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Possible approval of major pipelines would further limit demand for crude by rail.

JIM WILSON/NYT

The flow of North American crude oil by rail will stall this year at about 700,000 carloads – instead of rising by 40 per cent – amid low prices and new pipeline capacity, says Taylor Robinson, president of Chicago-based PLG Consulting.

Shippers in Western Canada have been favouring pipelines over crude by rail as the price difference between Western Canadian oil and West Texas intermediate has narrowed amid crude's plunge. Currently, the spread between the two grades is less than $8 (U.S.), far less than the $24 it costs to move one barrel from Alberta to the Gulf Coast. It costs about $12 to ship a barrel by pipeline.

"It's hard to make crude by rail out of Western Canada work in a low-price environment. Pipelines are going to win in the end," Mr. Robinson said by phone.

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Also dampening oil volume is added capacity on Enbridge Inc.'s Western Canadian pipeline network and reduced oil supply as a result of maintenance-related shutdowns and fires in Alberta's oil patch. This means there will be room in the pipelines for the expected rise in oil production later this year, Mr. Robinson said.

The slump has called into question the viability of several crude-by-rail terminals in Western Canada, including the $360-million Canexus facility in Bruderheim, Alta., which was sold last week to Cenovus Energy Inc. for $75-million.

"No one is close to capacity and I'm wondering if some of those facilities are even in service," Mr. Robinson said.

Energy has been a source of fast growth for the railways, going from almost nothing six years ago to about 7 per cent or 8 per cent of total revenue last year.

But as oil by rail slows, Canada's two major railways have each slashed their expected growth outlooks for their energy businesses. The amount of Canadian crude moving by rail to the United States fell by 28 per cent in the first quarter, compared with the year-earlier period, Canada's National Energy Board said.

Canadian National Railway Co. has already reduced its target for energy-related shipments, and recently said it will be "challenging" to post a 40,000-carload rise over 2014's 217,000. Canadian Pacific Railway Ltd. has cut its energy guidance once, and said it doubts it will meet the new forecast for 140,000 cars of crude oil.

The plunge in crude volumes comes at a time U.S. coal carloads are down by 6 per cent as power plants switch to cheap and plentiful natural gas. Investors have reacted by driving down railways' share prices – CP is down 8 per cent this year and CN is down by 10 per cent, compared with the flat performance of the benchmark S&P/TSX composite index.

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That's not to say the rail companies are facing tough times. Both Canadian carriers have posted record sales and profits in recent quarters, and have seen their share prices outperform the broader markets and economies amid growth in grain shipments and intermodal cargo.

Possible approval of the major pipelines stuck in the political process, including the Keystone XL, would further limit demand for crude by rail, Mr. Robinson said. "That's not going to give crude by rail in Western Canada a very long life, besides maybe a small niche," he said.

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