A Railroad Megamerger Might Be A Boon To Canada’s Soiled Oil Business

A railroad megamerger could create a new route for shipping crude oil from Canada into the U.S.

A railroad megamerger may create a brand new route for transport crude oil from Canada into the U.S.
Illustration: Kyle Ellingson For HuffPost

Shortly after 1 a.m. on July 6, 2013, Bernard Théberge stepped exterior a bar in japanese Québec for a cigarette. At simply that second, a runaway freight practice carrying 2.1 million gallons of oil throttled into Lac-Mégantic, a tiny city close to the Maine border. The practice derailed and exploded in an enormous fireball. When he noticed the flames, Théberge began pedaling away on his bike. Quickly after, all the downtown was decimated, killing 47 in Canada’s deadliest rail accident since 1894.

“Smoking saved my life,” Théberge later informed The Globe and Mail newspaper.

It was hardly the primary accident of its form. In 1996, a practice carrying propane and pure gasoline flew off the tracks and exploded in an inferno that burned for weeks in a rural Wisconsin city, forcing 3,000 folks to evacuate for practically a month. Miraculously, nobody was injured.

The chief govt of the Wisconsin rail firm behind the accident would go on to function CEO of Montreal Maine and Atlantic Railway, the corporate accountable for the Lac-Mégantic catastrophe 17 years later. MMA, because the agency was recognized, modified arms twice extra, changing into a subsidiary of Canadian Pacific Railway in 2020.

Deregulation on either side of the border has allowed railroads to rake in money by cutting costs and consolidating the continent’s railways from 40 main rail firms in 1980 to only seven right this moment.

Now Canadian Pacific is eying an excellent greater prize — with a possible payoff from connecting Canada’s uniquely dirty oil fields to U.S. refineries on the Gulf of Mexico and creating what analysts say may very well be a beautiful new backup route for crude producers if pipelines shut down. If profitable, it may improve how a lot oil is passing by rail by way of sure components of the USA, regardless of a protracted line of catastrophes. Since 2013, at least 20 more oil-freighting locomotives — dubbed “bomb trains” by environmentalists — went off the rails throughout North America.

The Calgary-based large is in search of approval from U.S. regulators to purchase rail large Kansas Metropolis Southern in a $27 billion deal that will fuse the 2 smallest of the remaining so-called Class 1 railways into the primary system with connections to the U.S., Canada and Mexico — however go away the continent with simply six separate operators. The so-called “NAFTA super railway” may improve rail site visitors of fast-moving, miles-long trains by over 300% in some areas.

At a regulatory listening to on the deal Wednesday, Daniel Gluba, the previous mayor of Davenport, Iowa, gave a grave evaluation of what that might imply for a stretch of his Mississippi River metropolis that hosts baseball video games and festivals.

“When a type of trains derails whereas passing by way of considered one of these occasions,” Gluba mentioned, “it gained’t be 47 folks killed like tragically occurred in Canada, will probably be a whole lot of individuals.”

“This can be a catastrophe of monumental proportions simply ready to occur.”

A Canadian Pacific Railway freight train follows the Bow River at Morant's Curve in Banff National Park, Canada.

A Canadian Pacific Railway freight practice follows the Bow River at Morant’s Curve in Banff Nationwide Park, Canada.
Arterra by way of Getty Photographs

At present, crude largely makes its method from the tar sands producers in Alberta all the way down to refiners in Texas and Louisiana by way of pipelines, which analysts say will proceed to be the case, since rail shipments are at all times costlier. The fraction of U.S. imports that do journey by practice come by the use of Canadian Nationwide Railway, which boasts North America’s longest rail community.

However Canadian Pacific and Kansas Metropolis Southern have lengthy sought a bit of that market. Final yr, Canadian Pacific began working specialised new oil trains carrying Canadian imports by way of Minnesota. The corporate declined to inform the Minneapolis Star Tribune how most of the new trains it was working. However the railroad’s chief advertising and marketing officer informed Wall Road analysts in a July 2021 earnings name that he expects “the enterprise to ramp as much as 15 or 20 trains monthly” as they journey all the way down to Port Arthur, Texas.

In 2019, the 2 companies inked an unprecedented 10-year deal to haul oil bitumen — a thicker, extra viscous kind of crude that operators say is much less liable to accidents as a result of the flammable diluting substances are eliminated — from Canada all the way down to the U.S. Gulf, utilizing a brand new know-how Canadian Pacific mentioned is way safer and fewer more likely to explode.

