Deadly derailment in Quebec fuels crude-by-rail concerns


The deadly July 6 explosion of a runaway crude-carrying train in Quebec threatens to ratchet up scrutiny of rising crude-by-rail shipments on both sides of the US-Canada border, amid a boom in North American oil production.

In both countries, shipments of crude by rail have shot up sharply, as producers race to get all their new oil to market and as pipeline companies scramble to build new lines or reconfigure old ones to handle the growing volumes. Meanwhile, uncertainty over several big pipeline projects -- including approval delays for TransCanada Corp.'s Keystone XL, which would connect Western Canada's booming oil sands development to the Gulf Coast -- have sent some oil companies looking to rail as a longer-term solution.

Canadian authorities confirmed 20 deaths after a runaway train carrying crude derailed on July 6 and exploded, demolishing a large swath of Lac Megantic, Quebec, including as many as 30 incinerated buildings.

Investigators, citing the high death toll, have opened a criminal investigation. Canadian regulators have said they are concentrating their probe initially on the train, its braking system and the track.

In the US, shipments of crude by rail have gone from 9,500 carloads in 2008, the year widely seen as the beginning of the current oil boom, to 233,811 carloads in 2012, according to the Association of American Railroads. A carload is typically about 740 barrels.

About 16.6 million bbl of Canadian crude were shipped by rail to the US in 2012, accounting for about 2% of Canadian crude exports, according to data from Canada's National Energy Board. But industry estimates say that could grow to as much as 73 million bbl in 2013 and nearly 110 million bbl by 2014.

Canada, in particular, has been hit by a recent spate of high-profile accidents involving trains -- several, but not all, of which have been carrying petroleum. Last month, a Canadian Pacific Railway freight train carrying petroleum diluent derailed on a failing rail bridge amid record flooding in Calgary, Alberta.

That accident was the fifth derailment of a CP train in three months. The city's mayor publicly questioned whether the company, which is responsible for its own track and bridge inspections, put profits ahead of safety. CP officials denied cutting corners on inspections and said the derailments aren't connected to any underlying trend.

But the recent accident is on a whole different scale. The train's operator, Montreal Maine & Atlantic Railway Inc., a unit of privately held US railroad operator Rail World Inc., said the runaway train was loaded with 72 carloads of crude bound from North Dakota to a refinery in New Brunswick.

It had been stopped during a crew rest outside town. The company said it inexplicably started to roll, unmanned, about 7 miles until derailing in Lac Megantic. The town has a population of about 6,000 and is some 22 miles from the US border with Maine.

In a statement, MM&A said an engineer inspected the train and ensured one of its locomotives was running and that its air brake was engaged. It said subsequent to that inspection, the locomotive was shut down, which may have released the brake. It didn't provide details but said it was cooperating with investigators.

Rail accidents, particular large derailments involving fatalities and spills, are relatively rare. The North American rail industry's safety record has improved in recent decades.

But the number of incidents involving crude shipments has surged along with growth in North American oil production. Industry executives say the number of spills is still tiny compared with the amount of crude shipped.

"In the past decade, 95% of rail incidents involving crude oil were... non-accident releases, and 70% of those incidents involved spills of less than 5 gallons," said Holly Arthur, a spokeswoman for the Association of American Railroads. The Railway Association of Canada said 99.9977% of all products shipped on the country's railroads arrive safely.

Most recent rail accidents involving crude have been small -- such as the three gallons of oil that spilled from three derailed tanker cars in central Maine on their way to the same refinery in New Brunswick, in March. But others have been more significant.

Crude shipments first started to make a noticeable difference to BNSF Railway, one big crude shipper, in 2008. At the time, it moved about 1.3 million bbl. In 2012 BNSF moved about 90 million bbl.

In Canada, CP hauled 53,500 carloads of crude last year, up from 13,000 in 2012 and just 500 in 2009. Meanwhile, Montreal-based Canadian National Railway Co. expects to double last year's 30,000 crude oil carloads this year.

Traditionally, railroads are less attractive to oil companies because of higher shipping costs compared with pipelines. But the rapid development of new oil fields, from West Canada through North Dakota and into West Texas in the past five years, has production outpacing pipeline construction, leading many producers and refiners to turn to rail, initially as a temporary fix.

But once seen as a temporary solution until new, permanent pipelines could be built, rail usage has proved to be so effective that many refiners have come to prefer the railroad.

Even though pipelines are generally less expensive and less prone to leaks and spills, rail offers refiners the ability to bring in crude from different locations at different prices, instead of being stuck with a single source of oil.

In Maine, crude has increasingly been shipped from Canada and the US Midwest to an Irving Oil refinery in Saint John, New Brunswick, raising worry there. Maine has seen crude by rail shipments soar in the past two years from 14,300 bbl in January 2012 to 1.1 million bbl in December, most of it from Canada.

Lac Megantic, the site of the July 6 derailment and explosion, is some 22 miles from the US border with Maine. The crude involved in the derailment there was scheduled to traverse Maine on its way to the Irving Oil refinery.

The increased Canadian crude traffic has Maine spill-response officials working with railroads to find locations to stage spill cleanup equipment, and has led environmental groups to organize protests and lobby state lawmakers for restrictions.

Last month, six people were arrested in Fairfield, Maine, when they tried to block a train carrying crude bound from Canada to Saint John.

Dow Jones Newswires

The Author