In Defense of the Keystone XL Pipeline

Brian Hicks

Written By Brian Hicks

Posted July 9, 2013

TransCanada Corp.’s (NYSE: TRP) Keystone XL pipeline may just have gotten the extra push it needs to sway the Obama administration into allowing the construction of its massive project.

The $5.3 billion pipeline has carried with it much heated contention since it was first proposed. It would run from Canada all the way to the U.S. Midwest and would transport roughly 830,000 barrels of oil per day.

oil trainIn a most unfortunate turn of events, a rail explosion that took place in the wee hours this past Saturday and ultimately claimed the lives of at least five people has some proponents of oil transport by rail doing a double take.

Saturday’s debacle will definitely swing momentum into TransCanada’s favor, adding fuel to the fire, as some states like Maine have recently begun to oppose shipping oil by rail.

The debate has raged on stronger than ever as rail transport has increased substantially since last year. The century-old American practice has been revived since the surge in shale oil production.

The Green Party of Quebec, where the rail explosion took place, is demanding strict regulations amid the harsh scrutiny the rail industry will likely face in weeks to come.

People often assume rail transport is much more cost effective, but when something like the tragedy in Quebec takes place, they have no choice but to think twice.

Without the Keystone XL, it’s expected that Canadian crude rail shipments would rise more than 40 percent by 2017. Companies like Cenovus Energy Inc. (NYSE: CVE) already plan to boost rail shipments fivefold by the end of 2014.

Rail Disaster

The deadly train derailment that stirred the ongoing debate took place around 1:15 a.m. Saturday morning in the tourist town of Lac-Megantic, east of Montreal, Canada. The fires and explosions ignited, burned, and incinerated at least 30 buildings and killed five people – a number that is presumed to rise as another 40 are still missing.

The Montreal, Maine & Atlantic Railway Ltd. train was carrying 73 tank cars full of crude oil from North Dakota on its way to refinery. The fishy part about the story, which is still under investigation, is that the train was reportedly driverless during the incident. It simply rolled down the hill into the heart of town, where it derailed and exploded.

It is the latest and most deadly account in a growing number of accidents on the North American rail network involving crude oil shipments.

En route with some 50,000 barrels of crude to be refined, the train was one of about ten shipments just like it each and every month. Oil producers in North Dakota use this route, crossing Maine, to get cheaper domestic crude to coastal refineries.

Across North America, such shipments have doubled since 2011, and in Maine, this was unheard of just two years ago.

Rail vs. Pipe

Before Saturday, rail was expected to steamroll on its way to more business. It is the only mode of transportation that can keep up with growing shale production, and pipelines can’t be built fast enough.

This is big news for rail operators like Canadian Pacific Railway (NYSE: CP), which have suffered as coal loaded cargo has gone down domestically. And for producers like Continental Resources Inc. (NYSE: CLR), who are pioneers in the Bakken Shale of North Dakota, rail transport has become the primary mode of shipping.

Pipelines are still years away from being able to accommodate the high level of production, and rail makes them easier to put on the back burner.

But we can’t have complete towns being decimated by explosions. Aside from the toll on human life, there are other factors that must be accounted for.

Saturday’s disaster will draw attention from environmental groups, which will point out risk factors like the risk to surrounding wildlife. The rate of a hazardous material spill is 2.7 times higher on railroads.

And costs. Rail transport is three times more expensive than the use of pipelines.

The explosion in Quebec may be the worst to date, but there was a serious spill in March as well, when 14 tanker cars derailed in Minnesota, leaking 15,000 gallons of crude. Regulators still haven’t released results from that investigation, and Canadian Crude, who is responsible, has yet to comment on the incident.

Moving Forward with Pipelines

Pipelines need to become a primary topic of discussion. Obama said last month that the Keystone XL pipeline approval would depend largely on its impact of carbon-dioxide emission. And that’s good news because the State Department already made a statement saying emissions would not be affected because crude, one way or another, would still be shipped by rail.

TransCanada and Enbridge Inc. (NYSE: ENB) are pipeline companies that have multi-billion dollar projects in the balance and could finally see some light on an uphill battle thus far.

As for the rail disaster in Quebec, there are still many questions as to why exactly the disaster ever happened.

It almost definitely will quiet the crude-by-rail boom that has been taking place in the past couple years. And when pipelines like the Keystone XL do come online, the rail will still be a valuable (albeit secondary) network to connect to cheap domestic crudes.


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