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Canadian Pacific locomotives sit in a rail yard in Montreal in this file photo.

Ryan Remiorz/THE CANADIAN PRESS

The boom in Bakken crude has prompted Canadian Pacific Railway Ltd. to make a merger overture to one of its largest U.S. rivals – CSX Corp.

According to a report in the Wall Street Journal, CSX rebuffed its competitor after it made an approach in the past week. But both railways are under pressure to extend their reach to cope with traffic backlogs created by surging shipments of oil from the Bakken region of North Dakota.

Canadian Pacific is the second-largest rail shipper of Bakken crude after BNSF Railway Co., and according to sources, it has been seeking to acquire or partner with a railway that can extend its reach from the West to deliver the crude to eastern-based refineries.

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Calgary-based Canadian Pacific has more than 22,500 kilometres of track stretching between Vancouver to Chicago and Montreal, with feeder lines reaching into North Dakota and other regions. CSX, which is based in Florida, operates more than 33,800 kilometres of track in 23 Eastern states and two Canadian provinces. A marriage of the two railways would mark one of the largest in the industry, creating a company with more than $18-billion in sales. Competition concerns have prompted U.S. regulators to reject major railway mergers in the past, but growing traffic bottlenecks and increased calls for safer oil tanker cars may give the rail industry a more compelling case for big mergers.

A shortage of oil pipelines has pushed the majority of Bakken oil shipments on to railways that can struggle with the demand and stresses the heavy traffic in volatile crude places on aging rail lines and rail cars.

One of the biggest bottlenecks is the limited number of rail lines connecting to oil refineries in the east and southern coasts of the United States. It was Bakken oil producers that hired CP to carry crude tankers to Montreal and hand them off to Montreal Maine & Atlantic Railway, an aging regional railway that carried the oil to the Irving Oil refinery in New Brunswick. Improperly set breaks on an MM&A train caused 72 cars of Bakken oil to explode and kill 47 people in the Quebec town of Lac-Mégantic in July, 2013.

Since then, oil shipments from the Bakken region have continued, putting pressure on Canadian Pacific to find more secure routes to eastern refineries.

More than one million barrels of crude are shipped daily on the rails from the Bakken region, a rush that has attracted some of America's most powerful investors, while raising community concerns about the safety of volatile oil travelling on century-old routes through North American cities and towns.

New York hedge fund investor Bill Ackman acquired a 14-per-cent stake in Canadian Pacific in 2011 and he lead a successful proxy battle against the railway's board of directors. The effort saw industry veteran Hunter Harrison parachuted in on a platform of cost-cutting and profit improvements at a railway that had disappointed shareholders for years.

A spokesman for Mr. Ackman's fund Pershing Square could not be reached for comment. In the past year, Mr. Ackman has sold off some of his CP shares, lowering his holding below 10 per cent. In his proxy battle, Mr. Ackman won support from shareholders to nominate seven directors, including himself, so it is unlikely that CP would proceed with any acquisition strategy without his support. A CP spokesman said "we don't comment on market rumours."

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Warren Buffett's Berkshire Hathaway Inc. paid $26-billion to acquire BNSF in 2009 and an investment company owned by Microsoft founder Bill Gates owns a 12-per-cent stake in Canadian National Railway Co. The veteran investors have made heavy investments in old economy railway companies on the bet that cost-cutting and technology improvements will deliver long-term profits. Rising industry costs have delivered mixed results, prompting speculation of industry consolidation.

Since the Lac-Mégantic tragedy, there have been about half-a-dozen explosive crude derailments on the outskirts of towns in North Dakota, Alabama and other states. None of these derailments resulted in injuries. However, regulators in the United States and Canada are imposing tighter safety regulations that some rail operators have complained are overly expensive.

With files from Brent Jang

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