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Oil Producers Switching to Rail Transportation as Pipelines Struggle

Thanks to Canada’s renewed emphasis on maintaining itself as a global energy superpower, the country has established growing relations with Asian investors and energy companies in order to facilitate oil exportation on an international scale. However, while Canada has tried to make production progress through a new Northern Gateway pipeline (proposed by Enbridge Inc.), it has faced opposition across numerous fronts—including environmental protests and sluggish investor relations.

Canada has sought to increasingly diversify its energy sector from a U.S.-centric export model, and has found growing interest especially in Asian markets. But the Northern Gateway pipeline and another Kinder Morgan Trans-Mountain expansion effort have stalled due to safety and climate concerns. This now raises the question of how Canada will actually transport its oil production to the new markets it wishes to grow within.

The potential answer? Canada’s major rail lines operating to West Coast ports—none of which require any permitting to transport crude oil.

J.J. Ruest, Canada’s executive vice president and chief marketing officer, had this to say during a recent Canoil Trade Conference: “The dilemma is the same – whether or not you could or should do that with the social license, and whether eventually there will be enough support for these things to happen. [If] Canadian crude continues to be stranded…you could see an economic solution where it could be done from the Gulf Coast.”

Many challenges still remain in order to see this potential oil railroading effort get underway. Foremost, a central oil transportation terminal would need to be established, as well as mobilizing tank cars and tankers to handle processing. All this would require federal and provincial authority approval, which has been slow in coming so far. That’s not to mention the increase in safety concerns surrounding Canada’s current rail system, and how an aggressive oil transportation demand might place undue stress on lesser-used routes employing older tracks.

Canada’s chief executive, Hunter Harrison, gave a speech to investors, stating: “The infrastructure we’re running on – where we see the most growth in the crude – is what has been described in the past as our secondary branch lines, [with rails of] 1950s vintage. These instances have been the result of some internal flaws in the rails, and so we’re having to go through some additional straining and testing and patrolling that we wouldn’t have to otherwise.”

Canada currently forecasts its oil production to hit 110,000 barrels per day, with annual revenues hitting 7-8% in the next couple years. But will Canada develop the necessary shipping capacity to handle its estimated 300,000 barrel-per-day production in 2015?