Railway officers say the circulation of oil gained’t be impacted by any merger. The quantity of crude oil shipments from supply to refinery is decided by macroeconomic forces that won’t be affected by the transaction, so the [Canada Pacific-Kansas City Southern] mixture won’t trigger extra crude oil to be shipped by rail,” Patrick Waldron, a Canadian Pacific spokesperson, wrote in an e mail.

But when the U.S. Floor Transportation Board offers the Canadian Pacific-Kansas Metropolis Southern merger the inexperienced mild, the brand new route may make it cheaper and simpler to ship crude which will have in any other case flowed by way of the now-defunct Keystone XL pipeline.

“It’s a deliberate, intentional workaround for the lack of Keystone; no less than, the fossil gas trade is viewing it that method,” mentioned Conan Smith, president of the Michigan Environmental Council, which opposes a merger that will doubtless improve shipments of oil by way of an space of Detroit known as the Nice Lake State’s most polluted ZIP code.

“The oil trade has been trying to improve transport to these southern states by any means obligatory,” he added. “The introduction of a secondary route goes to make that extra viable.”

The federal regulator earlier this month extended the deadline for environmental feedback on the proposed merger to Oct. 14.

Firefighters spray wagons at the site of the train wreck in Lac-Megantic July 14, 2013.

Firefighters spray wagons on the website of the practice wreck in Lac-Megantic July 14, 2013.
Mathieu Belanger by way of Reuters

Canadian Pacific mentioned it’s hoping to see the most important bump in income after the merger from hauling cargo shipments. Generally known as “intermodal” shipments, the class has been one of many few sectors the place railroads have seen vital progress lately as trucking wolfed up the freight market.

Consequently, the railroad large mentioned its deal would assist take long-haul vans off the highway. Railroads have typically complained that trucking firms are unfairly backed in that they don’t pay to take care of federal highways, regardless of the injury elevated tractor-trailer site visitors causes, whereas rail operators are solely accountable for sustaining rail traces.

Intermodal transport, Waldron mentioned, can be the “major driver” of recent site visitors, and will really be a local weather profit, for the reason that firm tasks it may cut back demand for as many as 64,000 tractor-trailer vans.

U.S. imports of Canadian oil elevated by practically 50% between 2013 and 2021, based on Power Data Administration data. However shipments by rail peaked in 2019 and plunged in 2020, when pandemic-induced lockdowns despatched oil markets into chaos. Rail shipments returned to 2018 ranges once more in January 2021, however have declined steadily since.

The explanation: Two pipelines bought up and working. Final October, the Line 3 substitute mission, a hotly protested 1,031-mile pipeline carrying crude from Alberta to Wisconsin, began operation, marking the first expansion of Canadian export capability in no less than six years.

Then Marathon Petroleum reversed the circulation of the Capline Pipeline, a 632-mile conduit that had carried crude drilled off the Gulf Coast northward to refiners within the Midwest. The reversal mission, accomplished in January 2022, will at most capability ship 200,000 barrels of oil per day from Illinois to Louisiana. Its preliminary shipments are “100% Canadian crude,” the pipeline’s operator, Plains All American Pipeline, mentioned in a November earnings call.

“Transport oil by rail, regardless of the way you slice it, goes to be costlier than transport oil by a pipeline,” mentioned Clark Williams-Derry, an oil analyst on the Institute for Power Economics and Monetary Evaluation, a nonprofit analysis outfit. “It’s unlikely that oil by rail can be the primary alternative for Canadian producers to attempt to get oil all the way down to the Gulf, as a result of it’s so costly.”

“What this does is make that second choice extra engaging and a bit extra useful to grease producers as a result of they can get it to the Gulf at a barely decrease value.”

– Clark Williams-Derry, Institute for Power Economics and Monetary Evaluation

However a part of what makes it so expensive is that each time a railcar switches to a different firm’s tracks, it pays that railroad a payment. Since rail shipments are often a “backup coverage, virtually like insurance coverage if the pipeline system fails, or it’s overloaded, or there’s an excessive amount of manufacturing,” he mentioned the mixed railroads may supply a less expensive route.

“What this does is make that second choice extra engaging and a bit extra useful to grease producers as a result of they can get it to the Gulf at a barely decrease value,” Williams-Derry mentioned.

