Oil by rail under scrutiny after Quebec tragedy

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The explosion of a train in Quebec casts new doubts over a major growth strategy for North America's railways and energy producers.

In recent years, as pipeline projects like TransCanada Corp.'s proposed Keystone XL line ran into stiff opposition from environmental groups, shipping oil by train had emerged as an attractive alternative and an expansion opportunity for rail operators.

Shipments of fossil fuels by rail surged and are on track to account for nearly 10 per cent of oil produced in the United States this year, providing energy producers with a convenient way to transport North America's burgeoning output of petroleum.

Rail has also been used by some oil producers to ship crude to refineries where they can get a better price. Pipelines to the U.S. Midwest are so full of oil that refiners there have been offering lower prices to buy it. The discount has been as much as $40 (U.S.) a barrel for West Texas Intermediate, the North America benchmark.

But the tragedy in Lac-Mégantic, Que., makes it clear that shipping oil by train carries its own dangers. Railways and energy firms will now face scrutiny about their new strategy and are likely to face increasing opposition to what had seemed like a less-contentious alternative to pipelines.

"There will be some very hard questions that will be asked about why an unmanned, parked train moved," said John Herron, president of trade group Atlantica Centre for Energy in Saint John, New Brunswick.

Pipelines may also wind up being subjected to increased scrutiny over the risks involved in energy transportation.

"If anything,[the accident] highlights the hazards of transporting crude oil – they are real and need to be managed," Andrew Leach, an associate professor at the Alberta School of Business at the University of Alberta, said in an e-mail. " In that sense, it's bad for pipelines too."

Thomas Mulcair, the federal Opposition Leader, visited Lac-Mégantic Sunday and said as oil production climbs and transportation by pipelines and rail rises, Canada must be mindful of the risks involved in both.

"The question is, with this important increase, has the ability to regulate followed suit?" he said. "And that is exactly the type of question the public is asking us today: 'How can something like this happen in Canada?'"

Rhona DelFrari, a spokesperson for Cenovus Energy Inc., an oil sands producer that has increasingly turned to rail to move oil around North America, said it is too early to tell how the accident will affect pipeline policy and the company's plans.

In 2008, trains carried fewer than 20,000 barrels a day of oil in the United States. But by the end of last year, roughly 500,000 barrels of oil per day moved on the rails, providing a significant boost to the revenues of many railways.

Oil and gas outfits would prefer to ship their products by pipeline because it is cheaper; proponents also argue that buried steel tubes are the safest way to move hydrocarbons.

U.S. President Barack Obama is considering whether TransCanada Corp.'s Keystone XL pipeline should be approved. Environmentalists want the government to reject the proposal because of the potential for spills.

Railways suffer from the same concern. Canadian Pacific Railway Ltd. has had a string of recent accidents, including an incident in May in which five tank cars carrying crude oil derailed near Jansen, Sask. One car leaked about 575 barrels of oil.

Pipelines, however, risk dumping a greater volume.

Enbridge Inc., which wants to build the Northern Gateway pipeline to Canada's west coast, had a major spill in the summer of 2010, when more than 20,000 barrels of oil leaked into wetlands in Michigan.

With files from Sophie Cousineau and Bloomberg