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Crude Calculations?

Expect Canada’s rail industry to remain under scrutiny for its capacity and fairness

Jan 21, 2015

by Tim Querengesser

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It is February 2013 in Manitoba and deep into a harsh winter that writers are calling a “polar vortex,” a grain farmer sits frustrated. His bumper grain crop also sits, waiting for transport and losing value by the day. As the two sit, the farmer watches Canadian Pacific and Canadian National locomotives roll past, pulling tankers of crude oil. Oil is clogging up the rails, he thinks, since this has never happened before. And the problem is only going to get worse.

Justified? That’s up for debate. But as Bill Hjelholt, director of freight rail (Americas) with AECOM, says, “When you see crude go by while your grain is sitting, it’s understandable you’re frustrated.”

Last winter, as the amount of grain stranded across the prairies hit 80,000 hopper cars, rail companies came under widespread condemnation and faced a strong reaction from Ottawa. Now, they must meet federal quotas on the number of cars available to grain producers, all with an eye on an expected explosion in oil-by-rail eating up system locomotives and track space. In a nut, the tension between those dependent on rail, those regulating it and those running it is the industry’s dominant trend. Yes, trains are getting longer, loading facilities are expanding, multi-modal train cars are becoming the norm and other shifts are shaping the space. But the question of whether oil is creating a shortage of capacity for Canada’s rail industry will continue to be asked for the foreseeable future.

According to the Rail Association of Canada, nearly 70 per cent of all non-local surface goods moved in Canada are now moved by rail. Rail’s prominence in our transportation matrix looks set to become more pronounced, as the trucking industry struggles to find drivers and rail invests in intermodal trailers (numbers are up 10 per cent over the decade). The association predicts that, over the next 10 years, the value of goods moved by rail will explode from $250 billion in 2013 to $650 billion in 2023. ­Transport Canada statistics show that, in 2013, the primary commodity on Canada’s rails, by tonnage, was coal. We moved 42.5 million tonnes of it, while moving 35.7 million tonnes of iron ore and 34.2 tonnes of grain – all increases over previous years. The big question on everyone’s mind, though, is how much crude is moving by rail. Michael Gullo, director of policy, economic and ­environmental affairs with the industry-­funded Rail Association, says that, on balance, “Crude oil is a pretty small service offering, about four per cent of our overall traffic.” Gullo does note, though, that the industry is moving a lot more oil than before. The Canadian Association of Petroleum Producers reports that rail shipments of oil hit 14,000 train carloads in 2013, up from 6,000 in 2009 (for comparison, in 2013, agricultural carload numbers, which include but aren’t limited to grains, were down 1.3 per cent over the year previous). Between 2011 and 2012, tonnages for oil and gas grew by 14.3 per cent, and the trend shows no sign of slowing.

With oil production expected to more than double by 2030, and no new trunk pipelines going into the ground, the question appears to be which critical cargo will be stranded most often in the short term. Despite that four per cent number, the tension between grain and oil has been building. In September, CN became the first rail company fined under Ottawa’s Fair Rail for Grain Farmers Act, which requires CN and CP to move a weekly minimum of about 5,000 railcars of grains or face up to $100,000 in fines per week (the amount of CN’s fine was not announced). Like the oil-by-rail industry, Canada’s $16-billion grain industry is getting more productive. Last year, a bumper crop of 79 million tonnes of grains and pulses saw 7.2 million tonnes of it stranded. Canada produces an average of 50 million tonnes of grains and pulses annually, but last year’s bumper crop is expected to become common. “This is the new normal,” Mark Hemmes, president of Quorum Corporation, told a grain transportation symposium last year.

Fingers started being pointed. Doug Chorney, president of Manitoba’s Keystone Agricultural Producers, argued that CP and CN’s “monopoly” was why the grain industry was receiving “abysmal service.” But the ­dominant culprit in public opinion was of oil cars crowding out grain cars on our tracks.

Industry insiders see the capacity situation differently. For one, says Hjelholt, crude is not single-handedly creating a capacity challenge. “Crude still represents a small percentage of the tonnage and carloads hauled in North America,” Hjelholt says, adding that there are still more crude-by-rail shipments coming out of the ­Dakotas than there are coming from Alberta and Saskatchewan. He does note that the response is understandable, though. “Certainly, the scrutiny from the grain industry would look at that and see it’s the fastest growing market by a large margin.”

Gullo goes further, arguing the entire supply chain needs to be examined. Capacity issues are specific to specific commodities, he says, and any problem highlights the need for all players to do a better job. “I wouldn’t consider a solution to capacity to be throwing more trains down the track. Rather, where the innovation needs to take place is improving the velocity and throughput of the network.”

What is holding the network back, then? One answer is chokepoints in key areas. “There are pieces of the rail network that are running at peak capacity,” says Hjelholt, who has 15 years of experience in the rail industry to back him up. “Some of them are in Western Canada, and I know CN and CP are investing lots of capital to grow the system so they can move more trains through there.”

The telling response to rail capacity issues in Western Canada is a dominant sub-trend for the industry. Both the grain and oil industries are building large tank farms and loading ­facilities to deal with fluctuations in rail capacity. Canexus Corporation just opened its 100,000 bpd oil-to-rail terminal near ­Edmonton, with several others set to see crude loading capacity hit nearly 900,000 bpd.

On the grain side, Hjelholt says storage capacity is being increased to weather the ups and downs of not only the market but also rail capacity. In announcing its expansion of its grain handling facility’s holding capacity by 10,000 tonnes, Cargill president Jeff Vassart noted, “Each element of the supply chain needs to be as efficient as possible. We all have challenges, whether it’s on-farm, elevator, rail or port.”

Gullo, however, sees storage capacity as less important than rail’s demonstrated ability to step up to its increasing demands. While increases in capacity for grain storage certainly wouldn’t hurt, he says, “There isn’t a single thing that you can point to and say, ‘This is going to be a shining light.’ ” Indeed, the growth of storage facilities for grain “speaks to the fact that it’s not just the linear capacity that’s harming the grain industry but also the terminals.” Looking back over the past year, then, Gullo sees only positives. “When you think about it, it’s a positive story of the railway’s ability to scale up and meet a new demand that wasn’t there before.”

Safety
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Accidents are becoming rarer on Canada’s rail, even though they may be becoming more spectacular and widely reported. The industry average for accidents involving dangerous goods averaged 161 per year between 2007 and 2011. In 2012, it hit 125 accidents, and those that resulted in a “release to the environment” dropped from three to two, according to RAC. Still, while safety is often touted by the industry, the total number of incidents grew by 15.9 per cent in 2012 compared to the year previous.

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Merger Mania

CP’s CEO, Hunter Harrison, has a dream of building a transcontinental rail network, and in October set his sights on CSX Corp., a Florida-based rail company with track throughout the U.S. While the merger fell through, many see the attempt as the start of a new era of mergers and acquisitions in the rail space. Of course, with complaints about monopoly-like situations fuelling rage across the prairie this past winter, as well as resistance from the trucking industry, expect the idea to have a lot of derailments.

Czechs, Cold and Rail
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As rail tracks get cold they contract, stressing welds and leading to breakages, says Michael Hendry with the Canadian Rail Research Laboratory at the University of Alberta. The trouble is our track isn’t necessarily designed for Canada’s cold. The Czech Republic, Japan and Colorado are the world’s three main rail suppliers, and “they’ve been going to [rail metallurgy] configuration geared for the U.S. – things that wear better.” Improvements on those fronts are impressive, Hendry says, but “it’s not optimized for our climate yet.”

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