Oil, Derailments and Regulation – Growth Formula For Canada’s Railway Industry

As Canadian oil production and exports to the US are booming, pipelines are an obvious way to handle logistics. However, Keystone XL, Northern Gateway, Energy East and MacKenzie Valley Oil pipeline projects are stuck in limbo and rail operators have stepped in, in a frantic attempt to compensate. Roaring growth comes at the cost of trains operating at unsafe speeds, outdated tanker cars, and ensuing derailments. The government and firms themselves have been quick to respond by strengthening safety regulations. With prospects outweighing compliance costs, regulation is boosting investment in safety and promoting innovation among rail car producers, setting up the railway industry for robust growth over the forecast period.

Oil production on the rise, but pipeline capacity stagnates

Canada, which ranked as the world’s fifth largest producer of oil in 2013, displays relentless growth in output. In 2013, production of oil exceeded 4 million barrels per day, up 6% from 2012. Nearly three quarters of total output were exported during the year, mostly to the US, which accounted for 99% of exports. At US$5 per barrel, pipelines are estimated to be two to three times cheaper for oil transport compared to rail.

However, Canada’s major pipeline projects are in limbo in 2015. Keystone XL, Northern Gateway, Energy East and MacKenzie Valley Oil have all run into political barriers, including concerns from environmentalist groups and opposition from municipal governments. Pipeline construction has stalled or failed to begin, causing a deficit of transportation capacity and allowing rail operators to capture the benefits of growing demand for oil transportation.

Rail operators ready to fill the gap

Canadian rail operators were happy to pick up the slack and transport oil to the US. Having shipped just 200,000 barrels of oil per day in 2013, rail operators are expected to more than triple the load and ship 700,000 barrels of oil per day in 2016, as major industry players including CN Rail are on the path of doubling their tanker car fleets in 2015. Moreover, rail infrastructure such as rail terminals designed to handle oil, is a lot cheaper to construct and maintain than pipelines.

Nevertheless, a single train equipped with 100 tanker cars is capable of carrying just over 20,000 barrels of oil per day, while the Keystone pipeline, if completed, would carry just short of a million barrels per day. Therefore, rail operators have scrambled to maximise capacity, leasing outdated rail cars and operating trains at unsafe speeds.

Security concerns give rise to investment and innovation

Tragic accidents have been the overwhelming cost of increased oil transportation activity via rail. Trains operated by CN Rail derailed 57 times in 2014, up from the 2009-2013 average of 39 accidents per year. Many derailments, including the most recent one in Ontario in early 2015, involved trains carrying crude oil, thus causing fire, chemical contamination and, in many cases, injury or death.

To address growing safety concerns, Transport Canada has launched a proposal in 2015 which once adopted would strengthen the requirements for tank cars carrying oil and other flammable liquids. The requirements include thicker steel, thermal protection, shields, phasing out outdated tank cars and other features which are set to provide country’s rolling stock producers with lucrative orders and innovation opportunities.

Bright prospects for future growth

Canada’s oil and gas industry is projected to register a CAGR of 7% during 2013-2019 and, as major pipeline projects will remain stuck awaiting approval and construction, the benefits of growing transportation demand will be captured almost exclusively by Canadian rail operators and manufacturers.

Rail transportation firms are set to record a 2% turnover CAGR during 2013-2019, owing to growing revenues from oil transportation. Sustainable capacity expansion, new regulatory pressures and stringent safety concerns will be the key challenges facing the industry. As of 2014, a number of major rail terminal construction projects are underway, initiated and funded by oil and gas heavyweights including Gibson Energy Inc and Exxon’s Canadian subsidiary Imperial Oil.

The railway and tramway locomotives and rolling stock industry is set to post a CAGR of 4% during the forecast period, as production, maintenance and upgrading of tanker cars will accelerate. New safety regulations, set to be adopted in 2015, will further facilitate growing orders and create opportunities for innovation in tanker car safety.

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