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Rail cars are backed up in the yard in the aftermath of a fiery oil train derailment, Dec. 31, 2013 in Mandan, N.D. (Tom Stromme/AP)
Rail cars are backed up in the yard in the aftermath of a fiery oil train derailment, Dec. 31, 2013 in Mandan, N.D. (Tom Stromme/AP)

Pipeline projects unlikely to slow flow of oil by rail Add to ...

After a third major oil-train inferno in six months, it’s only natural to get swayed into thinking that approving more pipelines will remove such dangerous risks to people and property. It won’t, though.

The oil industry is well past the point of being able to choose between railways or pipelines. Production is rising from the Alberta oil sands and North Dakota’s Bakken, and with each new barrel comes a new problem of getting it to market. For better or worse, pipeline approvals or not, it appears the oil trains will run.

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Some big-name investors have wagered hundreds of millions of dollars on boosting crude-by-rail capacity. Some have done so even after the deadly Lac-Mégantic, Que., disaster in July that put the practice of moving oil in tanker cars at the forefront of the public agenda, and even after another blast in Alabama in November. At last check, none has offered to walk away from those investments.

It’s critical now that the public demand much better performance and equipment from railways and oil shippers in both the United States and Canada, as well as tougher and more targeted regulation, inspection and enforcement.

Following Monday’s tank car blasts on a BNSF Railway Co. train in North Dakota, the mayor of a nearby small town – one that has shared in the drilling boom that’s made the state No. 2 U.S. oil producer – said it is only a matter of time before disaster strikes a populated area there.

It’s hard to disagree, but there is no sign of a pullback in the activity. In fact, the opposite is true.

BNSF, of course, is a subsidiary of Warren Buffett’s Berkshire Hathaway Inc., and it has pledged to double spending on crude-by-rail operations to $400-million (U.S.) in 2014. Mr. Buffett also has a sizable stake in Canadian oil production with a nearly 18-million-share position in Suncor Energy Inc.

Henry Kravis’s and George Roberts’s KKR & Co., meanwhile, injected $250-million last month into Calgary-based Torq Transloading Inc., a developer of oil-by-rail terminals. Torq’s latest project is a 168,000-barrel-per-day facility at Kerrobert, Sask.

The stats show a deluge of oil on the rails: In the United States, shipments on Class 1 railroads have surged from 9,500 car loads in 2008 to 234,000 in 2012, according to the Association of American Railroads. The industry group estimates the number to climb to 400,000 for 2013. From nearly nothing a few years ago, more than 11 per cent of U.S. crude output now moves by train.

As a startling investigation by The Globe and Mail last month showed, the surge has been driven by the boom in oil production from shale formations. In North Dakota, oil-by-rail shipments have jumped to around 700,000 barrels a day from virtually nothing in five years. In that time, alarms were raised, and ignored, about how potentially explosive the Bakken crude is.

In Canada, congestion on pipelines in the ground, and delays in adding new ones, have spurred big spending on oil-by-rail terminals as oil sands output ramps up. Just last month, Kinder Morgan Canada and Imperial Oil Ltd. formed a joint venture to build a loading terminal near Edmonton that would eventually handle 250,000 barrels a day.

That one is not included in a recent tally ARC Financial Corp. that pegged the capacity of new oil-by-rail facilities at 708,000 barrels a day. The figure includes those that have started up since 2012 and those planned for 2014 and 2015.

It all spells more and more strings of tank cars trundling between and through towns and cities, regardless of whether major pipelines such as Keystone XL to U.S. Gulf Coast refineries and Northern Gateway to the B.C. coast get built.

Geography and history are big reasons for that. East Coast refineries, for instance, were built to take oil imported from overseas. The price for that supply jumped, creating new demand for the cheaper crude produced in the middle of the continent, for which the necessary pipelines do not exist. The gap between prices of domestic and international crudes has more than covered the higher costs of moving the oil by rail.

But has the rail infrastructure, tank car design and traffic control technology caught up with the demand for moving oil on rails? As events have shown, the answer is no. Much more has to be done also on the regulatory front to make sure that loads are properly tested, labelled and handled. To be sure, it will increase shipping costs, making pipelines look much more economic.

But it won’t mean an end to oil-by-rail. That train has left the station.

 
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