Companies & Industries

After the Lac-Mégantic disaster

A price too high for oil by rail?

Lac-Megantic, Que., was devastated by the explosion of a derailed train on July 6 (Steve Poulin/Agence QMI)

Lac-Megantic, Que., was devastated by the explosion of a derailed train on July 6 (Steve Poulin/Agence QMI)

For the Canadian oilpatch, railways were an inelegant—if necessary—substitute for highly controversial pipelines. As the fight over the Keystone XL pipeline dragged on, trains served as a Plan B to get product to refineries. But little time was spent considering the risks associated with the alternate mode of transport, and the illusion of safety was shattered forever when a runaway train loaded with crude oil unleashed hell on a small Quebec town.

“It’s laughable that nobody has paid attention to that,” says Rafi Tahmazian, a portfolio manager with oversight of several energy funds at Canoe Financial in Calgary. “There’s such negativity toward pipe that has built momentum for so long. Those people disregarded the [risks] of rail.”

Those risks are now impossible to ignore. Early on Saturday, a train that was supposed to be secured on the tracks overnight rolled down a grade near Lac-Mégantic, derailed and ignited a series of explosions that incinerated part of the town.

Many hazardous and explosive materials are regularly carried by locomotive through Canada. An accident could have been comparably destructive if it involved propane or chlorine gas. In fact, crude oil is not even ranked among the substances requiring the most care and precaution. “It’s not considered a dangerous commodity,” says Phil Reid, a vice-president at an industry consultancy based in Vancouver. He is at a loss to explain the explosions, but whatever forces brought about such a catastrophe, the proof of the dangers of moving petrochemicals by rail is now apparent.

Railways had proven a boon to Canada oil producers, who have struggled without pipeline capacity to access the best markets and the highest prices. As a result, the market has at times imposed an enormous discount on Canadian crude. But that price gap between Canadian oil and its international competitors narrowed when the railways stepped into the void. Oil transportation by rail has grown astronomically, to about 140,000 carloads of crude in 2013 from 500 carloads in 2009, according to the Railway Association of Canada. The crude oil trade was largely responsible for turning around the fortunes of the Montreal, Maine and Atlantic Railway, which owned the train that was eastbound through Lac-Mégantic. But that sheer volume of trains bearing oil raises the risk of a recurrence, Tahmazian says. This is further evidence, he argues, of the need for pipelines to more safely move Canadian oil.

Studies that have compared safety records have typically determined that trains have far higher accident rates involving hazardous materials than do pipelines, although leaks from railcars tend to be more quickly contained. The risks are elevated further when you combine dangerous goods with aging rail infrastructure and a decline in safety standards, says Richard Plokhaar, a rail safety expert in London, Ont.

“It’s all about risk management, and that has all gone wrong in Canada,” he says. “Competition has made it unsafe.” The emphasis on cost reduction has exposed dangerous shortcomings in the common practices of the rail industry, Plokhaar says.

At this point, it’s difficult to say what the financial fallout will be. The incident might result in restrictions on using rail to transport oil, which could increase the price discount for Canadian crude. There could also be a reshaping of the pipeline debate in favour of the proponents of Keystone XL and other projects, although the disaster could make communities leery of pipelines too. “This incident has really contributed to changing the strategic environment in which these key pipeline infrastructure decisions are going to be made,” says Mark McClelland, head of North American research for risk-analysis firm Maplecroft.