Skip to main content

North Dakota oil production has shot up in recent years, and two-thirds of that gets to refiners by rail.Nathan VanderKlippe/The Globe and Mail

The deadly train disaster in Lac-Mégantic, Que., is sure to trigger tough new regulations on moving crude oil by rail, a major credit-rating agency said on Thursday.

That threatens to raise costs for railroads and their oil-company shippers, which have vastly expanded the practice as proposals to build major new pipelines have dragged.

The highest cost from increased government scrutiny will be borne by oil producers with operations in in the Bakken region, which is centred in North Dakota and extends into southern Saskatchewan. In the Bakken, surging output has overwhelmed pipeline capacity, and companies turned to railroads to get volumes to markets in the Eastern part of the continent and Gulf Coast, Moody's Investors Service said.

"These higher costs will be credit negative for North American rail companies, which have experienced a boom as crude shipments from the U.S. mid-continent, North Dakota and western Canada offset falling coal shipments," Moody's analysts wrote.

"Any slowdown in rail shipments of crude will pressure producers focused on the Bakken shale oil formation, which depends far more on rail than on pipelines for transport."

The agency pointed out that North Dakota oil production rose to 727,000 barrels a day in April, a nearly fivefold increase in just five years, and two-thirds of that gets to refiners by rail. It said rail shipments of crude oil and other petroleum products still account for just 6 per cent of car-loadings for Class I North American railroads, but volumes grew by nearly 40 per cent through June compared with a year earlier.

The Montreal, Maine and Atlantic Railway train that careened unmanned down an incline and derailed and exploded in the centre of Lac-Megantic early Saturday was loaded with North Dakota crude and destined for Irving Oil Ltd.'s refinery in Saint John.

Any increase in freight expenses will cut into crude shipments, a concern for such U.S. Bakken producers as Whiting Petroleum Corp., Continental Resources Inc. and Oasis Petroleum Inc., Moody's said.

It is not known yet what new regulations could be imposed in Canada and the United States in the aftermath of the Transportation Safety Board investigation into the tragedy, said David Berge, vice-president and senior credit officer at Moody's and one of the report's authors.

"There could be pressure on the part of regulators, either legislation or administrative directives, to come up with some sort of rules or regulations, that would, for example, add safety features to railroading that would add costs borne by the railroads," Mr. Berge said in an interview.

For instance, following a 2008 train crash in Los Angeles that killed 25 people, the U.S. government passed legislation requiring railroads to develop technology to better track and control trains throughout their systems, known as positive train controls. It is not yet known how those costs will flow down to shippers.

"They are still developing them right now. It's fairly costly, but well within the wherewithal of the Class 1 railroads, which have very good liquidity, to handle these things," he said.

Mr. Berge also said new regulations are likely to be considered in both Canada and the United States. Oil trains take routes to the eastern part of the continent that cross the border, as was the case with the Lac-Megantic disaster.