Analysts polled by S&P Global final yr mentioned a spike in rail shipments would solely come if extra pipelines shut down. The Dakota Entry Pipeline, which primarily conveys crude from North Dakota’s Bakken oil fields to U.S. refineries, will face a legally mandated environmental evaluation that activists hope may result in the closure of a mission that has already leaked a number of occasions. In Canada, opposition is mounting against the contentious Trans Mountain Pipeline, which might funnel oil from Alberta to British Columbia.

If these tasks fail, or if authorized challenges or activists disrupt the circulation of oil by way of working pipelines, then there would doubtless be an uptick of shipments by rail.

The Floor Transportation Board’s approval of the Canadian Pacific-Kansas Metropolis Southern merger will not be assured. The Biden administration has signaled higher skepticism of trade consolidation, and appointed a number of members to the five-person board with backgrounds in passenger rail.

Certainly, President Joe Biden, recognized all through his profession as “Amtrak Joe” for his enthusiastic commutes on the Northeast rail hall, has vowed to vastly increase the nation’s community of passenger trains.

“We’ve got a chance to remodel our practice techniques as important infrastructure of this nation,” environmental activist Winona LaDuke wrote in an op-ed opposing the merger. “In spite of everything, trains are probably the most environment friendly solution to transfer freight. And people trains must be secure, full of individuals and never harmful freight.”

Kansas City Southern workers repair a broken railroad signal after a massive tornado passed through the town killing at least 123 people on May 25, 2011, in Joplin, Missouri.

Kansas Metropolis Southern employees restore a damaged railroad sign after an enormous twister handed by way of the city killing no less than 123 folks on Could 25, 2011, in Joplin, Missouri.
Mario Tama by way of Getty Photographs

Outdoors the Northeastern U.S., Amtrak’s trains use freight rail traces, and federal legal guidelines require passenger locomotives to get precedence entry.

“There’s lots of friction there as a result of they don’t combine too properly, operationally talking,” mentioned Lawrence Gross, a freight transportation analyst and founding father of Gross Transportation Consulting. “Freight trains are alleged to get out of the best way, however freight trains are two miles lengthy, in order that they’re not agile.”

In comparison with the profitable cargo shipments, the passenger trains with just a few coaches “carrying 60, 70, 100 folks” are “gumming up the works from a railroad perspective,” he mentioned.

Whereas unions representing rail staff nearly crippled the U.S. freight system in a combat over working circumstances, others within the labor motion have opposed a merger they are saying may cut back jobs at West Coast ports. The deal would “vastly hurt our maritime and industrial labor by diverting the cargo coming by way of our US ports in favor of Canadian ports,” United Steelworkers Native 592 President Jared Moe informed Sen. Maria Cantwell (D-Wash.) in a February 2022 letter.

“This may in the end value a lot of our neighborhood their livelihoods,” he mentioned.

Warning that the merger would imply Canadian Pacific decamps from its Minneapolis headquarters for Kansas Metropolis, Missouri, Rep. Betty McCollum (D-Minn.) urged the Floor Transportation Board Chairman Martin Oberman to “strongly contemplate” the “potential unfavourable financial impacts on our neighborhood” in a letter despatched earlier this month.

Rep. Katie Porter (D-Calif.) mentioned in a five-page letter to the board: “The proposed merger represents a grave menace to competitors within the home rail trade, which is already extremely consolidated. It might doubtless result in job losses, hurt to different industries reliant on railroads, and extra fragility in American provide chain infrastructure.”

Maybe unsurprisingly, rival Class 1 railroads have raised objections to the deal. However “whereas there’s the sensation that in the event you had a mix of two of those giants, it will create a behemoth that others must match,” ending up “with simply two or three railroads in North America,” Gross mentioned the merger would permit two of the smallest firms to compete in a system already dominated by greater giants.

“You could possibly make the case that that is bringing the system extra into steadiness than it was earlier than,” he mentioned.

The Floor Transportation Board held three days of hearings on the merger this week in Washington, D.C. On Friday, the regulator added one other three days of hearings, set for subsequent week.

Whether or not the oil shipments will weigh on the approval is tough to inform.

“In the event you don’t have the pipeline and it makes financial sense, the stuff goes to maneuver by rail, somehow,” Gross mentioned. “This turns into extra of a narrative of the way it strikes quite than whether or not it strikes.”

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