Social risk trumps financial risk for Canadian crude-by-rail

Transport Canada revises speed restrictions for trains carrying dangerous goods

Shipments of Canadian heavy crude oil via rail in 2021 are likely to be below the volume peaks that occurred at the beginning of 2020, credit ratings firm Moody’s Investors Service said in a Monday note related to Canadian crude-by-rail. This means that the Canadian railways could see decreased revenue coming from crude-by-rail in 2021.

That said, the social risks to haul crude-by-rail are more costly than the financial risks for Canadian Pacific (NYSE: CP) and CN (NYSE: CNI), Moody’s said. Crude volumes account for less than 2% of Canadian rail carloads, Moody’s said, quoting the Railway Association of Canada.

“Shipments of crude by rail in Canada will remain subdued through 2021, well below the peaks of the beginning of 2020. But reputational and social risks associated with accidents far outweigh the financial risk that shipping crude by rail poses for the two main Canadian rail freight operators,” according to the report. 

Crude-by-rail involves “a potential social-impact risk disproportionate to the percentage of business that they generate,” the report continued. “The railway operators assume a considerable social risk with the possibility of changing policies, socially driven regulation, and investment decisions, and cannot refuse to move crude on their network as they are required because of their ‘common carrier’ obligation.”

Given the social and reputational risks, CP and CN, along with the Canadian federal government, will continue efforts to make the rail transport of dangerous goods safer, according to the report.

Indeed, Moody’s report comes as Transport Canada reaffirmed its commitment to rail safety research. Transport Canada has also modified its speed restrictions for trains hauling dangerous goods (see below). 

Meanwhile, the steps that the railways have taken included the installation of automated emergency brakes, electromagnetic detectors to identify cracks in railcar wheels and foam trailers at key points on crude routes, the report said. The railways are also incorporating predictive analytics and machine learning to maintain equipment and tracks, and they are using improved inspection technologies, the report said.

Crude-by-rail volumes have fallen in 2020 as Canadian crude production declined by 20% for the first six months of this year. Volumes are down from the year-ago period in 2019 amid the drop in global oil prices. Canadian crude production for the first six months of 2019 was an average of 5.5 million barrels per day.

According to their third-quarter earnings releases, CP moved 11% fewer carloads of energy, chemicals and plastics for the first nine months of 2020, while CN moved 15% fewer carloads of petroleum and chemicals for the first three quarters of 2020. CP and CN move roughly 95% of Canadian crude-by-rail.

“The decline in crude production in western Canada has led to declining shipment volumes for the Canadian railways. Yet despite big annual swings in carloads, the Canadian railways have relatively low exposure to the crude by rail segment, as customer-supplied rail cars and customer contracts help minimize losses in revenue,” Moody’s said.

The Canadian railways’ involvement in crude-by-rail is likely to continue for some time. The Canadian federal government and the provincial Alberta government are likely to continue their support of Canadian heavy crude production in the near term, as seen by their support of crude oil pipeline projects, according to Paresh Chari, Moody’s vice president-senior analyst. The banking sector has also been supportive of Canadian crude oil production.

“Near term and medium term, I would say that we don’t expect a decline” in crude production, Chari told FreightWaves. Modest growth could occur in 2021, he said. 

The Canadian oil sands sector benefits from a very low operating cost structure, and it has a durable asset base, meaning it doesn’t have to spend a lot of capital to reinvest in its assets, Paresh said. Furthermore, the U.S. remains a key importer of Canadian heavy crude, with the Gulf Coast refineries taking in more Canadian crude instead of crude oil from Mexico, Latin America and Venezuela, he said.

But longer term, the prospects of the industry are harder to determine, Paresh said.

Canadian government revises train speed restrictions

Moody’s report comes on the heels of new changes to the speed restriction initiative for dangerous goods traveling via rail. 

Last Friday, Canadian Minister of Transport Marc Garneau issued a new ministerial order that modifies existing speed restrictions related to the transport of dangerous goods via rail.

The new order, effective immediately, restricts train speeds based on low temperatures instead of setting restrictions based on a winter date range, according to Transport Canada. Garneau issued the new order per the Rail Safety Act.

The order also takes into account the differences in temperature and temperature fluctuations that various regions of the country can experience during the winter season, which runs from Nov. 15 to March 15. 

Railway companies will also be required to develop and submit a winter operations plan that is specific to each subdivision where higher-risk key trains might operatie, Transport Canada said.

Several other additional elements make up the new rule, according to the agency. They include:

  • Improved track inspection and track maintenance practices.
  • Requirement for further speed restrictions if warranted due to inspection results.
  • Requirement of risk mitigation measures to account for rapid temperature fluctuation.
  • Requirement of the use of new technology to detect a rail break.
  • Requirement for approval of the plan by a professional engineer.

Railway companies that don’t have a winter operations plan ready will be required to adhere to previous speed restrictions for trains transporting dangerous goods during the winter months. Should noncompliance or a safety concern be identified, Transport Canada could take various enforcement actions, such as letters of noncompliance, notices, orders, monetary penalties and/or prosecution.

The new speed restrictions are as follow:

(Transport Canada)

Transport Canada defines key trains as those that have one or more loaded tank cars of dangerous goods that are toxic by inhalation. Key trains are also trains that contain 20 or more tank cars containing dangerous goods.

The agency defines higher-risk key trains as trains carrying crude or liquefied petroleum gases in a continuous block of 20 or more tank cars or 35 or more tank cars dispersed through the train.

Transport Canada had set speed restrictions following several crude-by-rail derailments that occurred during the 2019-2020 winter season.

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Related articles:

Transport Canada: Dangerous goods recommendations under study

Transport Canada issues new speed restrictions for trains hauling dangerous goods

Ice near rail led to CN crude train derailment — report

Cenovus Energy to suspend crude-by-rail program in 2020

Construction of Alberta crude unit expected to start in April

FreightWaves oil report: Trying to get more Canadian crude on to the rails

Joanna Marsh

Joanna is a Washington, DC-based writer covering the freight railroad industry. She has worked for Argus Media as a contributing reporter for Argus Rail Business and as a market reporter for Argus Coal Daily.