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Quebec oil train derailment likely to increase costs, regulatory burden

12th July 2013

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Following last week’s fatal derailment and explosion of a fully laden oil train, which partially destroyed the town of Lac-Mégantic, in Quebec, Canadian and US authorities were expected to increase the regulatory burden on rail shipments of crude and petroleum products.

This could result in increased capital and operating costs for rail companies, ratings agency Moody’s Investors Service said on Thursday.

The July 6 incident, in which a Montreal, Maine & Atlantic Railway train carrying 72 carloads of crude oil rolled from an overnight parking spot into the town, derailed and exploded, was expected to be the worst Canadian train disaster since 1910. About 24 bodies had been recovered thus far from about 50 missing people – now presumed dead.

In the past, rail accidents of such magnitude and catastrophic oil spills have led to strong and costly new regulations.

Moody’s said the accident was expected to limit the near-term growth of petroleum freight, raising costs and tightening restrictions for North American oil producers that required rail to send their products to the east and west coasts.

“The Quebec derailment – likely North America’s worst rail accident since 1918 – would inevitably lead to increased US and Canadian government scrutiny and permitting delays, along with higher costs for shippers. These higher costs will be credit negative for North American rail companies, which have experienced a boom as crude shipments from the mid-continent, North Dakota and western Canada offset falling coal shipments,” Moody’s said in a note

BAKKEN IMPACT

The agency noted that crude producers focused on the Bakken shale oil formation, which depended far more on rail than on pipelines for transport, would be under increased pressure if there were a slowdown in crude shipments by rail.

Petroleum products account for much of the North American rail sector’s recent growth, owing to Bakken oil production, largely centred in North Dakota, had expanded far beyond what the region’s pipelines could handle.

Rail shipments of crude, natural gas and other petroleum products accounted for only about 6% of car loadings for Class 1 North American railroads a year ago, but volumes were boosted by nearly 40% in the period to June, just as rail shipments of coal had declined.

Moody’s said increase in rail freight costs would slow the growth of crude shipments and potentially widen the Bakken discount, which was a concern for such Bakken-focused producers as Whiting Petroleum, Continental Resources, Oasis Petroleum and Kodiak Oil & Gas. About two thirds of Bakken’s North Dakota oil production, which topped 727 000 bbl/d in April, reached its customers by rail.

Even costly shipping by rail had certain advantages for producers in the Bakken and other mid-continent regions, such as giving them access to higher waterborne pricing and the flexibility to change shipping destinations that long-term contracting requirements on pipelines would otherwise have prevented.

However, the accident threatened to delay further rail-route development, and would prompt a re-evaluation of pipeline transport as an alternative to rail.

Higher regulatory costs would also strain the railroads, but not as much. The western US railroads Burlington Northern and Union Pacific Railroad have the most direct access to Bakken crude production. But their strong liquidity profiles were expected to help them cope with any new costly regulatory mandates. Despite crude carloads offering good yields, prices and margins, petroleum products would remain only a small portion of the goods and commodities that these companies haul,” Moody’s said.

PRESSURE OVER KEYSTONE XL

Moody’s also said the Lac-Mégantic accident would put pressure on US president Barrack Obama’s administration to approve TransCanada PipeLines’ planned Keystone XL pipeline.

Refiners on the US East and West coasts today 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.

Proponents would argue that the accident points to the need to reduce rail shipments of crude by increasing pipeline capacity, including Keystone XL.

Edited by Creamer Media Reporter

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