before there is some kind of a planned major train accident with a crude oil spill”. We all laughed it off as not being a possibility.”

    Governments blow up high rise buildings, try to replace their own populations, erect concentration camps, lie armies into (world) war, set up fake shootings.

    For governments, the people are the sheeple of a tax farm, nothing more, although there are big differences in gradations between governments.

    It could be an accident, but if it is not, this would be a minor event in a long list of false flag operations.

  12. GregT on Wed, 10th Jul 2013 3:09 pm 

    James,

    The tankers involved were American DOT-111A which are reported to make up 69% of the entire US fleet.

    From a CBC news story yesterday:

    once the Transportation Safety Board’s investigation in Lac-Magentic is complete, Transport Canada will be working closely with the rail industry to assess the continued use of DOT-111A tankers in Canada.

  13. rollin on Wed, 10th Jul 2013 4:54 pm 

    Keith, If it was Bakken oil (and I have seen reports both ways) then it would head to St. Johns not Virginia. Why take it through Maine when it goes down CP (D&H) through Scranton then onto NS south? Much shorter distance.

  14. rollin on Wed, 10th Jul 2013 4:55 pm 

    The key here is that railroads go directly through many population centers where pipelines usually do not.

  15. Rob Dekker on Fri, 12th Jul 2013 7:57 am 

    EconMatters said “Mind you that there’s also an additional WTI-to-Brent discount of up to $25/bbl at some point during 2012, owing largely again to the pipeline constraint leading to the oil glut at Cushing, OK, artificially depressing the price of NYMEX WTI.”

    Can you please explain what the effect would be of pumping another 830,000 bpd (via the Keystone XL) into an already depressed WTI at Cushing, OK ?