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Oil industry watches as policy makers face rail questions

Charred vehicles and fire retardant foam can be seen in front of the destroyed Musi-Café on the main road in downtown Lac-Mégantic, Que., July 7, 2013. A train carrying crude oil tankers derailed early Saturday and burst into flames.

Moe Doiron/The Globe and Mail

Canada's oil industry faces the risk of tightened regulations on fuel shipments following Saturday's Lac-Mégantic rail disaster, just as companies are relying on rails to get rising production volumes to market.

Rail shipments have become crucial for oil producers such as MEG Energy Corp., which are trying to boost output amid pipeline constraints. That makes it unlikely that the recent derailment, which killed at least five people and has left at least 40 missing, will prompt regulators to force the oil industry to curtail rail shipments. Instead, they may require changes to how railways operate when moving oil.

Trains are moving as much as 150,000 barrels of Canadian crude oil daily to markets, mostly in the U.S. and eastern Canada, so far this year, up from virtually nothing at the start of 2012, according to Englewood, Colo.-based energy consultancy IHS CERA. That's about 2 per cent of Canadian crude exports, a figure expected to keep increasing.

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As recently as January, Canadian heavy crude sold for deep discounts to U.S. benchmark light oil – at times as much as $40 (U.S.) a barrel under – largely due to limited export pipeline capacity to move it to markets in the U.S. Midwest and elsewhere. However, prices for the Western Canadian Select heavy blend have gradually improved partly as a result of increased rail shipments. The oil sold for $16 a barrel below the benchmark West Texas intermediate (WTI) on Monday. Most oil companies see oil-by-rail as a stopgap measure as major pipeline proposals such as TransCanada Corp.'s Keystone XL to Texas and Enbridge Inc.'s Northern Gateway to the Pacific coast drag in the regulatory stages amid opposition from environmental groups and native communities.

"Every barrel of new supply that comes on in western Canada is going to move by rail in the next couple of years," IHS CERA senior director Jackie Forrest said in an interview. "We do not have enough pipeline capacity."

The investigation into what caused a driverless 73-car train carrying crude oil, operated by Montreal, Maine & Atlantic Railway, to careen into the centre of the eastern Quebec town of 6,000 and explode early Saturday will determine what regulatory changes will be necessary, said Joseph Doucet, dean of the Alberta School of Business at the University of Alberta. "Maybe that will lead to some narrow regulatory or other kinds of changes. And whether it leads to a policy change, that's a bigger question."

Production of Bakken crude from North Dakota, the light, low-sulfur grade that the doomed Montreal, Maine and Atlantic Railway train was loaded with, has climbed exponentially in recent years, and much of that production moves to market by rail. Some of that output competes with Canadian crude for space on the Enbridge pipeline system to the U.S. Midwest and southern Ontario. Rail shipment costs can be $10-$15 per barrel higher than with pipelines, depending on the destination, Ms. Forrest said.

MEG Energy, an oil sands producer that is an extensive user of rail to move production, depends on rail shipments.

"We definitely view pipelines as being the best, most efficient and safest means of moving product, but rail has a very good safety record and the economics of reaching new markets are still very attractive," MEG spokesman Brad Bellows said in an interview.

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