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Oil pipelines have just got a new sense of urgency

Ottawa's tougher new oil-by-rail regulations haven't only started the countdown to remove outdated and potentially hazardous tank cars from the country's increasingly crude-intensive rail lines. They have also started the clock on Canada's plans for new oil pipelines.

The new rules, announced Wednesday, give rail car owners three years to replace or retrofit all DOT-111 oil tank cars built prior to January, 2014, to bring the entire fleet to higher standards. It's a tall order: DOT-111s account for more than 70 per cent of all tank cars in North America, and more than 100,000 of them are used to transport crude and other flammable liquids.

The United States has not yet announced similar rules, but the rail industry has recommended that it adopt something similar to Canada's plan. Regardless, given that tank cars routinely cross the border (remember that the train in the Lac-Mégantic disaster was carrying oil from North Dakota), the new Canadian regulations will pretty much automatically trigger an upgrade of a substantial portion of the U.S. fleet, too. One estimate figured about 65,000 cars will be affected.

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Problem is, rail car manufacturers are already dealing with a massive order backlog of about 50,000 tank cars, the result of the boom in oil-by-rail demand. Even with ramped-up production rates, that's two full years of production. And that's before considering the inevitable flood of new orders – both to replace or retrofit DOT-111s that are being regulated out of service, and to keep up with still-growing demand. Consider that even with a significant slowdown in new orders in the 2014 first quarter (probably a weather-related blip that seems unlikely to become the trend, given the needs imposed by this phase-out), manufacturers' backlog shrunk by only 5,000 tank cars in the quarter.

Given the numbers, three years seems like a pretty aggressive timetable; it may be difficult to impossible for the industry to catch up on its orders, replace the fleet and keep up with demand in that time frame. By 2017, we may be looking at significantly constrained oil-by-rail capacity.

Canada's oil industry is already more than familiar with the consequences of transportation constraints. Significant limitations to rail capacity would threaten to plunge oil producers back into their dark days before the boom of oil-by-rail – when severe transportation bottlenecks resulted in regional oil gluts that slashed Alberta crude prices to barely half the North American benchmark.

Obviously, safety concerns must take precedence; indeed, environmental groups and rail workers' unions wanted an immediate ban of the cars. Even a three-year delay probably isn't adequate to avoid disrupting rail capacity. However, it just might be enough for oil pipelines to pick up the slack – but only if at least some of the proposed pipeline projects can steer through the regulatory maze without getting thrown off schedule.

The big one, of course, is Keystone XL, an expansion that would ship Alberta oil sands crude to the U.S. Gulf Coast. It could be ready within two years if it got the go-ahead from the U.S. government – but, as we know, that hasn't been forthcoming. The decision was delayed again last week. The Trans Mountain and Northern Gateway pipelines both plan to begin operations in 2017, but are still awaiting regulatory approval. The proposed Energy East pipeline is unlikely before 2018.

The three-year tank car phase-out has set a timetable – it has magnified the need for additional pipeline capacity by 2017. Perhaps the rail decision will impress upon governments and regulators the need to clear the fog from the multipronged pipeline question; the consequences of political waffling and delays have come into sharper focus. The clock is ticking.

Follow David Parkinson on Twitter at @ParkinsonGlobe.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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